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Constellation Software vs Private Equity Operating Strategies

Last year, we published research exploring how Constellation Software operates its subsidiaries. When CSI acquires a business, it restructures the opco revenue lines into its standard format used in the consolidated accounts: 

However, the costs are presented differently. CSI groups most of its cost into a broad 'staff' line item, which accounts for over 70% of cash expenses.

But each subsidiary has far more granular KPIs to optimise. CSI requires each opco to split every dollar of cost into 5 buckets: Professional Services (PS), Maintenance, Sales, R&D, and G&A. This standardizes the P&L of every opco to better compare performance across the group:

CSI own 900+ software businesses which gives them an amazing bank of data to work out what good or rubbish looks like and can share best practices. They know who is the best at professional services so they can teach the rest of the group. Such a spread allows them to have core KPIs for software businesses in all sectors. They can look through the same lens to measure the efficiencies of professional services and support teams, and cost of R&D, G&A and sales and marketing. They can tag every individual and pound spent or made into those five buckets, and know professional services revenue should be this ratio of professional services spend. That's what it should be, which means they can immediately spot weak spots in target businesses. - Former M&A Executive at CSI 

This interview with a Thoma Bravo operating partner, who also had a short spell at a CSI operating group, explores the different strategies of managing a software asset's cost base to create value. For example, the approach to professional services (PS) is different by CSI vs software PE funds. Constellation requires a 2x return on professional services expenditure whereas Thoma Bravo or Vista may run PS at breakeven or loss-making to drive growth.

Constellation Software Professional Services KPI for Opcos
Constellation Software Professional Services KPI for Opcos
You essentially get two times back what you spend. That's not a bad return. It depends on what you're using professional services for. If they're using it to generate profit, a company we work with may use professional services to build up the market. You don't want to lose money in professional services, but you may not make every dollar back. We might choose to use professional services as a way into a market, running it on a one-to-one ratio. It very much depends, and that's the difference in our model. We're very supportive of the market we're entering. - Operating Partner at Thoma Bravo

This interview walks through the software P&L and analyses how PE and CSI deploy different strategies to create value on every cost line item.

CCC & the Evolution of the Auto Claims Process

This interview with a Former SVP of Claims at GEICO explores the switching costs and pricing power of CCC vs Mitchell. We also explore the opportunity of CCCs straight-through-processing solution aiming to automate the claims process for insurers:

Historically, CCC has evolved at a faster pace than Mitchell and currently has more data than Mitchell. Data drives CCC's innovation in terms of straight-through processing (STP). I'm sure you've heard about it. When you have $100 billion a year in estimates for 10 years, you're talking about a trillion dollars of data to mine and match with pictures. That's what straight-through processing does. It matches pictures with historical estimates so that if you show a picture of a dent, the technology will tell you that dent on average costs, for example, $1,200. - Former VP of Claims at GEICO

LVMH: Working with Arnault & Luxury M&A

This interview with a former executive in charge of M&A reporting directly to Arnault provides get a window into how the group operates, looks at M&A, and life working under Arnault.

"This group has always been managed in a very ambiguous way, which might change in the future. Dealing with ambiguity has been crucial for success within the group. Your boss might be your boss on paper, but not in reality. Arnault doesn't care about hierarchies; he will go directly to the store and send you a memo on Monday morning. He might send a five-page memo to the store he visited on Saturday without informing the brand CEO. If you're a CEO upset by the lack of clear lines, you might need to look elsewhere. - Former Senior Executive at LVMH

CellaVision: Hematology Instruments Market

CellaVision is a Swedish $500 million provider of blood analysis equipment that has compounded its equity value at over 20% per year over the past decade. In this interview with a former Beckman Coulter executive, we explore the blood analysis market and where CellaVision fits in the customer's workflow.

Sysmex definitely has the largest market share, probably over 80% in the US. It's really high. Then you have Beckman Coulter. But it depends on the market too. In the non-acute market, Beckman Coulter has a higher percentage of market share. In the government space, Sysmex has about 80%. In the hospital space, Sysmex also has about 80%, while Beckman Coulter has around 17%, with the small remaining percentage being Siemens. - Former VP at Beckman Coulter

Sysmex, CellaVision's key strategic partner & distributor, has a dominant market share in the United States.

The CellaVisions and Scopios don't have many reagents; it's mainly about the hardware. I can't speak to specific SKUs or overall pricing, but in terms of cost, it's around $7,000 to $8,000 per year for reagents. The real revenue comes from the service side. They have service contracts, which for smaller instruments are about $5,000 to $6,000 a year. For larger instruments like the DM 1200 and the 9600, service contracts are around $14,000 to $16,000 per year. So, while you might only have a few thousand dollars in reagents, maintaining service, cleanliness, and preventative maintenance is where they make more money. - Former VP at Beckman Coulter

CellaVision's reagents / consumables business is currently small but is a potential source of growth after the acquisition of reagents manufacturer RAL Diagnostics. We will explore the Sysmex relationship and reagents potential for CellaVision next.

Celsius Holdings: European Energy Drink Market

Celsius Holdings is a ~$7B market cap energy drink company that has seen astounding growth in the past few years, compounding revenues at >80% over the past 5 years. It's main distribution partner PepsiCo, also has the option of distributing Celsius outside of the US. In this interview with a European Coca-Cola executive who launched Monster in Western Europe, we explore the European landscape for energy drinks and Celsius' growth opportunity internationally.

When we initially launched Monster, Coke Energy was not really a success. However, the strength of our overall share is much more beneficial than for Pepsi. In terms of colas, Pepsi's share is just 5% or 6%. It used to be 5%, 6%, or 7%, depending on the context. Their strength is very low at that point. - VP at Coca-Cola Europe

Restoration Hardware: International Expansion

In this interview, a former Vice President at Restoration Hardware sheds light on the effect in-store restaurants have on the stores' financial results.

