Constellation Software : Q4 2024 Management Discussion and Analysis

Published: 2025-03-07 17:09:24 ET CSU.TO

CONSTELLATION SOFTWARE INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

The following discussion and analysis should be read in conjunction with the Annual Consolidated Financial Statements for the year ended December 31, 2024, which we prepared in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board (IFRS). Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. See "Forward-Looking Statements" and "Risks and Uncertainties".

Unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. All references to "$" are to U.S. dollars and all references to "C$" are to Canadian dollars. Due to rounding, certain totals and subtotals may not foot and certain percentages may not reconcile.

Additional information about Constellation Software Inc. (the "Company", "Constellation" or "CSI"), including our most recently filed Annual Information Form ("AIF"), is available on SEDAR+ at www.sedarplus.ca.

Forward Looking Statements

Certain statements in this report may contain "forward looking" statements that involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "anticipate" and other similar terminology are intended to identify forward looking statements. These statements reflect current assumptions and expectations regarding future events and operating performance as of the date of this MD&A March 7, 2025. Forward looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to vary significantly from the results discussed in the forward looking statements, including, but not limited to, the factors discussed under "Risks and Uncertainties". Although the forward looking statements contained in this MD&A are based upon what management of the Company believes are reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward looking statements. These forward looking statements are made as of the date of this MD&A and the Company assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances. This report should be viewed in conjunction with the Company's other publicly available filings, copies of which can be obtained electronically on SEDAR+ at www.sedarplus.ca.

Non-IFRS Measures

This MD&A includes certain measures which have not been prepared in accordance with IFRS such as Free cash flow available to shareholders.

Free cash flow available to shareholders ''FCFA2S'' refers to net cash flows from operating activities less interest paid on lease obligations, interest paid on debt, debt transaction costs, payments of lease obligations, the IRGA / TSS membership liability revaluation charge, and property and equipment purchased, and includes interest and dividends received, and the proceeds from sale of interest rate caps. The portion of this amount applicable to non-controlling interests is then deducted. We believe that FCFA2S is useful supplemental information as it provides an indication of the uncommitted cash flow that is available to shareholders if we do not make any acquisitions, or investments, and do not repay any debts. While we could use the FCFA2S to pay dividends or repurchase shares, our objective is to invest all of our FCFA2S in acquisitions which meet our hurdle rate.

FCFA2S is not a recognized measure under IFRS and may not be comparable to similar financial measures disclosed by other issuers. Accordingly, readers are cautioned that FCFA2S should not be construed as an alternative to net cash flows from operating activities. See ''Results of Operations -Free cash flow available to shareholders" for a reconciliation of FCFA2S to net cash flows from operating activities.

Overview

We acquire, manage and build vertical market software ("VMS") businesses. Generally, these businesses provide mission critical software solutions that address the specific needs of our customers in particular markets. Our focus on acquiring businesses with growth potential, managing them well and then building them, has allowed us to generate significant cash flows and revenue growth during the past several years.

Our revenue consists primarily of software license fees, maintenance and other recurring fees, professional service fees and hardware sales. Software license revenue is comprised of non-recurring license fees charged for the use of software products licensed under multiple-year or perpetual arrangements. Maintenance and other recurring revenue primarily consists of fees charged for customer support on software products post-delivery and also includes recurring fees derived from combined software/support contracts, transaction revenues, managed services associated with CSI software that has been sold to the customer, and hosted software-as-a-service products. Professional service revenue consists of fees charged for implementation services, custom programming, product training, certain managed services, and consulting. Hardware and other revenue includes the resale of third party hardware as part of customized solutions, as well as sales of hardware assembled internally and the reimbursement of travel costs. Our customers typically purchase a combination of software, maintenance, professional services and hardware, although the type, mix and quantity of each vary by customer and by product.

Expenses consist primarily of staff costs, the cost of hardware, third party licenses, maintenance and professional services to fulfill our customer arrangements, travel and occupancy costs, depreciation, and other general operating expenses.

