So far this year, less has been more for Constellation Software Inc.
Less communication, as chief executive Mark Leonard has decided to abandon his regular shareholders' letters, and his company has ended quarterly earnings conference calls and announced it will no longer reveal certain performance metrics.
Yet more share price, as Constellation stock, up nearly 25 per cent year to date, is one of the best performers in the S&P/TSX Composite Index.
That may suggest shareholders are sanguine about the quirky company’s new tight-lipped policy. Still, Constellation’s 2018 return was much greater, until an earnings miss a week ago sent the shares tumbling. At Friday’s close of $935.52, they’re down 16 per cent from the 52-week high of $1,134.30 set July 19.
The failure to meet expectations suggests Constellation, which buys and fixes up underwhelming software companies, may want to revisit some of its recent retreats into reticence. So far, though, the company seems determined to stay in its perpetual quiet period.
To come to these conclusions, I spoke to analysts who did not want to be quoted, exhibiting a Constellation contagion of their own. And while I feel I have some comfort with how Constellation thinks, I have no formal comment from the company, either.
I do have, however, this spring’s final regular shareholders’ letter. (Partly offsetting the loss of the newsletter is a new Q&A feature on the Constellation website, where the company will periodically post shareholder questions, and the company’s answers.)
Some have called Mr. Leonard “the Warren Buffett of Canada,” in part because Constellation has provided excellent long-term returns, and in part because of these letters, which reveal a disdain for stilted corporate communications.
I am sure Mr. Leonard has some sort of editor, but he’s also the CEO, so when he offhandedly revealed in this letter that Constellation could get out of the software business, it seems no one could talk him into removing such a bombshell from the text.
“One day Constellation may find that [vertical market software] businesses are too expensive to rationally acquire,” he wrote. “If that happens, I hope we’ll have had the foresight and luck to find some other high [return on equity] non-VMS businesses in which to invest at attractive prices. I am already casting about for such opportunities. If we don’t find attractive sectors in which to invest, then we’ll return our [free cash flow] to our investors.”
While this appears to be more a musing than an imminent strategic shift, it would be a shame for such unfiltered insight to go unrevealed.
Mr. Leonard’s letter gives some sense of why the company is turning more inward. The company has always been uncomfortable talking about its acquisitions, fearing competitors might gain an advantage.
Constellation will no longer reveal the number of companies it purchased in the quarter, only revealing the total amount spent. This takes away the ability to assess average acquisition size.
The company also raised the threshold for the disclosure of any one acquisition from US$10-million spent on any one acquisition, to US$50-million.
And a breakdown that told investors how revenue growth in its “maintenance and other recurrring” segment came from either price increases or sales volume growth, will vanish.
These departures from disclosure are partially offset by a new disclosure of organic revenue of individual revenue lines; Constellation had previously only given an organic number for total revenue. (“Organic” revenue removes the effect of acquisitions from total revenue and allows assessment of how a business is increasing sales on its own.)
“For competitive reasons we are limiting the information that we disclose about our acquisition activity,” Mr. Leonard wrote. “We believe that sharing our tactics and best practices with a host of Constellation emulators is not in our best interest.”
Mr. Leonard seems also concerned about short-term traders in Constellation shares, the volatility they bring, and how it might harm long-term holders of the stock, a group that includes Constellation employees. These long-term, “enterprising investors,” as Mr. Leonard calls them, are “the ones we consult when we need advice and input from engaged shareholders.”
They are probably not the ones responsible for the recent swoon, however. When Constellation reported earnings per share July 26 of $5.75 for the second quarter, versus a mean analyst expectation of $6.78, the company’s shares started on what is now a double-digit decline.
It’s entirely possible Constellation, a multiyear high-flier, was caught up in the general downdraft in North American tech stocks. Investors have soured on many hot growth stories after Netflix Inc. and Facebook Inc. issued disappointing numbers and forecasts in July.
But here is the question: Will Constellation’s quieter style contribute to analyst estimates that will be less on-target, thereby increasing the volatility from short-term trading? Analysts certainly aren’t saying so, yet, and it could be argued that short-term traders aren’t reading the company’s securities filings anyway, so skimpier disclosure can’t be the primary reason for a sudden burst of selling.
Yet long-term shareholders deserve the means to assess their investment. Particularly if we are in for a bout of less-robust shareholder returns, Constellation should yield to providing more-robust communication.