It's interesting because when you launch a new gallery in a market, you typically see a good arbitrage. It lifts the market by maybe 20% to 30%. When we started incorporating food and beverage, the stores became much larger, and we could showcase a lot more products. With the addition of food and beverage, we saw an additional 20% to 30% lift in those markets, almost doubling the impact. - Former Vice President at Restoration Hardware

Carvana vs CarMax: ABS Ratings

Carvana relies on securitising its loan book and recycling its capital through the ABS market to fund its growth. In this interview, a former Senior Executive at Moody's Investors Service explains how ABS pools are rated and the differences in performance between Carvana and CarMax' ABS pools.

Differences do exist. One of your questions led me to compare the CarMax pool with the prime Carvana pool. There are differences in borrower profiles and some counterintuitive performance differences, though they are similar on the margin. For instance, the Carvana prime pool generally performs better in terms of CNL than the CarMax pool. - Former Senior Executive at Moody's

Kinsale Capital: History and Advantage of Technology

In this interview, a former Software Developer at Kinsale Capital explains the competitive advantage born out of developing in-house systems rather than relying on off-the-shelf solutions and how Kinsale's management team enabled the execution of such a long-term vision.

Kinsale's long-term vision was to replace the licensed off-the-shelf solution entirely with in-house systems, which we achieved in about four to five years, just before going public, around 2015 or 2016. The leadership team, composed of industry veterans, was highly focused and aligned on this strategy. This was my first job in the insurance sector, and I often heard that achieving this was a first in the E&S sector. It wasn't because we had extraordinary engineers, though they were skilled, but because the leadership was dedicated and single-minded in their approach. We were a lean team with a long-term vision, and the leadership's commitment was unwavering. - Former Developer at Kinsale Capital

Lithia, Penske & US Franchised Car Dealers: ICE and EV Servicing

In this interview, a former General Manager at Lithia & Driveway explains the differences in process and economics between EV and ICE vehicle repairs.

"But here's the issue with all these new EVs. There are so many sensors on the car; sensors for lighting, for other cars ahead, for pedestrians. There are so many sensors that if you just use the basic two post, you might not find all the problems. With EVs, you need to go into full detail, which is why it costs more. There are more labor hours involved and much more information to check. For example, if you're checking an older BMW, you might just need to replace the bumper. But my 2003 BMW didn't have all the technology that exists now, especially on EVs with sensors in the mirrors, front bumper, rear bumper, and all the cameras. That's why it's more expensive for EVs; there are so many more things to check besides just a bumper. If you hit the front or rear bumper, there's also a camera back there. - Former GM at Lithia

Supply Network Limited: Challenges in Building Truck Parts Catalogs

Supply Network Limited (ASX: SNL) is an 860 $mm market cap Australian company that distributes aftermarket parts for trucks and buses. It operates in the $7bn+ Australian truck parts aftermarket and has been growing top line at 17%+ CAGR for the past 5 years while averaging ROEs north of 30%.

In the truck parts aftermarket, building a parts catalog for each model is challenging. Every part has to be validated by a technician who knows the truck model involved and the different options for each part being replaced. Such information is not publicly available and constitutes an edge for distributors:

That's where the shady side of the aftermarket world comes into play. It's about finding ways. As I mentioned, people get logins for particular things, access overseas to catalogs that they can't get in Australia, and disgruntled former workers. It slowly builds up from there. - Former Product Development Specialist at Supply Network Limited

In this interview, a former Product Development Specialist at Supply Network Limited explains how the company manages to build comprehensive truck parts catalogs, which constitutes an edge over its competitors.

Melrose Industries: GKN Aerospace Special Products Group

Last week, we published an interview on Melrose Industries and its subsidiary GKN Aerospace. In this interview with a former GKN Aerospace executive detailing the Special Products Group, the executive explains how the profitability of some parts has been pressured.

You've got these legacy platforms with long-term programs, projects, and deals on the table. When GKN bought the Bristol facility in that sellout by Airbus, they acquired components and parts with considerable margins. There were rotables and such, with thousands of part numbers, but significant margins for a structures business. Airbus has been trying to trade parts and renegotiate deals to drive costs down. I don't know where they ended up, but I've heard of a few disputes. The challenge is that while there are only old platforms flying, ignoring the 787 and the Airbus Bombardier joint program, there aren't many new platforms. You still have the 737, A320, and 777. Some aren't even in OE build anymore, like the 777, and if it is, it's in small numbers. These deals can weigh you down, but you can't move away from them. - Former Senior Executive at GKN Aerospace

Credit Acceptance: CAPS Technology Challenges

In this interview, a former Software Engineer at Credit Acceptance sheds light on the challenges the company has been facing regarding its tech stack overhaul.

The aim was to replace CAPS, but it didn't work out. It was a huge project with many people involved. There were several reasons for its failure, primarily budget issues. It went so over budget that they didn't see the return on investment they expected. - Former Developer at Credit Acceptance

Public Policy Holding Company: Seasonality, Price Sensitivity & Cross-Selling

In this interview, a former Senior Executive at Public Policy Holding Company explains how price sensitivity differs between public and government affairs and the cross-selling opportunities that exist between both departments:

On the public affairs side, pricing is an issue. However, on the GR side, it's not really an issue. The pricing in the GR space is often publicly available due to the Lobbying Disclosure Act. There's not much undercutting, and pricing is often based on a feel for the workload. For example, a client might be quoted $25,000 a month based on the workload. If a client comes back and says their budget is $22,000, most lobbying firms would likely agree to that. The business model allows for profitability even with such concessions. - Former Senior Executive at Public Policy Holding Company