Preferred Share Investment in Lumine

On February 22 and 23, 2023 (as part of a series of transactions relating to the acquisition of WideOrbit Inc. ("WideOrbit")), the Company's subsidiary, Lumine Group Inc. ("Lumine"), completed a corporate reorganization. At the beginning of the period, the Company owned 63,582,712 preferred shares ("Lumine Preferred Shares") in the capital of the Company's subsidiary, Lumine. The Lumine Preferred Shares were non-voting and under certain conditions were redeemable at the option of CSI for a redemption price of $21.74 (the "Initial Face Value") per share. The redemption price was to either be settled in cash or through the issuance of a variable number of subordinate voting shares of Lumine ("Lumine Subordinate Voting Shares") based on the terms of the Lumine Preferred Shares, or any combination thereof. The Lumine Preferred Shares were also convertible into Lumine Subordinate Voting Shares at a conversion ratio of 1:2.4302106 at any time. The Lumine Preferred Shares entitled CSI to a fixed annual cumulative dividend of 5% per annum on the Initial Face Value.

On March 25, 2024, all of the Lumine Preferred Shares were automatically converted into Lumine Subordinate Voting Shares, and additional Lumine Subordinate Voting Shares were issued in satisfaction of the amounts owing in connection with the accrued dividends on the Lumine Preferred Shares. As at December 31, 2024, CSI holds 157,553,539 Lumine Subordinate Voting Shares.

Subsequent to the conversion, CSI continues to consolidate Lumine and now reflects an equity interest of

61.40% (December 31, 2023 - 0%) in Lumine and a non-controlling interest of 38.60% (December 31, 2023 - 100%).

Results of Operations

(In millions of dollars, except percentages and per share amounts) Unaudited

Revenue

Expenses

Amortization of intangible assets Foreign exchange (gain) loss

IRGA / TSS membership liability revaluation charge Finance and other expense (income)

Bargain purchase gain

Impairment of intangible and other non-financial assets Redeemable preferred securities expense (income) Finance costs

Income before income taxes

Income tax expense (recovery)

Current income tax expense (recovery)

Deferred income tax expense (recovery)

Income tax expense (recovery)

Net income (loss) attributable to:

Common shareholders of CSI

Non-controlling interests

Net income (loss)

Net cash flows from operating activities Free cash flow available to shareholders

Weighted average number of shares outstanding

Basic and diluted

Net income (loss) per share

Basic and diluted

Net cash flows from operating activities per share Basic and diluted

Free cash flow available to shareholders per share Basic and diluted

Cash dividends declared per share

Basic and diluted

Total assets

Total long-term liabilities

NM - Not meaningful

Three months ended

Period-Over-Period

December 31,

Change

2024

2023

2,703

2,323

380

16%

1,980

1,712

269

16%

273

240

14%

(42)

(82)

(10)

(27)

-63%

(6)

(3)

97%

(12)

-52%

278

(278)

-100%

22%

364

(56)

420

129

136%

(85)

(11)

(74)

659%

285

141

144

102%

(241)

276

320

(100)

419

678

511

167

33%

482

325

157

48%

21.2

13.44

6.65

6.78

102%

31.99

24.09

7.90

33%

22.76

15.33

7.43

48%

1.00

Year ended

Period-Over-Period

December 31,

Change

2024

2023

10,066

8,407

1,660

20%

7,559

6,360

1,199

19%

1,044

859

184

21%

(26)

(70)

183

152

20%

(60)

(34)

(25)

74%

(10)

(54)

-81%

597

(539)

-90%

280

192

46%

1,011

265

746

281%

525

370

155

42%

(281)

(166)

(114)

69%

244

204

20%

731

565

165

29%

(503)

540

767

706

2,196

1,779

417

23%

1,472

1,160

312

27%

21.2

34.48

26.67

7.81

29%

103.64

83.94

19.70

23%

69.48

54.75

14.73

27%

4.00

12,863

10,862

2,001

18%

4,903

3,418

1,485

43%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Comparison of the three and twelve month periods ended December 31, 2024 and 2023

