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Canada Research Published by Raymond James Ltd.

Please read domestic and foreign disclosure/risk information beginning on page 35 and Analyst Certification on page 33. Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

Constellation Software Inc. August 15, 2016 CSU-TSX Company Report - Initiation of Coverage Steven Li CFA | 416.777.4918 | [email protected]

Jonathan Lo (Associate) | 416.777.6414 | [email protected]

Software/IT Services

Building Up Maintenance Value, But Timing Not Without Risks

Recommendation Constellation is a serial acquirer of Vertical Market Software (VMS) businesses, with 260+ acquisitions over 20 years and on pace for another 30+ this year. This acquisition engine has a stellar track record of sustained high ROIC (last 5 year average ROIC of 35%+). The strong execution has resulted in increasing cash flow (FCF has grown 17-fold in the last 10 years, 33% CAGR) which in turn funds future acquisitions/cash flow growth and so on. Finding companies, like Constellation, that can consistently and profitably reinvest their capital over decades is rare. That said, we believe current timing has some risks and prefer to wait for a lower entry point. We are initiating coverage at Market Perform.

Analysis Building up Maintenance Value. VMS are structurally attractive with limited

competition in each individual vertical – i.e., customers are sticky. What we found was that Constellation has successfully grown its maintenance base at a 30% CAGR over the last 9 years with ~22% growth coming from acquisitions and ~8% organically (new maintenance contracts and price increases). These growth drivers have been consistent over the last decade, so we would expect Constellation to continue to grow its maintenance base/value which backstops at least some of its valuation. We calculate a maintenance intrinsic value of C$325/share. Constellation has not traded at its maintenance value since 2013, as the market has been increasingly willing to pay up for Constellation’s acquisition engine.

M&A Prowess. Some of that premium is justified. We compared a peer group of acquirers (platform, as well as asset optimizers). If we look at how much incremental FCF is generated for each dollar spent on M&A, Constellation tops the group – it has generated $0.32 of incremental FCF for each $1 spend of M&A.

Timing Not Without Risks. CSU valuation assumes it will be able to make acquisitions at similar cash flow based IRR hurdle rates and also continue to deploy most of its cash flow into M&A – which may or may not happen. Things to watch: 1) Organic Growth. F2016 thus far has been mixed with zero growth in 1Q but then 2Q rebounded with 3% organic growth; 2) Pressure on Hurdle Rates & M&A Pace. CSU has had to lower its hurdle rates to put in competitive bids on larger transactions. A faster pace is easier said than done. So far 1H16 M&A spend annualized is tracking lower y/y; and 3) Have Margins Peaked? Margins and ROIC go hand in hand. The very high ROIC that Constellation has sustained recently is in a large part driven by the substantial margin expansion. We believe some of the margin improvement resulted from “unusual” acquisitions/factors which are less predictable/repeatable. Given we also expect a pick-up in M&A activity (typically dilutive to margins early on), we believe margins may have peaked in the near-term.

Valuation Our $575.00 target price is based on 16x our C2017 EBITDA and supported by our DCF model (see Valuation on page 23) – a premium to software comps at 14x 2017E EV/EBITDA, given its superior M&A engine.

EPS 1Q 2Q 3Q 4Q Full Revenues EBITDA Mar Jun Sep Dec Year (mln) (mln)

2015A US$3.52 US$3.76 US$4.67 US$5.55 US$17.51 US$1,838 US$463

2016E 2.95A 4.24A 5.33 5.41 17.94 2,093 519

2017E NA NA NA NA 22.05 2,446 594

Source: Raymond James Ltd.

Market Perform 3 C$575.00 target price

Current Price ( Aug-10-16 ) C$543.18 Total Return to Target 7% 52-Week Range C$596.96 - C$427.99 Suitability Medium Risk/Growth

Market Data Market Capitalization (mln) C$11,511 Current Net Debt (mln) C$163 Enterprise Value (mln) C$11,674 Shares Outstanding (mln, f.d.) 21.2 10 Day Avg Daily Volume (000s) 35 Dividend/Yield C$5.23/1.0%

Key Financial Metrics 2015A 2016E 2017E

P/E 23.7x 23.2x 18.8x

EV/EBITDA 19.3x 17.2x 15.0x

EV/Revenue NA 4.3x 3.7x

Company Description Constellation Software is a holding company of Vertical Market Software (VMS) businesses which provide mission critical software that solve specific customer needs in their particular verticals.

Canada Research | of 38 Constellation Software

Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

Table of Contents

Investment Thesis ........................................................................................................................................ 3

Investment Risks .......................................................................................................................................... 14

Company Overview ...................................................................................................................................... 15

Industry Overview, Growth & Competition ................................................................................................. 20

Financial Model/Metric Highlights .............................................................................................................. 21

Valuation & Recommendation .................................................................................................................... 23

Appendix: Full List of Verticals Constellation Operates ............................................................................... 26

Appendix: Financial Statements .................................................................................................................. 27

Appendix: Management & Board of Directors ............................................................................................ 29

Share Ownership & Insider Holdings ........................................................................................................... 31

Constellation Software Canada Research | of 38


Investment Thesis

Simply put, Constellation Software acquires Vertical Market Software (VMS) businesses – 260+ businesses taken over and counting since its inception 20+ years ago – and does a great job at it. VMS software businesses (software developed for and customized to a specific vertical’s needs) are structurally attractive with limited competition in each individual vertical. This allows Constellation, when the acquisition is successfully executed, to expand margins and grow its recurring maintenance base organically generating as much cash flow as possible with minimal assets. In the last five years, for instance, Constellation’s ROIC has averaged a stellar 35%+. The increasing cash flow generation in turn funds the acquisition of future VMS to fuel further cash flow growth and so on. This approach has seen Constellation deploy $1.35 bln (~90% of its FCF) in acquisitions over the last 10 years since its IPO in 2006 and expand its FCF 17-fold (for a 33% CAGR). See Exhibit 1. Exhibit 1: M&A Machine

Source: Constellation Software Inc., Raymond James Ltd.

As of July 2016, Constellation had 212 Business Units (BU) serving more than 75 verticals, run by over 200 BU managers that rolled up into CSI via 6 Operating Groups. Each BU is usually organized around a single vertical, although there are a few BUs that serve more than one vertical, and many verticals served by more than one BU. The business units rarely get large. The biggest is 307 employees and two-thirds of employees are working in business units with less than 100 employees. Instead of pursuing economies of scale by centralizing functions such as S&M and R&D, Constellation’s preference is to keep the business units small, and the majority of the decision making down at the business unit level.

Key Highlights

Building Up Maintenance Value with Market Niches Constellation only acquires vertical market niche software (never horizontal software companies). VMS businesses are more structurally attractive. The landscape is less competitive in each individual vertical than say in the more general ERP (horizontal) software industry. Large ERP vendors tend not to compete in very niche verticals, while in-house systems are expensive. Most



times, competitors are small with limited access to capital to pursue growth opportunities and typically lack the professional management found in larger software vendors. VMS also has high barriers to entry as they provide mission critical enterprise level software with high switching costs (relatively expensive and time consuming to replace) and long product development cycles (not many opportunities for competitors to displace you). Maintenance renewal rates are usually quite high (>90%) – customers are sticky. As a result, most of Constellation’s acquired businesses carry a large maintenance revenue base. Maintenance represented ~64% of Constellation’s total revenue in 2015. Exhibit 2: Constellation Growing Maintenance Base


What we found was that Constellation has successfully grown its maintenance base at a 30% CAGR over the last 9 years with ~22% growth coming from acquisitions, and ~8% organically at constant currency. The drivers of organic growth have been new maintenance contracts and price increases offsetting attrition from lost modules and customers. See Exhibit 3 below. Maintenance revenue represents a highly profitable and stable revenue stream. In the case of Constellation, the organic growth drivers have been consistent over the last decade or so and we would expect Constellation to continue to grow its maintenance base/value which backstops at least some of its valuation. Exhibit 3: Maintenance Revenue Growth Drivers


Historical Maintenance 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Maintenance Revenue (US$mln) 116 142 193 252 337 417 510 725 1015 1170

Maintenance Growth from Acquisition 17% 11% 25% 27% 25% 15% 15% 34% 32% 15%

Organic Sources

a) New Maintenance 15% 9% 9% 8% 8% 8% 8% 10% 10% 8%

b) Price Increases & Other 5% 9% 9% 4% 5% 5% 5% 6% 7% 5%

c) Attrition - Lost Modules -2% -2% -3% -3% -2% -2% -2% -2% -4% -2%

d) Attrition - Lost Customers -4% -4% -4% -4% -4% -3% -4% -5% -5% -5%

Maintenance Organic Growth 14% 12% 10% 4% 7% 7% 8% 8% 8% 7%

Estimated effect of FX 0% 0% 0% -1% 1% 2% -1% -1% -1% -6%

Total Maintenance Growth 31% 23% 35% 31% 34% 24% 22% 42% 40% 15%



How do we calculate a maintenance value for Constellation? We assume there is a buyer that just intends to mine the maintenance business – specifically – cut most of the R&D and S&M costs associated with the rest of the business. Under this scenario, there is no “new maintenance growth” and no “price increases” – just customer attrition over time. If it’s a software buyer, arguably one could cut costs and still be able to offer a migration path to other products over time in which case there may be more value to the business as attrition could be curbed and/or price increases justified. In the case of Constellation, we don’t see another software buyer that offers similar products and therefore we have assumed a financial buyer model. We value the maintenance revenues like an annuity: simply the net present value of the future maintenance cash flows. Constellation provides enough disclosure to allow us to do this exercise. Our DCF returns a maintenance intrinsic value of ~C$325/share. Please let us know if you would like a copy of our maintenance DCF. What does Constellation maintenance value mean? For one thing, if the stock ever gets to that level (C$325/share), we would just buy the stock. However, Constellation has not traded at/around its maintenance value since 2013 (see Exhibit 4). In fact, recently it has been trading at a substantial premium to its maintenance value (as high as 130% premium; i.e., 2.3x its maintenance value in 2015). The market has been increasingly willing to pay up for Constellation’s acquisition engine. The large premium to maintenance value has moderated this year, now at ~75% premium (or trading at 1.75x maintenance value). Constellation shares have not been at a “cheaper” premium since late 2014 – so relatively speaking, this might indicate an interesting opportunity if the timing is right and you expect some of the key financial metrics to accelerate. Exhibit 4: Constellation Software Premium/Discount to Maintenance Value

