For those looking for a single PDF containing all of Constellation’s president’s letters:
What is Constellation Software
Mark Leonard started Constellation Software in 1995 to acquire and consolidate vertical market software (commonly referred to as VMS). Constellation currently has over 500 businesses under its brand operating in an array of markets such as transportation, education, government, and more.
Why are the president’s letters interesting
If you’re reading this, you’ve likely read Warren Buffett’s shareholder letters. Widely known as some of the best writing in business, Berkshire Hathaways chairman does an incredible job breaking down complex businesses, such as insurance, in a language that makes sense to most with some financial literacy. Mark Leonard had done the same with his President’s letters. I was expecting a software company to talk about compound metrics, ARR, or any other buzz word you would hear inside tech companies today. The simplicity is what draws you in. Being able to distill an investment thesis so clearly is a super power.
Three themes from the letters
Throughout the letters, there are many recurring themes. We chose to focus on three, but there are more throughout the years of writing. The three main themes we found to be interesting are self-doubt, identifying your north star metric, and finding your arbitrage.
Even the greats sometimes doubt themselves
[…] I’d interpret that as meaning that the company is likely to be sold
Mark Leonard, 2010 President’s letter
In the 2010 letter, Marc Leonard wrote about exploring an acquisition for Constellation. He talks about having difficulty convincing investors (or the market in general) of the value of Constellation’s many companies. Because each company gets rolled into a single financial statement, the individual companies that are doing well may not be properly reflected in the share price. Its incredible to see someone, in their 15th year of operation, have these kinds of doubts. Leonard was successful by every metric, yet still doubted what he was doing could be valuable to investors and the market. Self belief here was important, considering they did not sell (and continued to grow). Investors were eventually able to recognize the true value of what Constellation was accomplishing and finally had the share price to reflect it.
[…] I used to maintain that if we concentrated on fundamentals, then our stock price would take care of itself. The events of the last year have force me to re-think that contention
Mark Leonard, 2011 President’s letter
ROIC + Organic growth
We use the sum of ROIC and Organic Net Revenue Growth as the best single metric for measuring the short-term performance of our low asset intensity software business.
Mark Leonard, 2011 President’s letter
The concept of finding your north star metric as a business doesn’t get talked enough about. In e-commerce, it could be the average order value (AOV). In SaaS, it could be net dollar retention (NDR). Whatever the business choses will alter its course for better or worse. Choosing the right north star metric is one of the most important decisions a business can make because all downstream decisions will be made to accomplish that goal. Leonard and Constellation chose return on invested capital + Organic Net Revenue Growth.
We believe that the sum of ROIC and Organic Net Revenue Growth is the best single metric for measuring performance of a low asset intensity software business
Mark Leonard, 2010 President’s letter
Find your arbitrage
The gist of the matter, is that with disproportionate expenses in Canadian dollars and revenues in US dollars, we run a fundamental and unhedged foreign exchange position.
Mark Leonard, Q1 2009 President’s letter
Perhaps overlooked in a lot of investment situations is the natural currency arbitrage a company has based on their geographic headquarters. This has been talked about before by Andrew Wilkinson, founder of Tiny, on the My First Millions podcast. Wilkinson stated the advantage of being a Canadian company that does business in USD. Paying salaries in CAD while receiving payments in USD is something Tiny and Constellation both have in common, and plays a huge advantage to their business. The exchange rate of receiving $1 USD being worth $1.35 (as of this writing) is the ultimate arbitrage. A company is able to pay its employees while retaining extra cash after conversion, which can be redeployed in further acquisitions. Constellation has grown to acquire many American companies over the years, so this arbitrage has become a smaller aspect to their success, but the compounding that this exchange rate enabled from their early days should not be overlooked.
Leave a Reply