Revenue:

Total revenue for the quarter ended December 31, 2024 was $2,703 million, an increase of 16%, or $380 million, compared to $2,323 million for the comparable period in 2023. For the year ended December 31, 2024 total revenues were $10,066 million, an increase of 20%, or $1,660 million, compared to $8,407 million for the comparable period in 2023. The increase for both the three and twelve month periods compared to the same periods in the prior year is primarily attributable to growth from acquisitions as the Company experienced organic growth of 1% and 2% respectively, 2% for both periods after adjusting for the impact of changes in the valuation of the US dollar against most major currencies in which the Company transacts business. For acquired companies, organic growth is calculated as the difference between actual revenues achieved by each company in the financial period following acquisition compared to the estimated revenues they achieved in the corresponding financial period preceding the date of acquisition by Constellation. Organic growth is not a standardized financial measure and might not be comparable to measures disclosed by other issuers.

The following table displays the breakdown of our revenue according to revenue type:

Three months ended

Period-Over-

Q423

Proforma

Organic

December 31,

Period Change

Adj.

Growth

(Note 1)

2024

2023

($ in millions, except percentages)

Licenses

134

133

-19%

Professional services

524

476

10%

-4%

Hardware and other

26%

Maintenance and other recurring

1,948

1,637

311

19%

227

$M - Millions of dollars

2,703

2,323

380

16%

344

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

2023

Year ended

Period-Over-

Proforma

Organic

December 31,

Period Change

Adj.

Growth

(Note 2)

2024

2023

($ in millions, except percentages)

393

386

-18%

1,975

1,766

209

12%

278

-3%

302

268

12%

-5%

7,396

5,985

1,411

24%

1,023

10,066

8,407

1,660

20%

1,443

Note 1: Estimated pre-acquisition revenues for the three months ended December 30, 2023 from companies acquired after September 30, 2023. (Obtained from unaudited vendor financial information.)

Note 2: Estimated pre-acquisition revenues for the twelve months ended December 31, 2023 from companies acquired after December 31, 2022. (Obtained from unaudited vendor financial information.)

For comparative purposes the table below shows the quarterly organic growth as compared to the same period in the prior year by revenue type since Q4 2022. Note that the estimated revenues achieved by acquired companies in the corresponding financial period preceding the date of acquisition by Constellation may be updated in the quarter following the quarter they were acquired resulting in slight variances to previously reported figures.

Quarter Ended

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

2022

2023

2024

Licenses

-7%

-9%

-1%

-7%

15%

-8%

-23%

-20%

-19%

Professional services

-9%

-1%

-2%

-6%

-4%

Hardware and other

36%

-1%

10%

-18%

-11%

-9%

-7%

Maintenance and other recurring

Revenue

-1%

The following table shows the same information adjusting for the impact of foreign exchange movements.

Quarter Ended

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

2022

2023

2024

Licenses

-3%

-7%

-1%

-9%

13%

-9%

-22%

-20%

-18%

Professional services

-5%

-2%

-7%

-3%

Hardware and other

44%

-20%

-12%

-8%

Maintenance and other recurring

Revenue

Expenses:

The following table displays the breakdown of our expenses:

Expenses

Staff Hardware

Third party license, maintenance and professional services

Occupancy

Travel, Telecommunications, Supplies & Software and equipment Professional fees

Other, net Depreciation

Three months ended

Period-Over-

December 31,

Period Change

2024

2023

($ in millions, except percentages)

1,366

1,202

164

14%

22%

259

218

19%

20%

137

113

21%

19%

38%

13%

1,980

1,712

269

16%

Year ended

Period-Over-

December 31,

Period Change

2024

2023

($ in millions, except percentages)