Source: Constellation Software Inc., Raymond James Ltd., Capital IQ



For some additional perspective, we also show how another software acquirer, Open Text, has been trading relative to its maintenance value over time. In the case of Open Text, trading at its maintenance value has been a strong buying signal without fail the last few times (see Exhibit 5). Open Text currently trades at a ~50% premium to its maintenance value – vs. Constellation’s 75% premium. Exhibit 5: Open Text Premium/Discount to Maintenance Value

Source: Open Text, Raymond James Ltd., Capital IQ

M&A Prowess Ultimately, Constellation is a capital allocator which is working on behalf of its shareholders to acquire strong VMS operators. In our view – and we doubt you will find many investors disagreeing with this – Constellation has proven to be a better capital allocator than most. So paying some premium for this M&A prowess is justified. In our analysis of Constellation, we look at a peer group of acquirers (platform acquirers, as well as asset optimizers). Additionally, we look at how much incremental free cash flow each dollar spent on acquisitions generates. It’s a bit simplistic, but for everyone in the peer group, M&A has driven the majority of growth in the period analyzed. What we found is that over the last 10 years, Constellation has generated $0.32 of incremental free cash flow every year for $1 spent on M&A (32% FCF/M&A). This compares to a peer group of acquirers averaging 16% over the last 10 years. Jack Henry (JKHY) is less active in M&A (last major acquisition in F2010), making the comparison less relevant. After JKHY, the nearest comparable is Oracle at 20% FCF/M&A. So on a FCF return basis, Constellation consistently pays back the cost of acquisition in ~3 years (vs. comps of ~6 years). Interestingly, unlike its peers, the 3-year, 5-year, and 10-year average FCF Growth in Dollars/M&A Spend for Constellation are consistently ~30% FCF/M&A. This consistency gives us increased confidence in management’s ability to execute on their forecasts.



Exhibit 6: Efficiency of M&A – Tops the Group & Consistent

Source: Company Reports, Raymond James Ltd., Capital IQ

A Team/System That Has Produced Incredible Results While we spend a lot of effort figuring out how much something is worth in a very short time period (a one-year horizon), arguably for long-term investors, finding companies that can consistently and profitably reinvest their capital over decades is much more critical. The Constellation team and system has produced incredible results since its IPO. Importantly, can it scale and continue to produce those returns consistently? The Team In the last 5 years, Constellation has made acquisitions with an average revenue contribution of ~$8 mln. This metric has not changed much given the nature of VMS businesses serving niche vertical markets. For Constellation’s acquisition strategy to continue to have a meaningful impact given the larger size of the company now, it has to scale up the volume of acquisitions. Management is trying to increase the pace of acquisitions from ~20/year up to ~50+/year with 1-2 large transactions every year. Constellation’s organizational structure is designed around a culture of decentralization where every team is self-managed and run by trusted individuals with experience and integrity. Constellation has over 200 of these trusted individual leaders to run the business units. While President/Chairman Mark Leonard used to review every business deal, this is no longer possible and the investment process has been pushed down to the Operating Group level and more recently even further down to the BU level. The idea is for each of the 200 individual BU leaders to acquire a similar business in their niche every 3-5 years following the Constellation acquisition criteria and coach them to perform. The BU leaders still would need some M&A support – the M&A team has thus grown quickly to 42 employees as of 3Q15 (from 30, a year prior).

Company Ticker F2013 F2014 F2015 3 YR Avg 5 YR Avg 10 YR Avg

Constellation CSU 51% 23% 46% 31% 31% 32%

Software Tech

Descartes DSGX 36% 24% 11% 12% 12% 13%

OpenText OTEX 21% 23% 6% 9% 12% 14%

Enghouse ESL 30% 61% 3% 26% 20% 18%

Oracle ORCL 10% 23% -40% -1% 24% 20%

Jack Henry JKHY - - 39% - 34% 39%

SAP SAP 0% -43% 4% -2% 2% 7%

Average 19% 18% 4% 9% 17% 19%

Comparable M&A Acquirers

Roper ROP 8% 4% 29% 9% 12% 12%

Danaher DHR 5% 15% 0% 4% 9% 9%

Ametek AME 6% 14% -9% 3% 8% 11%

Average 6% 11% 7% 5% 10% 11%

Dollar FCF Growth / M&A Spend

This metric helps us measure EFFICIENCY OF CAPITAL SPEND - how much incremental FCF is yielded

from M&A Spend. (Higher = Better)

EFFICIENCY OF CAPITAL SPEND

Dollar FCF Growth/M&A Spend



Exhibit 7: Constellation Corporate Acquisition Team Structure

Source: Constellation Software Inc.

Incentive bonuses are based on long-term profitability (ROIC) plus net revenue growth (net revenue is IFRS-based, inclusive of inorganic increases), thereby incentivizing managers to look for long-term good M&A acquisitions, to counter the short-term incentive of increasing revenues at any cost. If someone overpays, the capital base is also stuck with you for life. If someone cuts R&D to increase margin, in the short-term this might be fine, but the growth quickly slows down. As well, to incentivize employees to share in the growth of the company, but without diluting shareholders, Constellation encourages employees to use their incentive bonuses to purchase common shares, while senior management is mandated to use their bonus to buy shares. In the 2011 President’s Letter “We incent managers and employees with shares (escrowed for 3-5 years) so that they are economically aligned with shareholders. In return, we need and want loyal employees… if they aren't planning to be around for 5 years, then they aren't going to care much about the outcome of multi-year initiatives, and they certainly aren't going to forego short-term bonuses for long-term profits.” Senior executives are mandated to reinvest 75% of their after-tax bonuses into shares (Management Information Circular, 2015) to mitigate the risk of taking excessive risks with operations. Only once in every 5 years can a senior executive receive their full bonus in cash, and only if they place the number of shares that equates to the same value of freely tradeable shares in escrow (under the same conditions as if shares were purchased). As a result, insiders own ~17% of the company shares – 10% by employees, President/Chairman Mark Leonard still holds ~2% directly and his adult children control ~4.7%. The System Constellation’s targets have to be VMS businesses with experienced and committed management, high market share with rational competitors, and no customer dependency (hundreds or thousands of customers). With decades of acquisition experience and hundreds of operating businesses providing proprietary data on base rates (for organic revenue growth, typical margins, and potential market share improvements in specific niche markets), Constellation is in the unique position of being able to test hypotheses on M&A targets’ forecasts and subsequently get more comfort on cash flow projections and whether they can hit their hurdle rate. This unique database of knowledge highly differentiates Constellation from other potential software acquirers. Out of the 260 acquisitions made over the years, only 5 currently are below targeted hurdle ROIC rate, whilst three have had goodwill impairment charges.



The VMS Landscape M&A Opportunity Our analysis of software vendors from Capterra.com indicate substantial fragmentation with approximately 38,000 VMS vendors spanning more than 12 vertical markets, with the highest concentrations in Retail and Media & Services verticals – see Exhibit 8. Constellation has also expanded their database of potential targets with now well over 30,000 targets (adding 4k+ targets per year for the last 3-4 years). Each target has a contact name next to it, with the expectation of staying in contact 3-4 times a year. Every time Constellation enters a new niche, every other competitor gets added to the list.

Exhibit 8: No Shortage of M&A Targets

Source: Capterra.com, Gartner Inc., Raymond James Ltd.

Is the Acquisition Engine Scaling Up? Constellation has been decentralizing M&A for several years (at least the last five years), but perhaps with more focus in recent quarters (as seen in Exhibit 9) showing the trend of an increasing number of small acquisitions on a trailing 12-month basis. While this breakout could be a positive point in the cycle, we continue to monitor this trend in order to determine if this level can be sustained. Exhibit 9: Number of Acquisitions Quarter By Quarter


Vertical Market# of Software

Vendors%

1 Retail 7,315 19.3%

2 Media and Services 7,208 19.0%

3 Healthcare 2,382 6.3%

4 Manufacturing 2,070 5.5%

5 Transportation 1,830 4.8%

6 Education 1,626 4.3%

7 Banking & Securities 1,522 4.0%

8 Wholesale Trade 1,394 3.7%

9 Government 795 2.1%

10 Utilities 772 2.0%

11 Insurance 528 1.4%

12 Other 10,493 27.7%

Total 37,935



Timing Not Without Risks - Things To Watch

Organic Growth – Room to do better Organic growth fluctuates a bit as it goes through cycles. Sometimes, Constellation has acquired poorly performing businesses (e.g., PTS acquired in November 2009) that hurt organic growth near term, but after a period of stabilization, now generates high ROIC for the company. Still, over the last 10 years, Constellation organic growth has averaged a respectable ~3% per year which is in-line with US Gross National Product (GNP) growth of ~3% over that same period. F2016, thus far, has been mixed with zero growth in 1Q, but then 2Q rebounding with 3% organic growth. See Exhibit 10. Exhibit 10: Constellation Organic Growth


The VMS market remains generally buoyant. According to Gartner, the VMS market in 2015 was a $122.3 bln market that grew 6.5% worldwide (up from +6.2% in 2014). In North America, where 57% of Constellation’s revenues are generated, the market was $62.1 bln growing 8.3% y/y in 2015. Public sector was $23.7 bln growing 6.9% y/y with the private sector at $98.6 bln growing at 6.5% y/y in 2015. To us, all of this indicates room for improvement in Constellation’s organic growth going forward.



Exhibit 11: VMS Market Breakdowns

Source: Constellation Software Inc., Raymond James Ltd., Gartner (Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2014-2020, 1Q16 Update)

Paying for Constellation Acquisition Engine Prospectively Constellation’s stellar track record has led the market to bake in some element of M&A in forecasts and valuation. This assumes Constellation will continue to be able to make acquisitions at similar cash flow based IRR hurdle rates and also continue to deploy most of its cash flow into M&A – which may or may not happen. Pressure on Hurdle Rates President/Chairman Mark Leonard noted in his 2015 Presidents Letter: “…I have a feeling that acquisition multiples, acquisition size and acquisition profitability have all increased over time for the HPCs. In [Constellation’s] case, I’ve confirmed the first two (acquisition multiples and size are going up), but need to check the third.” While we don’t have perfect information, we tested both hypotheses using Constellation’s current disclosure around acquired revenue (given out every quarter). Our estimate of the four-quarter average acquisition multiple shows an increasing trend since F2012. See Exhibit 12. Higher acquisition multiples are bound to lead to lower ROIC.



Exhibit 12: Constellation Four-Quarter Average Size Per M&A vs. Acquisition Multiple


In recent years, Constellation has also begun looking at larger targets and in those cases, they have had to lower their hurdle rates in order to put in competitive bids (e.g., for Total Specific Solutions, they targeted a lower hurdle rate). Management has talked about 1-2 large transactions per year which might depress the overall ROIC, especially early on, even if they are tracking to plan. In our DCF, we assume a declining ROIC for this reason (see our Valuation section for more details). M&A Pace – Easier Said Than Done Historically, Constellation has been able to fully deploy its FCF into M&A (on average has deployed $215 mln/year for last five years). As Constellation grows, we expect they will need to deploy larger amounts of capital on investments each year, maybe in the form of larger transactions (elephant-size deals) to keep the pace. This is easier said than done. Smaller transactions, where private equity firms generally don’t play, is a place where Constellation is able to consistently deploy capital. For larger transactions, Constellation has been much less successful. In 2015, 80 large VMS transactions occurred and Constellation took part in roughly one-fourth of them and closed none. Similarly, in 1Q16, there were 10 large transactions that occurred. Constellation was aware of seven of them and participated in none. In our DCF, we assume the pace picks up given recent efforts to scale up its acquisition engine and Constellation deploys $1.6 bln over the next five years as the baseline (+50% vs. $1 bln deployed over last 5 years). Management has indicated that they have no intention of paying up just for the sake of M&A and would rather build up cash or just give it back to shareholders. If Constellation cannot find targets meeting its strict hurdle rates, a slower M&A pace would definitely impact our DCF. Exhibit 13 shows the sensitivity of our DCF to the pace of M&A activity (see our Valuation section for more details).



Exhibit 13: Discounted Cash Flow Sensitivity To Future M&A Activity


Have Margins Peaked? EBITDA margins and ROIC go hand in hand. The very high ROIC that Constellation has sustained recently is in a large part driven by the substantial margin expansion. Constellation saw a 680 bps increase in the EBITDA margin since 2010 from 18.4% to 25.2% in 2015, with more than half of the improvement coming from just the past two years (2014-2015). FX was a tiny contributor to this margin improvement (less than 1%, according to Constellation). We believe some of the 2014-2015 margin improvement resulted from “unusual” acquisitions. From the 2015 President’s Letter: “We acquired some large, high margin but shrinking businesses with attractive tax characteristics and higher than normal profitability resulting in consolidated EBITA/revenue margin reaching record levels”. Additionally, we think other large acquisitions (e.g., TSS) turned around very well with significant improvement in their profitability which drove Constellation’s overall margin improvement. These “unusual” factors are less predictable/repeatable and given we also expect a pick-up in M&A activity (typically dilutive to margins early on), we believe margins may have peaked in the near-term. So far, 1H16 is showing EBITDA margins slightly down from F2015. See Exhibit 14.

Exhibit 14: Historical Adjusted EBITDA


One trend that is more sustainable is the shift of revenue mix towards higher margin segments, most notably maintenance – and we expect the mix shift to continue to buoy margins to some extent. Revenue from professional services has essentially flatlined over the last 10 quarters with

Last 5

years

(US$mln)

Next 5

years

(US$mln)

Years 6-10

(US$mln)

DCF

(C$/share)

Historical M&A $1,078

RJL Base Case M&A

(Historical M&A +50%)$1,600 $3,668 $577

Scenario AnalysisNext 5

yearsYears 6-10 DCF

No M&A $0 $0 $347

Historical M&A Pace $1,078 $2,472 $502

Double Historical M&A Pace $2,157 $4,944 $658



year-over-year quarterly growth rates hitting the single digits and dropping into negative territory (-1% y/y average in the last six quarters). All the while, higher margin license and maintenance revenues have averaged +10% y/y and +17% y/y growth in the last six quarters, respectively. The result is maintenance revenue has increased to 64% of revenue (from 54% in 2010) and professional services have shrunk to 21% of revenue (from 27% in 2010). See Exhibit 15. Exhibit 15: Improving Revenue Mix Boosting Margins


Investment Risks

Acquisition Risks. 1) Identifying acquisitions within their IRR hurdle rates. Constellation has strict IRR hurdle rates; if it cannot continue to identify and acquire good/excellent VMS businesses within its IRR hurdle rates, its future growth may be impacted. 2) Large Acquisition Risk. Large acquisitions of distressed companies makes achieving its historical IRR hurdle rates harder. Financing larger acquisitions also will depend on Constellation’s ability to generate FCF in the future. See our Valuation section for a discussion on our DCF sensitivity if Constellation makes no further acquisitions. Key Executive Risks. Constellation has operated in a decentralized format which mitigates this risk to some extent. Still, many members of its senior management team are very important to Constellation’s business given their skills and experience (finding, valuing, closing transactions, and coaching BU leaders to Constellation’s core values) and industry contacts. Mark Leonard (President, Founder, Chairman) is ~60 years old and will retire at some point. Adjusted vs Reported EPS profit variance. There is increasing talk in the US about heightened SEC scrutiny of non-GAAP financial reporting. Constellation reports in Canada (IFRS) so should not be impacted by the SEC growing focus on these non-GAAP financial measures. That said, if this scrutiny in the US impact investors’ sentiment around non-GAAP measures, this may carry over to Canadian markets too. 2015 saw Constellation report EPS of $8.36 versus Adjusted EPS of $17.51 ($9.15 delta or 109%). Economic Risks. 69% of Constellation’s revenues are from the Public Sector. Public Sector spending on software can be cyclical and sensitive to economic downturns, which can delay spending. Constellation is diversified in many vertical sectors which helps smooth out the impact of economic cycles. Geographic Concentration. In 2015, 54% of revenue was from the US, 12% from Canada, 29% from UK/Europe, and 5% from the rest of the world. With the FX impacts on GBP and Euro from



the Brexit vote, there may be some impact on topline revenues; however, typically revenues are denominated in the same currency as expenses, so the natural hedge should reduce the EBITDA impact. Constellation does not use currency hedges. Longer term, the impact on end-market demand is less certain and may need more time to gauge what the impact is more broadly. Exhibit 16: Revenue Breakdown: Geography


Customer attrition. In the last 10 years, Constellation has averaged -2% annual maintenance attrition due to lost modules, and -4% from lost customers. So far they have been able to replace the attrition with new maintenance and price increases. If they fail to command a price increase due to competition and price pressure, or fail to win new customers, there is risk to organic growth. Dividend Discussion. Constellation pays a US$1/share/quarter dividend which amounts to a 1% dividend yield. The dividend has been unchanged since 2013, and the company seems to have no intention of increasing it. In fact, on several occasions, management has indicated it would be willing to cut the dividend “should other attractive sources of capital not be available”, or “if a very large acquisition came along … I would not hesitate to recommend to the Board that we sacrifice the dividend to help announce that acquisition”. However, we believe that management understands the importance of the dividend to many of its shareholders and wouldn’t “disenfranchise” these shareholders so quickly. Constellation is also looking to introduce a new class of common shares called “DE Common Shares” or dividend equivalent shares. This share structure was recently approved by shareholder vote. The DE shares will be the same as Common Shares except: 1) DE shares will not be paid a regular dividend; 2) DE shares will not be listed on any stock exchange; and, 3) DE shares will be subject to a one-year holding period. Initially, one DE share will be convertible from one Common share. After a dividend is paid on the Common shares, the conversion ratio will be adjusted to represent a fair market value. The purpose of the split share structure is to give shareholders the choice of a yielding share or a capital appreciationfocused share. The DE share will be more tax efficient over a DRIP.

Company Overview

Constellation Software is a C$11+ bln market cap company of VMS businesses. These VMS businesses provide mission critical software solutions that solve specific customer needs in their particular verticals, typically automating aspects of their business processes. Based in Toronto, Canada, Constellation serves customers globally both in private (commercial customers) and public sectors (government customers), with offices in North America, Europe, Australia, South America, and Africa. Constellation was founded in 1995 and became a public company in May 2006, growing mainly through acquisitions but also organic growth, now with over 85,000 customers in over 100 countries served by six operating groups (see Exhibit 17) in more than 75 vertical markets (see Appendix). At the end of June 2016, Constellation employed 11,218 employees globally.