5,322

4,493

828

18%

169

158

960

810

150

19%

25%

502

398

104

26%

178

151

18%

182

138

32%

182

162

13%

7,559

6,360

1,199

19%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Overall expenses for the quarter ended December 31, 2024 increased 16%, or $269 million to $1,980 million, compared to $1,712 million during the same period in 2023. As a percentage of total revenue, expenses equalled 73% for the quarter ended December 31, 2024 and 75% for the same period in 2023. During the twelve months ended December 31, 2024, expenses increased 19%, or $1,199 million to $7,559 million, compared to $6,360 million during the same period in 2023. As a percentage of total revenue, expenses equalled 75% for the twelve months ended December 31, 2024 and 76% for the same period in 2023. For the three and twelve months ended December 31, 2024 the change in valuation of the US dollar against most major currencies in which the Company transacts business resulted in an approximate 0.5% and 0.1% decrease in expenses respectively compared to the comparable periods of 2023.

Staff expense - Staff expenses increased 14% or $164 million for the quarter ended December 31, 2024 and 18% or $828 million for the twelve months ended December 31, 2024 over the same periods in 2023. Staff expense can be broken down into five key operating departments: Professional Services, Maintenance, Research and Development, Sales and Marketing, and General and Administrative. Included within staff expenses for each of the above five departments are personnel and related costs associated with providing the necessary services. The table below compares the period over period variances.

Professional services Maintenance

Research and development Sales and marketing General and administrative

Three months ended

Period-Over-

December 31,

Period Change

2024

2023

($ in millions, except percentages)

292

272

278

227

23%

361

328

10%

164

152

270

223

21%

1,366

1,202

164

14%

Year ended

Period-Over-

December 31,

Period Change

2024

2023

($ in millions, except percentages)

1,155

1,043

112

11%

1,069

855

215

25%

1,437

1,215

222

18%

635

563

13%

1,026

817

209

26%

5,322

4,493

828

18%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

The increase in staff expenses for the three and twelve months ended December 31, 2024 was primarily due to the growth in the number of employees compared to the same periods in 2023 primarily due to acquisitions.

Hardware expenses - Hardware expenses increased 22% or $10 million for the quarter ended December 31, 2024 and 7% or $11 million for the twelve months ended December 31, 2024 over the same periods in 2023 as compared with the 26% and 12% increases in hardware and other revenue for the three and twelve month periods ending December 31, 2024 respectively over the comparable periods in 2023. Hardware margins for both the three and twelve months ended December 31, 2024 were 44% as compared to 41% for both the comparable periods in 2023.

Third party license, maintenance and professional services expenses - Third party license, maintenance and professional services expenses increased 19% or $42 million for the quarter ended December 31, 2024 and 19% or $150 million for the twelve months ended December 31, 2024 over the same periods in 2023. The increase is primarily due to third party license, maintenance and professional services expenses of acquired businesses.

Occupancy expenses - Occupancy expenses increased 20% or $3 million for the quarter ended December 31, 2024 and 25% or $13 million for the twelve months ended December 31, 2024 over the same periods in 2023. This increase is primarily due to the occupancy expenses of acquired businesses; however, excluding the impact of acquired businesses, occupancy expenses are expected to decrease in the future, as certain businesses reduce office space as a result of the increase in remote working environments.

Travel, Telecommunications, Supplies & Software and equipment expenses - Travel, Telecommunications, Supplies & Software and equipment expenses increased 21% or $24 million for the quarter ended December 31, 2024 and 26% or $104 million for the twelve months ended December 31, 2024 over the same periods in 2023. The increase in these expenses is primarily due to expenses incurred by acquired businesses.

Professional fees - Professional fees increased 19% or $8 million for the quarter ended December 31, 2024 and 18% or $27 million for the twelve months ended December 31, 2024 over the same periods in 2023. There are no individually material reasons contributing to this variance.

Other, net - Other expenses increased 38% or $13 million for the quarter ended December 31, 2024 and 32% or $44 million for the twelve months ended December 31, 2024 over the same periods in 2023. The following table provides a further breakdown of expenses within this category.