Constellation began trading on the TSX on May 18 2006 when private shareholders (OMERS and Birch Hill Equity Partners) chose to sell 5.18 mln shares at C$17/share to the public markets. Constellation did not receive any proceeds. Exhibit 17: Constellation Software Operating Business Units




Exhibit 18: Constellation Software New Vertical Markets Added Via Acquisitions By Year


Products Constellation has six operating business units in over 75 vertical markets. Each vertical market has at least one software product, but often multiple product lines. See Appendix for a list of all vertical markets Constellation competes in. Constellation’s operating businesses use vertical-focused direct sales as its primary distribution channel. Constellation believes direct sales teams increase visibility, market penetration, long- term customer relationships, and cross selling of new products. R&D is focused on expanding functionality of existing software in existing verticals. New verticals are typically acquired first and developed after. In the past, Constellation has talked about organic growth initiatives taking five years to begin generating positive cash flow and taking 7-10 years to generate superior financial returns. Organic initiatives cost substantially less than growth by acquisition, but R&D investments are more difficult to correlate with immediate organic growth. Some vertical market software examples: Public Transit – Software to automate scheduling and routing of vehicles. Keeping accurate timekeeping of employees used in payroll systems, systems to manage maintenance activities and daily assignments, and monitor employee performance. Example: Trapeze offers several solutions including: Intelligent Transportation Systems to automatically coordinate real-time data by displaying the top priorities to dispatchers, Traveler Information for delivery schedules and real-time information to fixed route and demand response passengers, Transit Operations and Workforce Management Solutions track any employee who can be assigned a shift, designed to



automate bidding, dispatching, timekeeping, workforce management, and yard management functions. Private Club – Software to manage membership accounting, point of sale, gift cards, credit books (tournament vouchers, gift cards), loyalty programs, and recurring billing systems. They even operate a private club network for hundreds of golf clubs in the US & Canada to allow clubs to have reciprocal play. Example: Jonas Club Software has helped over 2,300 clubs around the world discover the right mix of software solutions to optimize the management of their unique businesses. Provides accounting and membership, payroll, employee management, and HR for the following: food and beverage, retail sales, spas, gyms, fitness centers and classes, hotels, marinas and more. Construction – Software to manage projects (estimating project costs, allocating resources, payroll, invoicing). Example: Jonas Construction Software is a fully integrated construction software solution built specifically for the construction industry. For mechanical contractors, HVAC contractors, electrical contractors, plumbing contractors, general contractors, specialty trade contractors, design builders, home builders, or real estate and land developers. The construction software manages the administrative end of the business. Over 1000 customers, 97% retention rate, 85% of customers continue to use the solution for over 10 years. Better cost estimates, integrated accounting tools to improve account receivable turnover, generate business reports, integrated into excel, and manage subcontractors. Pulp and Paper – Business management system integrated into a single, standardized system that supports the enterprise from order forecasting and budgeting, complex pricing, invoicing, business process optimization, integration with ERP, multi-mill order entry, block scheduling, customer web access, compliant/claims management, and reporting. Retail – Software for any retail business: Wine and Spirits, Drugstores, Pet Stores, Apparel, Jewelry, Garden Center, Auto dealers, Party Suppliers, Clearance Centers, Luggage stores, etc. Everything a retailer needs to run a business, point of sales and store management, customer relationship management and loyalty, business intelligence, mobile solutions, warehouse and supply chain management, and head office operations. Utilities – Software to help utilities improve revenue streams and provide first-rate customer service. Automate repetitive tasks, move paper-based processes online, easier to adopt training systems, customer account services (meters, billing, moving customers, payment plans), enable complex rating (pricing) engines, consolidated billing for large accounts, collections management, reporting, inventory management and maintenance scheduling for meters. Justice – solutions for courts, attorneys and specialty courts to better manage cases. Easier access to information on the case, person histories, scheduling of tasks, and real time monitoring of new events. Notable Acquisitions Picis was acquired on May 20 2015 by Constellation’s subsidiary Harris. Picis is a provider of perioperative management solutions and emergency department solutions for over 700 hospitals globally. The acquisition expanded Harris’ acute care business in the US, Canada, and internationally. The software optimizes perioperative, anesthesia and critical care environments and workflows. In 2007, Picis was taken private by Goldman Sachs Private Capital Investing for $155 mln at 2.2x TTM revenue; it was subsequently purchased by OptumInsight in 2010 before being sold to Constellation in 2015. Total Specific Solutions (TSS) was acquired on December 16 2013 by Constellation’s Netherlands subsidiary for €240 mln and formed a new operating group. TSS was one of the largest VMS businesses in the Netherlands, with solutions for general practitioner, pharmacy, long-term care, mental care, property tax, and civil affairs markets. TSS had approximately 1400 employees at the time of acquisition with revenue of €174 mln (~€90 mln maintenance revenue). A one-year term loan was taken to fund the acquisition. On December 23, 2014, the sellers of TSS exercised their right to purchase a minority interest of 33.29% of TSS (Constellation Software Netherlands



Holdings Cooperatief U.A.) for €39.4 mln (US$48.5 mln). The minority owners may at any time exercise a put option to sell all or a portion of their interest back to Constellation. After 2023, Constellation has a call option to purchase the minority ownership in TSS. There is a valuation premium if the call option is exercised versus the put option. 100% of the financial results of TSS are included in the consolidated financial statements of Constellation. PTS was acquired from Continental on November 2, 2009 for $3 mln. In 3Q10, Constellation received $6.8 mln from Continental to resolve an existing dispute, netting Constellation a negative goodwill. PTS annualized revenue was $25 mln in 2008, but was in a negative cash flow position. Constellation rarely breaks out the results from acquisitions; however, given the distressed nature of PTS, revenue recognition on some contracts would not be reflected in revenues and would show a discrepancy in the cash flow. This extra disclosure helped reconcile that difference. For the first 12 months post acquisition, PTS generated $97.6 mln revenue, $8.3 mln EBITDA, and $0.36 mln CFO. PTS has generated substantial revenue and CFO for Constellation given the negative price it paid. 2010: $110 mln revenue, 11% EBITDA margin and $13.1 mln CFO. 2011: $144 mln revenue, 15% EBITDA margin and $15.9 mln CFO. 2012: $130 mln revenue, 18% EBITDA margin and $15.4 mln CFO. Insider Holders Insiders own ~17% of the company shares – 10% by employees, President/Chairman Mark Leonard still holds ~2% directly and his adult children controls ~4.7%. President/Chairman Mark Leonard reduced his salary to zero in 2014 and lowered his bonus factor and in 2015 eliminated his salary and incentive compensation completely, while also not charging any expenses to the company. On August 5, 2015, Mark Leonard’s holding company holding 1,000,000 shares (4.7% of S/O) was transferred to his adult children. With the new control, an agreement was entered that the holding company will provide notice within 5 days of any sale, transfer or assignment of shares.

Exhibit 19: Insiders own ~17% of the company shares

Source: Constellation Software Inc., Raymond James Ltd., Ink Research

Revenue Breakdown - Split of Public and Private Revenues While Constellation serves a wider reach of private sector verticals, it is the public sector that brings in two-thirds of the revenue. However, private sector verticals are growing at a faster pace, partially due to stronger organic growth (5% private vs. 4% public average annual organic growth over the last 5 years), but mostly by choosing acquisitions in the private sector (25% private vs. 18% public average annual M&A growth over the last 5 years).

Insider Holders Position with the Company Shares % of O/S

Mark Leonard Founder, Chairman, President 438,342 2.07%

Mark Miller COO, Director, CEO of Volaris Group 312,483 1.47%

Dexter Salna President of Perseus Operating Group 220,617 1.13%

Barry Symons CEO of Jonas Operating Group 159,636 0.75%

Bernard Anzarouth VP of M&A 146,120 0.69%

Jeff Bender Director, CEO of Harris Operating Group 75,407 0.35%

Stephen Scotchmer VP, Lead Independent Director, Chairman of

Compensation, Nominating & HR Committee

71,004 0.33%

John Billowits CEO of Vela Software International 41,219 0.19%

Brian Beattie CFO at Volaris Group 25,056 0.12%

Jamal Baksh CFO Constellation Software 7,493 0.04%

Mark Dennison General Counsel, Secretary 3,161 0.01%

Meredith Hayes Director, Member of Audit Committee 2,415 0.01%

Ian McKinnon Director 1,934 0.01%

Robin van Poelje CEO of TSS 597 0.00%

Robert Kittel Director, Member of Audit Committee and

Compensation, Nominating & HR

573 0.00%

Jeffrey MacKinnon CFO of Jonas Operating Group 478 0.00%

Paul McFeeters Director, Member of Audit Committee 23 0.00%

1,506,558 7.17%



Exhibit 20: Revenue Breakdown: Public Sector vs Private Sector


Industry Overview, Growth & Competition

VMS as a whole has seen accelerating growth in the last couple of years, growing 3.9% in 2013, 6.2% in 2014, and 6.5% in 2015, now at $122 bln annual revenue according to Gartner (Market Share Analysis: Vertical-Specific Software, Worldwide, 2015). Gartner forecasts VMS to continue growing at a healthy clip in 2016, with 6.4% y/y forecast growth to $130 bln and growth through to 2020 of 7.6% CAGR to $176 bln (Gartner Forecast Analysis: Enterprise IT Spending Across Vertical Industries, Worldwide, 1Q16 Update Published: 19 May 2016). Exhibit 21 shows 2015 Vertical breakdown by industry revenue and forecast five-year CAGR. Exhibit 21: 2015 Vertical Market Software Breakdown by Industry Revenue

Source: Gartner (Forecast Analysis: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2014-2020, 1Q16 Update), Raymond James Ltd.