Advertising and promotion Recruitment and training Bad debt expense

R&D tax credits Contingent consideration Other expense, net

NM - Not meaningful

Three months ended

Period-Over-Period

December 31,

Change

2024

2023

($ in millions, except percentages)

17%

41%

497%

(29)

(24)

(5)

22%

(4)

(8)

75%

38%

Year ended

Period-Over-Period

December 31,

Change

2024

2023

($ in millions, except percentages)

130

111

17%

16%

50%

(69)

(52)

(17)

33%

(5)

55%

182

138

32%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

The contingent consideration expense amounts recorded for the three and twelve months ended December 31, 2024 related to an increase (decrease) in anticipated acquisition earnout payment accruals primarily as a result of increases (decreases) to revenue forecasts for the associated acquisitions. Revenue forecasts are updated on a quarterly basis and the related anticipated acquisition earnout payment accruals are updated accordingly.

An expense of $7 million relating to a customer dispute was recorded to Other expense, net in the quarter ended December 31, 2024.

There are no individually material reasons contributing to the remaining variances.

Depreciation - Depreciation of property and equipment increased 13% or $6 million for the quarter ended December 31, 2024 and 13% or $21 million for the twelve months ended December 31, 2024 over the same periods in 2023. The increases are primarily due to the depreciation expense associated with acquired businesses.

Other Income and Expenses:

The following table displays the breakdown of our other income and expenses:

Amortization of intangible assets Foreign exchange (gain) loss

IRGA / TSS membership liability revaluation charge Finance and other expense (income)

Bargain purchase gain

Impairment of intangible and other non-financial assets Redeemable preferred securities expense (income) Finance costs

Income tax expense (recovery)

NM - Not meaningful

Three months ended

Period-Over-

December 31,

Period Change

2024

2023

($ in millions, except percentages)

273

240

14%

(42)

(82)

(10)

(27)

-63%

(6)

(3)

97%

(12)

-52%

22%

403

711

(308)

-43%

Year ended

Period-Over-

December 31,

Period Change

2024

2023

($ in millions, except percentages)

1,044

859

184

21%

(26)

(70)

183

152

20%

(60)

(34)

(25)

74%

(10)

(54)

-81%

597

(539)

-90%

280

192

46%

244

204

20%

1,740

1,985

(245)

-12%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Amortization of intangible assets - Amortization of intangible assets increased 14% or $33 million for the quarter ended December 31, 2024 and 21% or $184 million for the twelve months ended December 31, 2024

over the same periods in 2023. The increase in amortization expense for the three and twelve months ended December 31, 2024 is primarily attributable to an increase in the carrying amount of our intangible asset balance over the twelve-month period ended December 31, 2024 as a result of acquisitions completed during this twelvemonth period.

Foreign exchange - Most of our businesses are organized geographically so many of our expenses are incurred in the same currency as our revenues, which mitigates some of our exposure to currency fluctuations. For the three and twelve months ended December 31, 2024, we realized foreign exchange gains of $42 million and $26 million respectively compared to foreign exchange losses of $41 million and $43 million for the same periods in 2023. The following table provides a breakdown of these amounts.

Unrealized foreign exchange (gain) loss related to:

Remaining foreign exchange (gain) loss

NM - Not meaningful

Three months ended

Period-Over-Period

December 31,

Change

2024

2023

($ in millions, except percentages)

(1)

(25)

(35)

(48)

(72)

(2)

-29%

(42)

(82)

Year ended

Period-Over-Period

December 31,

Change

2024

2023

($ in millions, except percentages)

721%

(33)

(43)

(40)

(58)

(5)

-48%

(26)

(70)

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

(1) Offsetting amounts recorded in other comprehensive income. Net impact to Total comprehensive income for each period is nil.

The remaining foreign exchange gains and losses per the table above are primarily related to the unrealized foreign exchange translation gains and losses of certain non-US dollar denominated working capital balances to US dollars as a result of the depreciation or appreciation of the US dollar.