Competition VMS are niche offerings, targeting small- and medium-sized business, where large software vendors typically do not compete and when they do compete, their solutions are limited in the specific functionality necessary to be competitive. On the other hand, smaller software vendors that have a stronger niche offering often lack the capital and long-term strategy to control and grow market share. This bifurcated competitive landscape creates an opportunity for Constellation. With larger software vendors, Constellation wins because their technology provides vertical-specific functionality. With smaller VMS vendors, Constellation wins because of the financial strength of the head office company, instilling confidence in customers that longer-term, they will be around to provide the next generation of software. Incidentally, these smaller VMS vendors become good targets for Constellation to acquire.

Exhibit 22: Constellation Software Competitors


Financial Model/Metric Highlights

ROIC. Return on Invested Capital as defined by Constellation, is a ratio of Adjusted Net Income to Average Invested Capital, which is based on its estimate of the amount of money that its shareholders had invested. Constellation adds Adjusted Net Income and subtracts dividends, and adds new share issuances and minor changes for incentive programs and amortization of impaired intangibles. We add Net Debt to the Invested Capital to neutralize the return benefits from leverage. The ROIC jump in 2011 is attributable to a recovering economy (7% organic net revenue growth) and reduced growth expenses (staff, long-term R&D) as they were in a strategic review process. The ROIC decline in 2013 was due to increasing amounts of debt taken for acquisitions, increasing the Average Invested Capital. Exhibit 23: Reported ROIC vs ROIC Debt Adjusted


Private Sector Competitors:

Xerox Amdocs Oracle

IBM McKesson Sage Software

Oracle Cerner Roper Industries

Tyler Technologies Epic Systems

INFOR Thomson Reuters

Cisco Al lscripts Healthcare

HP athenahealth

Nokia

Public Sector Competitors



Cash Flow Conversion. Cash flow conversion is defined as the ratio of Cash Flow from Operations (CFO) to Adjusted EBITDA. CF conversion has averaged 87% over the last six years. We assume 2016 CF conversion will be in line with historical cash conversion at 86%, declining every year as Constellations cash tax rate gradually increases over time. Unless Constellation acquires companies with significant tax loss carry forwards, this decline in cash conversion is inevitable. Exhibit 24: Free Cash Flow and Cash Flow Conversion


Organic Growth. Historically, Constellation has grown organically between 2%-3%. We assumed the same for our DCF, but note that management continues to explicitly target growth at 2% above GNP (or cost of living) of about 3%, through market share gains.

Exhibit 25: Constellation Organic Growth

Source: Constellation Software Inc., Raymond James Ltd., ycharts.com

Seasonality. 1Q and 2Q are typically lower margin quarters due to payroll taxes, and 1Q is also lower margin because of the yea-end sales push in 4Q pulling in some revenue forward from 1Q, resulting in less (high margin) license revenue.



Recent Financial Highlights 2Q16 Results Constellation reported 2Q16 revenue of $529 mln, adjusted EBITDA of $135.6 mln and adjusted EPS of $4.24 versus consensus of $510 mln revenue, $131 mln Adjusted EBITDA, and $4.69 Adjusted EPS. The revenue and EBITDA beats came on improved and broad based organic revenue growth (+3% y/y cc vs 0% in 1Q, even though 1% is attributable to hardware sales) in the quarter, +15% y/y professional services growth, a rebound in high margin license revenue and strong maintenance revenue (+22% y/y for the third straight quarter). Adjusted EBITDA margin was 25.6% (1Q: 23.1%). The EPS miss was partially due to a higher tax rate.

Financial Model Forecasts 2016 Forecast We are modeling $2.09 bln in revenue which implies 3% of organic growth and 11% of acquired growth. We forecast $519 mln adjusted EBITDA (24.8% margin), and $17.94 Adjusted EPS vs. consensus of $2.11 bln revenue, $536 mln Adjusted EBITDA and $18.03 Adjusted EPS. We are assuming Constellation can close ~$250 mln in M&A for 2016. 2017 Forecast We are modeling $2.45 bln in revenue, which implies 3% of organic growth and 14% of acquired growth, and $594 mln adjusted EBITDA (24.3% margin), and $22.05 Adjusted EPS vs. consensus of $2.44 bln revenue, $609 mln Adjusted EBITDA and $21.73 Adjusted EPS. We are assuming they can close ~$275 mln in M&A for 2017.

Valuation & Recommendation

We use a 10-year DCF (2017 to 2026). In Exhibit 26, our base case scenario analysis assumes:

A declining debt-adjusted ROIC from ~31.8% in 2015 to ~24% in 2026. The decline reflects increased contributions from new acquisitions at lower hurdle rates and accumulation of excess cash, driving overall ROIC down.

A faster pace of M&A than historical. We estimate Constellation invests $1.6 bln (or 50% more than historical M&A pace) in the first five years from 2017-2021 and $3.7 bln from 2022-2026.

A declining margin profile from 25% in F2015 to 22 % in 2026.

A declining cash flow conversion from 86% CFO from EBITDA conversion declining 1% a year to 80% as cash taxes increase

A 3% organic growth rate which is in-line with what they have historically generated.

A 10% discount rate. This yields an Equity Value of US$9.3 bln or C$577 per share.



Exhibit 26: Constellation Software Discounted Cash Flow Model


If we assume that Constellation makes no further acquisitions, our model calculates an equity value that is ~60% of the current stock price. The chart below shows the sensitivity of our DCF to the pace of M&A activity. Exhibit 27: M&A Sensitivity to Our DCF


Similarly, the model is quite sensitive to the organic growth that Constellation is able to achieve. Historically, Constellation has grown organically between 2%-3%. Our model assumes 3% organic growth but adding another 1% organic growth to our base line assumption increases the calculated equity value by ~19% or $111/share. Doubling the organic growth to 6% would almost double the calculated equity value.

Trading Multiples Constellation currently trade at 15.0x 2017 EBITDA and 18.8x 2017 EPS, more-or-less in-line with its peers (software, as well as comparable M&A acquirers). The current trading multiple is also at the higher end of its historical range (falls between 1 and 2 standard deviations from the mean). We are initiating coverage with a Market Perform rating and a $575.00 target price based on 16x our C2017 EBITDA and supported by our DCF model.

Constellation DCF 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Terminal

Revenue 634 773 891 1211 1669 1838 2095 2447 2833 3249 3696 4159 4763 5549 6416 7361 8384

Organic Growth -4.0% 10.0% 1.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Acquire Growth 48.8% 12.0% 14.2% 31.9% 33.9% 7.1% 11.0% 13.8% 12.8% 11.7% 10.7% 9.5% 11.5% 13.5% 12.6% 11.7% 10.9%

Total Growth 44.8% 22.0% 15.2% 35.9% 37.9% 10.1% 14.0% 16.8% 15.8% 14.7% 13.7% 12.5% 14.5% 16.5% 15.6% 14.7% 13.9%

EBITDA 116 169 186 244 365 463 519 594 669 753 842 935 1057 1220 1411 1619 1845

EBITDA Margin 18.4% 21.8% 20.9% 20.1% 21.8% 25.2% 24.8% 24.3% 23.6% 23.2% 22.8% 22.5% 22.2% 22.0% 22.0% 22.0% 22.0%

Adjusted Net Income 84 140 172 207 274 371 422 471 557 626 700 780 887 1028 1193 1373 1567

Annual M&A Spend 83 46 139 523 122 249 250 275 300 325 350 350 600 667 734 800 867

Invested Capital (with Debt) 341 385 476 786 1051 1165 1392 1667 1967 2292 2642 2992 3592 4259 4992 5792 6659

ROIC 24.6% 36.4% 36.2% 26.3% 26.1% 31.8% 30.3% 28.3% 28.3% 27.3% 26.5% 26.1% 24.7% 24.1% 23.9% 23.7% 23.5%

FCF 100 130 139 209 328 383 423 477 528 585 644 704 793 912 1053 1207 1374 1374

FCF to Shareholders 5 42 64 84 84 85 85 85 228 260 294 354 193 245 319 407 507 1374

Discount Factor 91% 83% 75% 68% 62% 56% 51% 47% 42% 39% 39%

PV FCF to shareholder 77 189 195 201 220 109 126 149 172 195 7857

M&A ROIC 21% 9490

Shares Outstanding 21.19 177

Discount Rate 10% 9313

Terminal Growth Rate 3.0% 1.312

$576.66

Enterprise

Net Debt

Equity Value

FX

Share Value

Last 5

years

(US$mln)

Next 5

years

(US$mln)

Years 6-10

(US$mln)

DCF

(C$/share)

Historical M&A $1,078

RJL Base Case M&A

(Historical M&A +50%)$1,600 $3,668 $577

Scenario AnalysisNext 5

yearsYears 6-10 DCF

No M&A $0 $0 $347

Historical M&A Pace $1,078 $2,472 $502

Double Historical M&A Pace $2,157 $4,944 $658



Exhibit 28: Historical Forward EV/EBITDA Range

Source: Raymond James Ltd., Capital IQ Exhibit 29: Comparable Companies

Note: Estimates for Constellation Software, Descartes Systems, and Open Text are from Raymond James Ltd.; all other estimates are from Capital IQ. Source: Raymond James Ltd., Capital IQ

Constellation SoftwareAll values in US$ mlns, except per share data or otherwise stated.

Ticker Price Mkt. Cap. EV/Sales EV/EBITDA P/E Growth (15A-17E)

Company Symbol 10-Aug-16 ($ mlns) C15A C16E C17E C15A C16E C17E C15A C16E C17E Rev. EPS

Vertical Software

Sage Group LSE: SGE £7.23 $7,818 5.8 5.2 4.6 20.8 17.6 15.7 29.1 25.6 22.9 13% 13%

Micro Focus International LSE: MCRO £20.02 $4,577 4.6 4.2 4.0 11.6 9.1 8.5 14.3 12.3 11.5 6% 12%

Jack Henry & Associates JKHY $88.93 $7,040 5.5 5.1 4.8 15.6 14.8 13.6 32.2 30.2 27.6 7% 8%

Tyler Technologies TYL $162.52 $6,208 10.8 8.2 7.2 40.5 28.2 23.5 62.7 46.8 41.4 22% 23%

Group Average 6.7 5.7 5.2 22.1 17.4 15.3 34.6 28.7 25.8 12% 14%

CDN Software

Descartes Systems DSGX $20.24 $1,547 8.1 7.3 6.6 24.9 21.6 18.9 31.8 27.5 23.4 10% 16%

Enghouse TSX: ESL $52.54 $1,430 4.7 4.2 3.6 18.9 16.6 13.9 38.1 35.5 29.5 14% 14%

Open Text OTEX $62.45 $7,606 4.9 4.5 4.1 14.3 12.9 12.0 17.8 16.3 14.2 8% 12%

Group Average 5.9 5.3 4.8 19.4 17.0 14.9 29.2 26.4 22.4 11% 14%

Comparable M&A Acquirers

Roper Technologies, Inc. ROP $171.40 $17,562 5.6 5.3 5.0 16.2 15.2 14.3 25.7 26.0 23.6 5% 4%

CA, Inc. CA $34.20 $14,193 3.3 3.4 3.3 11.0 8.7 8.6 14.3 14.0 13.3 1% 4%

Danaher Corp. DHR $81.20 $56,751 3.3 4.0 3.9 14.3 17.2 16.0 18.9 22.8 20.8 (8%) (5%)

Oracle Corporation ORCL $41.08 $174,076 4.3 4.3 4.2 10.7 9.6 9.3 15.7 15.4 14.1 1% 5%

Ametek Inc. AME $47.28 $11,100 3.2 3.3 3.2 11.7 12.8 11.9 18.5 20.6 18.9 (0%) (1%)

Group Average 4.0 4.1 3.9 12.8 12.7 12.0 18.6 19.7 18.2 (0%) 2%

Overall Group Average 5.3 5.0 4.6 17.3 15.6 14.0 26.7 25.0 22.1 8% 10%

Constellation Software Inc. TSX:CSU $543.18 $11,511 4.9 4.3 3.7 19.3 17.2 15.0 23.7 23.2 18.8 12% 18%



Appendix: Full List of Verticals Constellation Operates

Exhibit 30: Verticals Constellation Operates

Source: Raymond James Ltd., Constellation Software Inc.

Private Public

Association management Agri-business

Attractions Asset management

Auto clubs Benefits administration

Buy here pay here dealers Collections management

Cabinet manufacturers Communications

Construction County systems

Education Court

Event management Credit unions

Financial services District attorney

Food services Drink distribution

Health clubs Electric utilities

Healthcare electronic medical records Fashion retail

Home and community care Financial services

Homebuilders Fleet and facility management

Hospitality Healthcare

Housing finance agencies Higher education

Lease management Home and community care

Leisure centers Insurance

Long-term care Local government

Made-to-order manufacturers Long-term care

Metal service centers Marine asset management

Mining Municipal systems

Moving and storage Non-emergency medical

Multi-carrier shipping Notaries

Multi-channel distribution Para transit operators

Municipal treasury & debt systems Pharmacies

Outdoor equipment dealers Public safety

Pharmaceutical and biotech manufacturers Public transit operators

Private clubs & daily fee golf courses Rental

Product licensing Ride share

Public housing authorities School administration

Pulp & paper manufacturers School and special library

Radiology & laboratory information systems School transportation

Real estate brokers and agents Taxi dispatch

Real estate brokers and agents Water utilities

Retail management and distribution

RV and marine dealers

Salons and spas

Supply chain optimization

Textiles and apparel

Third party logistics warehouse management systems

Tire distribution

Tour operators

Wholesale distribution

Window and other dealers

Window manufacturers

Winery management



Appendix: Financial Statements

Exhibit 31: Income Statement


Exhibit 32: Cash Flow Statement


US Dollars

Constellation Software Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Income Statement F2010 F2011 F2012 F2013 F2014 F2015 F2016E F2017E

Revenues (US$ mln) 633.97 773.34 891.23 1210.78 1669.34 1838.31 2093.46 2446.26

Cost of Revenue

Expenses 524.30 612.53 712.92 976.96 1321.26 1392.77 1593.12 1873.84

Staff 356.54 401.38 469.68 643.67 881.59 912.42 1046.73 1235.36

Hardware 45.11 60.85 61.45 73.48 79.53 90.31 102.58 119.87

Third Party License, Maintenance, Professional Services 37.67 51.07 61.47 102.38 152.19 163.68 186.32 217.72

Occupancy 16.84 18.92 21.02 29.31 41.04 43.22 50.24 58.71

Travel 23.09 30.04 35.97 44.72 50.14 54.64 62.80 73.39

Telecommunications 9.18 9.99 11.00 14.21 16.36 17.91 20.93 24.46

Supplies 11.13 15.31 15.31 22.02 9.85 10.95 12.56 14.68

Software and Equipment 26.98 30.95 33.50 39.14

Professional Fees 8.22 8.62 15.03 17.63 22.84 22.62 25.12 29.36

Other 9.78 8.48 14.36 19.59 24.28 29.04 33.50 39.14

Depreciation 6.76 7.87 7.64 9.94 16.46 17.03 18.84 22.02

Adjusted EBITA 109.66 160.81 178.31 233.82 348.08 445.54 500.34 572.43

Adjusted EBITA Margin 17.3% 20.8% 20.0% 19.3% 20.9% 24.2% 23.9% 23.4%

Amortization of Intangible Assets 67.93 76.65 85.14 119.14 173.19 180.47 203.07 244.63

FX Loss (gain) 4.53 3.39 0.82 -0.77 10.53 -15.74 25.80

Share in Net (Income) Loss of Equity Investee 0.00 0.49 0.84 -0.78 -0.83 -1.07 -0.31

Finance and Other Income -1.24 -7.27 -23.18 -1.04 -4.11 -4.77 -4.19 -5.00

Finance Costs 5.78 5.58 4.00 7.12 16.68 20.11 27.21 31.80

Bargain Purchase Gain -1.75 -8.11 -2.25

TSS Membership 22.24 6.87

EBT 34.41 81.97 110.68 118.25 154.87 244.30 241.88 301.00

EBT Margin 5.4% 10.6% 12.4% 9.8% 9.3% 13.3% 11.6% 12.3%

Current Income Tax Expense (Recovery) 16.96 18.62 23.63 22.53 51.54 63.45 62.89 78.26

Deferred Income Tax Expense (Recovery) -12.56 -93.82 -5.58 2.59 0.23 3.60 3.63 4.51

Net Income 30.02 157.17 92.63 93.14 103.10 177.25 175.36 218.22

Amortization of Intangible Assets 67.93 76.65 85.14 119.14 173.19 180.47 203.07 244.63

Deferred Income Tax Expense (Recovery) -12.56 -93.82 -5.58 2.59 0.23 3.60 3.63 4.51

Bargain Purchase Gain -1.75 0.00 0.00 -8.11 -2.25 0.00 0.00

TSS Membership 9.80 -1.93

Adjusted Net Income 83.63 140.01 172.20 206.76 274.27 371.12 380.12 467.36

EPS 1.42 7.42 4.37 4.39 4.86 8.36 8.27 10.30

Adjusted EPS 3.95 6.61 8.13 9.76 12.94 17.51 17.94 22.05

Basic Shares Outstanding 21.19 21.19 21.19 21.19 21.19 21.19 21.19 21.19

Diluted Shares Outstanding 21.19 21.19 21.19 21.19 21.19 21.19 21.19 21.19

Constellation Software

Cash flow Summary (US$mln) F2010 F2011 F2012 F2013 F2014 F2015

Net Income 30.02 157.17 92.63 93.14 103.10 177.25

+ Depreciation and amortization 74.68 84.52 92.79 129.09 189.65 197.50

+ Finance expense, net 4.54 -1.69 -19.18 6.08 12.57 15.34

+ Unrealized FX loss (gain) 4.53 3.39 0.82 -0.77 10.53 -15.74

+ Income taxes expense 4.40 -75.20 18.05 25.12 51.77 67.05

+/- Other -21.44 -14.76 -22.93 -32.88 -24.44 -48.53

Operating Cash Flow 96.72 153.43 162.18 219.77 343.18 392.86

+ Change in W/C 10.55 -15.90 -17.39 0.52 -1.71 3.08

- Capex 7.09 7.35 6.10 11.10 13.87 12.89

Free Cash Flow 100.18 130.18 138.69 209.19 327.59 383.05

- Acquisitions (Sales) 82.93 45.86 138.60 522.87 121.64 248.77

- Common Dividends 4.67 41.64 63.57 84.42 83.98 84.77

+ Equity Raised

+ Debt Increase (Decr) -0.04 -49.14 36.24 428.87 -172.32 75.48

+/- Other -14.88 9.03 35.06 5.87 43.06 -17.20

Change in Cash from continued operations -2.34 2.58 7.82 36.65 -7.29 107.79



Exhibit 33: Balance Sheet


Constellation Software

Balance Sheet (US$mln) F2010 F2011 F2012 F2013 F2014 F2015

ASSETS

Cash 31.77 33.49 41.31 77.97 70.68 178.47

Equity Security Available for Sale 23.72 21.22 0.47 0.78 0.00 0.00

Accounts Receivable 92.10 96.26 126.99 191.45 200.06 226.77

Work in Progress 24.41 26.24 36.93 55.73 51.48 59.48

Inventories 15.95 13.54 18.74 21.15 25.25 24.33

Property and equipment 16.43 14.59 21.30 36.02 37.23 42.07

Deferred income taxes 33.73 99.66 104.31 71.67 60.76 56.65

Intangible Assets 274.26 267.79 402.36 981.66 887.44 952.11

Other assets 41.05 57.78 60.28 101.29 100.24 99.43

Total Assets 553.41 630.58 812.68 1537.70 1433.13 1639.32

LIABILITIES AND EQUITY

Bank Indebtedness 47.29 0.00 44.36 477.17 294.62 355.18

Accounts Payable and Accrued Liabilities 118.07 114.95 147.56 260.59 245.00 274.98