IRGA / TSS membership liability revaluation charge - On December 23, 2014, in accordance with the terms of the purchase and sale agreement for the initial acquisition of TSS (as defined below) by CSI, and on the basis of the term sheets attached thereto, Constellation and the Joday Group, among others, entered into a Members Agreement (the "Members Agreement") pursuant to which the Joday Group acquired 33.29% of the voting interests in Constellation Software Netherlands Holding Coöperatief U.A. (which was renamed to Topicus.com Coöperatief U.A.), a subsidiary of Constellation and the indirect owner of 100% of TSS at the time of the acquisition. Total proceeds from this transaction was €39 million ($49 million).

On January 5, 2021, the Members Agreement was terminated in conjunction with the acquisition of Topicus.com B.V., the reorganization of Topicus Coop and the execution of the IRGA. The IRGA was established to create certain contractual obligations of the parties in respect of the governance of Topicus and Topicus Coop. As of December 31, 2024 the Joday Group's interest in Topicus Coop comprised 38,148,221 Topicus Coop Ordinary Units ("Topicus Coop Units") resulting in an interest of 29.38% in Topicus Coop. The IRGA provides for transfer restrictions in respect of the Topicus Coop Units. See "Liability of CSI under the terms of the IRGA" below for further details.

The valuation of the IRGA liability (previously the TSS membership liability) increased by approximately 9% or $61 million from Q3 2024, and approximately 29% or $183 million from Q4 2023. The increases are primarily the result of the growth in TSS' trailing twelve month maintenance revenue on a pro-forma basis (primarily due to acquisitions). Maintenance revenue and net tangible assets are the two main drivers in the calculation of the liability. The liability recorded on the balance sheet increased by 9% or $57 million over the twelve month period ended December 31, 2024 from $635 million to $693 million as a result of the revaluation charge of $183 million less a distribution to the Joday Group of $63 million, a payment pursuant to an exercised call option of $22 million and a $40 million foreign exchange gain. The IRGA / TSS membership liability is denominated in Euros and the Euro depreciated 6% versus the US dollar during the twelve months ended December 31, 2024.

Finance and other expense (income) - Finance and other income for the three and twelve months ended December 31, 2024 was $10 million and $60 million respectively, compared to $27 million and $34 million respectively for the same periods in 2023. The following table provides a further breakdown of expenses (income) within this category.

Three months ended December 31,

Years ended December 31,

2024

2023

2024

2023

Interest income on cash

(9)

(2)

(33)

(3)

(Increase) decrease in the fair value of equity securities held for trading

(5)

(2)

Share in net (income) loss of equity investee

(5)

Finance and other income

(4)

(15)

(27)

(24)

Finance and other expense (income)

(10)

(27)

(60)

(34)

Finance and other income for the three months ended December 31, 2023 includes a $13 million reversal of a performance obligation that was required to be set up as part of an acquisition's purchase price accounting. The Company was able to negotiate a release of the obligation from the customer. Accounts receivable balances totalling $8 million that had been reserved for as part of the purchase accounting for an acquisition made in Q3 2023 were collected during the three months ended June 30, 2024. This income has been recorded as part of the "Finance and other income" line item above. There are no individually material reasons contributing to the remaining variances.

Bargain purchase gain - Bargain purchase gains totalling $6 million and $10 million were recorded in the three and twelve months ended December 31, 2024 respectively, compared to $3 million and $54 million for the same periods in 2023, relating to acquisitions made in the respective periods. A $49 million gain was recorded in the twelve months ended December 31, 2023 relating to an acquisition that was expected to incur operating losses in the first year of ownership, and below average margins in the following two years. In accordance with IFRS, an accrual for these investments in the business was not recorded as part of the purchase price accounting. The remaining gains resulted from the fact that the fair value of the separately identifiable assets and liabilities acquired exceeded the total consideration paid, principally due to the acquisition of certain assets that will benefit the Company that had limited value to the sellers.

Impairment of intangible and other non-financial assets - Impairment expenses of $11 million and $28 million were recorded in the three and twelve month periods ended December 31, 2024 compared to $22 million and $26 million for the same periods in 2023. The expenses relate to businesses that have been unable to achieve the goals established in their respective investment theses.