Dividends Payable 0.00 0.00 20.95 21.03 21.19 21.33

Deferred Revenue 157.24 181.45 227.58 306.21 347.34 421.03

Provisions 0.00 3.56 6.40 11.89 13.40 8.42

Acquisition Holdback Payments 6.92 13.85 26.61 30.70 26.27 16.10

Income Tax Payable 1.42 4.75 5.07 5.47 25.59 6.56

Deferred Income Taxes 30.92 11.26 29.28 112.78 107.28 109.80

Other Liabilities 41.63 44.48 46.08 45.87 92.62 88.65

Total Liabilities 403.49 374.30 553.88 1271.71 1173.29 1302.04

Total Equity 149.93 256.28 258.80 266.00 259.83 337.28

Total Liabilities and Equity 553.41 630.58 812.68 1537.70 1433.13 1639.32



Appendix: Management & Board of Directors

Exhibit 34: Management & Board of Directors

Management Team

Mark Leonard President and Chairman of the Board

Mr. Leonard founded CSI in 1995. Prior to founding CSI, Mr. Leonard worked in the venture capital

business for eleven years. Mr. Leonard holds a BSc. from the University of Guelph, and a MBA from

the University of Western Ontario.

Bernard Anzarouth VP, Mergers & Acquisitions

Mr. Anzarouth joined CSI in 1995. He works closely with the Operating Groups to identify and pursue

opportunities for platform and tuck-in acquisitions on a global basis. Before joining CSI, Mr.

Anzarouth was AVP Business Development for Ascom Inc., a Swiss-based technology corporation

from 1993 to 1994. Prior to that Mr. Anzarouth held various positions with IBM. Mr. Anzarouth holds a

B.Eng. in Electrical/Computer Engineering from McGill University and an MBA from the European

Institute of Business Administration (INSEAD).

Jamal Baksh CFO

Mr. Baksh has been with CSI since 2003 when he joined as Controller of the Jonas Operating Group.

Mr. Baksh is currently the Chief Financial Officer of CSI. Prior to assuming this role, he has served in a

number of senior executive roles within Jonas and CSI including Vice President of Finance for CSI

reporting to the Chief Financial Officer. Mr. Baksh is a Certified Management Account and holds an

Honours Bachelor of Mathematics degree from the University of Waterloo.

Jeff Bender Director & CEO, Harris Operating Group

Mr. Bender joined CSI in 1999 after spending 7 years at Deloitte LLP. Mr. Bender has been the Chief

Executive Officer for Constellation's Harris Operating Group since 2002 and was appointed to the

Board of CSI in 2013. Mr. Bender is a Chartered Professional Accountant and holds a BCom from

Carleton University.

John Billowits CEO, Vela Operating Group

Mr. Billowits has been with CSI since 2003 when he joined as the CFO of Jonas Operating Group. Mr.

Billowits is currently the Chief Executive Officer of Vela Operating Group. Prior to assuming this role,

he held numerous positions within CSI, including Chief Financial Officer of CSI and President of Jonas

Club Division. Prior to joining CSI, Mr. Billowits held a number of roles with Bain & Company, Dell

Computers and PwC. Mr. Billowits is a Chartered Professional Accountant, holds an MBA with

Distinction from the London Business School and Honours BBA with Distinction from Wilfrid Laurier

University.

Mark Dennison General Counsel and Secretary, CSI

Mr. Dennison joined CSI in 2001, initially working within the Volaris Operating Group and moving to

CSI head office in 2007. Prior to joining Constellation, Mr. Dennison worked in the law department at

Bombardier Aerospace. Mr. Dennison was called to the Bar of Ontario in 1999. He has received an

LL.B. from the University of Toronto and a B.A. from the University of Windsor.

Mark MillerDirector & COO of CSI, and CEO of Volaris

Operating Group

Mr. Miller has been with CSI, for well over 15 years. Mr. Miller currently spends the majority of his

time as the Chief Executive Officer of Volaris Operating Group and Trapeze Group, but also acts as

Chief Operating Officer. Mr. Miller received a B.Sc. in Statistics and a B.Sc. in Mathematics from

McMaster University in Hamilton, Ontario. In addition, Mr. Miller has attended the Executive

Marketing Program at the Ivey Business School at the University of Western Ontario. He was

appointed to the Board in 2013. Mr. Miller is also on the Board of Directors of Medgate Inc. and

pVelocity Inc., two private software companies both headquartered in Toronto, Ontario.

Dexter Salna President, Perseus Operating Group

Mr. Salna joined CSI in 1995 and is currently the President of Perseus Operating Group. Prior to his

current role, Mr. Salna held various senior executive positions with the Volaris Operating Group since

1995. From January 2000 to March 2001, Mr. Salna took a leave of absence from Volaris to pursue other

business opportunities. Mr. Salna received a B.A.Sc. in Civil Engineering from the University of

Toronto, an M.S. in Construction Management and Engineering from Stanford University and an

M.B.A. from Harvard Business School.

Barry Symons CEO, Jonas Operating Group

Mr. Symons joined CSI in 1997. During his tenure with CSI, Mr. Symons has held various senior

financial and operational management positions within CSI and CSI subsidiaries. In August 2007 Mr.

Symons was appointed to the role of Chief Executive Officer of the Jonas Operating Group. Prior to

this appointment he was the Chief Financial Officer of CSI from 2004 to 2007. Before joining CSI, Mr.

Symons was with a major international accounting firm in varying roles of increasing responsibility.

Mr. Symons holds a Chartered Accountancy designation and a BBA (Honours) degree from Wilfrid

Laurier University both of which were received with distinction.

Robin Van PoeljeCEO, Total Specific Solutions (TSS)

Operating Group

Mr. Van Poelje has been with CSI since January 2014. From January 2010 to now, Mr. Van Poelje has

been the Chief Executive Officer of TSS, based in the Netherlands. Mr. Van Poelje holds a BSc. in

Economics from the University of Groningen, the Netherlands and is a post graduate in Marketing and

Strategy from École Supérieure de Commerce de Montpellier, France.




Board of Directors

Paul McFeeters Director

Mr. McFeeters joined the board in October 2014. Mr. McFeeters retired from OpenText where he

served as the Chief Financial Officer from June 2006. Mr. McFeeters has more than thirty years of

business experience, including previous employment as Chief Financial Officer of Platform

Computing Inc., a grid computing software vendor from 2003 to 2006, and of Kintana Inc., a privately-

held IT governance software provider, from 2000 to 2003. Mr. McFeeters also held President and CEO

positions at MD Private Trust from 1997 to 2000. Between 1981 and 1996 Mr. McFeeters worked at

Municipal Financial Corporation and held various progressive positions there including CFO, COO,

President and CEO. Since 2015, Mr. McFeeters has been a Board Advisor for Hootsuite, a social media

management company. From 2007 to January 2016, Mr. McFeeters was a member of the board of

Blueprint Software Systems Inc., an enterprise requirements software solutions provider. Mr.

McFeeters holds a B.B.A (Honours) from Wilfrid Laurier University and a MBA from Schulich School of

Business at York University and is a Chartered Professional Accountant.

Mark Leonard President and Chairman of the Board

Mr. Leonard founded CSI in 1995. Prior to founding CSI, Mr. Leonard worked in the venture capital

business for eleven years. Mr. Leonard holds a BSc. from the University of Guelph, and a MBA from

the University of Western Ontario.

Ian McKinnon Director

Mr. McKinnon joined the board in March 2006. Between 1995 and 2007 he held the position of Chief

Executive Officer for TSX listed Promis Systems and Certicom. Mr. McKinnon is currently a board

member of TSX and Nasdaq listed SMART Technologies Inc. and one privately held software company.

He holds an Honours BA from McMaster University and attended the INSEAD Advanced Management

Program.

Meredith (Sam) Hall Hayes Director

Mr. Hayes joined the Board in 2013. Mr. Hayes joined The CSL Group Inc. in 1981. He served as

President and CEO from 1995 until his retirement in 2008 and also served as Executive Vice President

and CFO from 1992 to 1995 and Vice President and Treasurer from 1989 to 1992. Prior to that, Mr.