Redeemable preferred securities expense - The redeemable preferred securities expense for the three and twelve month periods ended December 31, 2024 was nil and $58 million respectively, compared to $278 million and $597 million for the same periods in 2023. In conjunction with the acquisition of WideOrbit, Lumine issued 10,204,294 special shares of Lumine (the "Lumine Special Shares" or the "Preferred Securities") to the sellers of WideOrbit for an initial subscription price of approximately $222 million. Holders of the Preferred Securities were

entitled to convert some or all of their Preferred Securities into Lumine Subordinate Voting Shares on the basis of 3.4302106 Lumine Subordinate Voting Shares per Preferred Security, at any time.

The Preferred Securities were recorded at fair value at the end of each reporting period. The change in fair value of the Preferred Securities was recorded as redeemable preferred securities expense (income) in the consolidated statements of income (loss). Based on the Preferred Securities conversion right, the value of the Preferred Securities was primarily dependent on the price movement of Lumine's Subordinate Voting Shares. The holders of the Lumine Special Shares were also entitled to a fixed annual cumulative dividend of 5% per annum.

On March 25, 2024, all of the Lumine Special Shares were automatically converted into Lumine Subordinate Voting Shares, and additional Lumine Subordinate Voting Shares were issued in satisfaction of the amounts owing in connection with the accrued dividends on Lumine Special Shares. Specifically, a total of 35,076,193 Lumine Subordinate Voting Shares were issued.

Finance costs - Finance costs for the quarter ended December 31, 2024 increased $13 million to $73 million, compared to $59 million for the same period in 2023. During the twelve months ended December 31, 2024, finance costs increased $88 million to $280 million, from $192 million for the same period in 2023. The increases are primarily a result of an increase in the average debt outstanding in 2024 as compared to 2023.

Income taxes - We operate globally and we calculate our tax provision in each of the jurisdictions in which we conduct business. Our effective tax rate on a consolidated basis is, therefore, affected by the realization and anticipated relative profitability of our operations in those various jurisdictions, as well as different tax rates that apply and our ability to utilize tax losses and other credits. For the quarter ended December 31, 2024, income tax expense increased $1 million to $44 million compared to $43 million for the same period in 2023. During the twelve months ended December 31, 2024, income tax expense increased $40 million to $244 million compared to $204 million for the same period in 2023. Current tax expense has historically approximated our cash tax rate however the quarterly expense can sometimes fall outside of the annual range due to out of period adjustments. Current tax expense reflects gross taxes before the application of R&D tax credits which are classified as part of "other, net" expenses in the statement of income (loss). The Company's consolidated effective tax rate in respect of continuing operations for the three and twelve months ended December 31, 2024 was 12% and 24% respectively (-77% and 77% for the three and twelve months ended December 31, 2023 respectively). The effective tax rates are impacted by the redeemable preferred securities expense, which is not deductible for tax purposes.

Constellation is subject to tax audits in the countries in which the Company carries on business globally. These tax audits could result in additional tax expense in future periods relating to historical filings. Reviews by tax authorities generally focus on, but are not limited to, the validity of the Company's inter-company transactions, including financing and transfer pricing policies which generally involve subjective areas of taxation and a significant degree of judgment. If any of these tax authorities are successful with their challenges, the Company's income tax expense may be adversely affected and Constellation could also be subject to interest and penalty charges.

Net Income and Earnings per Share:

Net income attributable to common shareholders of CSI for the quarter ended December 31, 2024 was $285 million compared to $141 million for the same period in 2023. On a per share basis this translated into net income per diluted share of $13.44 in the quarter ended December 31, 2024 compared to net income per diluted share of $6.65 for the same period in 2023. For the year ended December 31, 2024, net income attributable to common shareholders of CSI was $731 million or $34.48 per diluted share compared to $565 million or $26.67 per diluted share for the same period in 2023. There was no change in the number of shares outstanding.

Disclaimer

Constellation Software Inc. published this content on March 07, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on March 07, 2025 at 22:08:21.692.