Hayes was The CSL Group Inc.’s Director of Finance. He currently holds a director or advisory position

at a number of organizations including The CSL Group Inc., CSL Pension Fund Society, Horizon Capital

Holdings Inc., Canadian Executive Service Organization, and Cape Breton University Shannon School

of Business. Mr. Hayes holds a BA (honors) from Bishop’s University in Quebec and attended the

Western Executive Program at the University of Western Ontario.

Robert Kittel Director

Mr. Kittel joined the Board in 2013. Mr. Kittel has been the Chief Operating Officer of The Westaim

Corporation since January 2013. The Westaim Corporation is a Canadian-based publicly traded

financial and investment holding company. Previously he was a Partner and Portfolio Manager at

Goodwood Inc., an investment management firm that he joined in 2002. From 2000 through 2002, he

was Vice President and Analyst of a Canadian-based hedge fund investment firm. From 1997 through

2000, Mr. Kittel was employed by the Cadillac Fairview Corporation, a commercial real estate

development company in the investments area. Prior to 1997, Mr. Kittel was a staff accountant at

KPMG LLP. Mr. Kittel has served as a director on several public boards, both in Canada and the United

States. Mr. Kittel holds a BBA Honours (Gold Medalist) from Wilfrid Laurier University and is a

Chartered Professional Accountant and a Chartered Financial Analyst.

Stephen R. Scotchmer Director & Lead Independent Director

Mr. Scotchmer has been a member of the Board since 2000. He is currently a director of Manitou

Investment Management Ltd., which he co-founded in 1999. From 1982 until 1987, he served as

President of Bay Mills Ltd., a TSX listed company in the business of manufacturing engineered

materials. Mr. Scotchmer is an engineering graduate of Queen’s University.



Share Ownership & Insider Holdings

Exhibit 35: Insider Holders

Source: Ink Research, Raymond James Ltd., August 8, 2016 Note that On August 5, 2015, Mark Leonard’s holding company holding 1,000,000 shares (4.7% of S/O) was transferred to his adult children. With the new control, an agreement was entered that the holding company will provide notice within five days of any sale, transfer, or assignment of shares. Mark Leonard still holds ~2% directly. Exhibit 36: Top Holders

Source: Capital IQ, BD Vision, Raymond James Ltd. – August 8, 2016

Insider Holders Position with the Company Shares % of O/S

Mark Leonard Founder, Chairman, President 438,342 2.07%

Mark Miller COO, Director, CEO of Volaris Group 312,483 1.47%

Dexter Salna President of Perseus Operating Group 220,617 1.13%

Barry Symons CEO of Jonas Operating Group 159,636 0.75%

Bernard Anzarouth VP of M&A 146,120 0.69%

Jeff Bender Director, CEO of Harris Operating Group 75,407 0.35%

Stephen Scotchmer VP, Lead Independent Director, Chairman of

Compensation, Nominating & HR Committee

71,004 0.33%

John Billowits CEO of Vela Software International 41,219 0.19%

Brian Beattie CFO at Volaris Group 25,056 0.12%

Jamal Baksh CFO Constellation Software 7,493 0.04%

Mark Dennison General Counsel, Secretary 3,161 0.01%

Meredith Hayes Director, Member of Audit Committee 2,415 0.01%

Ian McKinnon Director 1,934 0.01%

Robin van Poelje CEO of TSS 597 0.00%

Robert Kittel Director, Member of Audit Committee and

Compensation, Nominating & HR

573 0.00%

Jeffrey MacKinnon CFO of Jonas Operating Group 478 0.00%

Paul McFeeters Director, Member of Audit Committee 23 0.00%

1,506,558 7.17%

Top Holders Shares % of O/S

Fidelity Investments Canada ULC 873,000 4.12%

Mawer Investment Management, LTD 624,041 2.94%

BlackRock, Inc. (NYSE:BLK) 532,060 2.51%

Janus Capital Management, LLC 473,790 2.24%

Ruane, Cunniff & Goldfarb, Inc. 422,445 1.99%

Neuberger Berman Investment Advisers, LLC 400,262 1.89%

Fidelity Management & Research Company 369,149 1.74%

FIAM LLC 303,880 1.43%

The Vanguard Group, Inc. 274,163 1.29%

Akre Capital Management, LLC 256,000 1.21%

AllianceBernstein, L.P. (U.S.) 221,152 1.04%

WCM Investment Management 203,660 0.96%

Connor Clark & Lunn Investment Management, LTD 196,152 0.93%

Fidelity Management & Research (UK), Inc. 172,200 0.81%

CPP Investment Board 164,000 0.77%

Empire Life Investments, Inc. 152,650 0.72%

BMO Asset Management Inc. 143,975 0.68%

Baillie Gifford & Company, LTD 138,616 0.65%

Leith Wheeler Investment Counsel 133,234 0.63%

Manulife Asset Management 101,432 0.48%

6,155,861 29.05%



Glossary

BU Business Unit

ERP Enterprise Resource Planning

MTCE Maintenance

VMS Vertical Market Software

Company Citations

Company Name Ticker Exchange Currency Closing Price RJ Rating RJ Entity

Allscripts Healthcare Solutions Inc. MDRX NASDAQ US$ 13.43 3 RJ & Associates athenahealth Inc. ATHN NASDAQ US$ 124.95 2 RJ & Associates CA Technologies CA NASDAQ US$ 34.35 3 RJ & Associates Cerner Corporation CERN NASDAQ US$ 67.06 3 RJ & Associates Cisco Systems CSCO NASDAQ US$ 30.95 2 RJ & Associates Comerica Inc. CMA NYSE US$ 45.52 2 RJ & Associates Copa Holdings, S.A. CPA NYSE US$ 80.01 2 RJ & Associates McKesson Corporation MCK NYSE US$ 196.62 3 RJ & Associates Nokia NOK NYSE US$ 5.70 3 RJ & Associates Open Text OTEX NASDAQ US$ 63.36 2 RJ Ltd. Oracle Corp. ORCL NYSE US$ 41.28 2 RJ & Associates Roper Technologies ROP NYSE US$ 174.45 1 RJ & Associates The Descartes Systems Group Inc. DSGX NASDAQ US$ 20.26 2 RJ Ltd.

Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.



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RATINGS AND DEFINITIONS

Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.



Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

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Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions: Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon.

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Suitability Ratings (SR)

Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital.

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RATING DISTRIBUTIONS

Coverage Universe Rating Distribution* Investment Banking Distribution

RJL RJA RJ Arg RJEE/RJFI RJL RJA RJ Arg RJEE/RJFI

Strong Buy and Outperform (Buy) 69% 53% 56% 50% 39% 18% 10% 0%

Market Perform (Hold) 31% 43% 44% 36% 15% 7% 0% 0%

Underperform (Sell) 1% 4% 0% 14% 0% 2% 0% 0%

* Columns may not add to 100% due to rounding.



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Company Name Disclosure

Constellation Software Inc. Raymond James Ltd - the analyst and/or associate has viewed the material operations of CSU.

STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences.

Target Prices: The information below indicates our target price and rating changes for CSU stock over the past three years.

Valuation Methodology: We value Constellation Software Inc. using EBITDA multiples comparable to the peer group.

RISK FACTORS

General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation.

Technology & Communications - Software/IT Services Information Security Markets Are Highly Competitive The market for information security software, hardware, and services is highly competitive, with a number of suite vendors, best-of-breed vendors, and small niche vendors often present in each sales opportunity. Remaining competitive requires continual research and development and strong sales execution. Information Security Companies Are Exposed to Rapidly Changing Technologies The markets for information security products are relatively new and are marked by a rapid pace of change. Moreover, many companies in the space have short operating histories, making historical comparisons challenging.

Risks - Constellation Software



Acquisition Risks. 1) Identifying acquisitions within their IRR hurdle rates. Constellation has strict IRR hurdle rates; if it cannot continue to identify and acquire good/excellent VMS businesses within its IRR hurdle rates, its future growth may be impacted. 2) Large Acquisition Risk. Large acquisitions of distressed companies makes achieving its historical IRR hurdle rates harder. Financing larger acquisitions also will depend on Constellation’s ability to generate FCF in the future. See our Valuation section for a discussion on our DCF sensitivity if Constellation makes no further acquisitions. Key Executive Risks. Constellation has operated in a decentralized format which mitigates this risk to some extent. Still, many members of its senior management team are very important to Constellation’s business given their skills and experience (finding, valuing, closing transactions, and coaching BU leaders to Constellation’s core values) and industry contacts. Mark Leonard (President, Founder, Chairman) is ~60 years old and will retire at some point. Adjusted vs Reported EPS profit variance. There is increasing talk in the US about heightened SEC scrutiny of non-GAAP financial reporting. Constellation reports in Canada (IFRS) so should not be impacted by the SEC growing focus on these non-GAAP financial measures. That said, if this scrutiny in the US impact investors’ sentiment around non-GAAP measures, this may carry over to Canadian markets too. 2015 saw Constellation report EPS of $8.36 versus Adjusted EPS of $17.51 ($9.15 delta or 109%). Economic Risks. 69% of Constellation’s revenues are from the Public Sector. Public Sector spending on software can be cyclical and sensitive to economic downturns, which can delay spending. Constellation is diversified in many vertical sectors which helps smooth out the impact of economic cycles. Geographic Concentration. In 2015, 54% of revenue was from the US, 12% from Canada, 29% from UK/Europe, and 5% from the rest of the world. With the FX impacts on GBP and Euro from the Brexit vote, there may be some impact on topline revenues; however, typically revenues are denominated in the same currency as expenses, so the natural hedge should reduce the EBITDA impact. Constellation does not use currency hedges. Longer term, the impact on end-market demand is less certain and may need more time to gauge what the impact is more broadly.

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