Thank you, Valerie. Welcome, everyone, to the Q2 call.

I've got Jamal here with me and we're going to take your questions. Valerie is going to tee those up right now.

Mark, I just wanted to focus on the TSS business for a second. You made good progress on your margins sequentially.

Just want to see how that restructuring is looking as we kind of move into the back half and so if you have any, or what your margin targets are there for the year, firstly? And then, I guess, secondly, how -- would any of the 5 acquisitions made down in the TSS business -- or how is their acquisition pipeline looking?

Okay, a couple of questions there. One is a plaintive request for forecast, which we don't give.

What we've said in the past is that TSS is a business that has a much higher component of professional services activities inside of it. That isn't going to change anytime soon, although we hope for sure that they will build their recurring revenues over time.

The -- hence, we tend to believe that they will ultimately have lower margins than our other pure software-type plays. But when we get there, and whether we get there, to be seen.

And regarding acquisitions, they have done an acquisition and they have a couple of full-time folks looking for acquisitions as well as the management team participating in that activity. So we anticipate that like our other businesses, they will be serial acquirers of local vertical market software businesses, and gradually we'll branch out from the Netherlands to other geographies.

Okay, great. And just one other quick question, if I could, just on the organic growth.

In the public sector, in particular, looked strong this quarter, up about 7%. Any commentary or color you can give us there in terms of how the spending environment is looking at state and local levels?

For sure, there is the environment issue, but I think what you're seeing here is a deliberate attempt to invest in and cultivate organic growth inside of our businesses. If you track our R&D and sales and marketing spending and look at what's happening to the headcount in those functions as a proportion of our spending and our headcount, it's been going up, and that's hopefully designed to drive organic growth.

Whether we get the returns on those investments or not is yet to be seen, but I think we are seeing some early signs.

Just Mark, probably top of mind, is any comments you would make on the acquisition environment right now, your own funnel, how would you characterize it versus, let's say, last quarter?

The funnel looks better but the proof is in the pudding, right? It's getting things across the finish line.

And we didn't close that many transactions of good size over the course of the last -- well, they've been quite small. Nothing wrong with nice, small acquisitions.

We'd love to do a bunch of them. And -- but one would hope to -- I would've hoped that we would have invested more capital in the first half.

And when you look at that, hope versus the reality, I mean, is there any -- maybe hold up is the wrong word -- but is there anything in particular that you would you call out as a factor in not getting some of those deals done?

I think maybe expectations got -- if you look at the market, we're 5 years into a bull, I think people's expectations are very high. We are signing lots of NDAs, getting into conversations with a number of companies, but not closing the percentage that we have historically.

And then the margins in the Public Sector business look like they jumped up quarter-over-quarter, excluding the TSS. It did look like a higher license mix this quarter.

Was there anything else that was sort of unusual on your mind?

It was a very good license deal signed down in Australia that we announced, that I believe, helped. And then in the public sector in general, the guys are cautious but it seems to be going well.

Okay. Just couple of questions on the standalone TSS financing.

Are there any other assets other than TSS in that Constellation [indiscernible] business?

Not right now.

Okay. And then what -- is there any -- the filing makes -- alludes to some limitations.

Are the future acquisitions of TSS limited, to some extent, to the cash that they themselves generate, or can you still funnel capital over there?

We can funnel capital over there once we get the minority shareholding agreement signed and sealed. Obviously, we'll have a partner.

And you have, with any partnership, to make sure that you work within the constraints of your partner. And so to the extent that they, the partners can or can't come up with the capital, we'll have to figure out how we handle larger transactions if we're going to try and do them through the management team at TSS.

Mark, I'm wondering if there's any natural trade-offs between organic growth and M&A. And so, in the healthy climate, do your managers perhaps spend a little bit more focus in terms of capitalizing on organic opportunities, which slow down M&A?

Or are the 2 activities sort of really independent of each other?

Yes. We've talked about this at the board and with the operating groups.

And I think there's definitely a diversion of attention that you see with acquisitions. A number of our operating groups are now getting to the stage where some of the smaller acquisitions can happen without the involvement of the General Manager of those operating groups.

But if it's anything sizable, it's going to suck those guys in. And they're also the ones that tend to make change happen around the organic processes inside the business.

It isn't that they come up with the ideas that will create organic growth, but they create the environment and the processes that foster organic growth. And so they can be doing one or the other, it's hard to do both.

And so I think there is a natural trade off. I think that's -- I think we've seen it.

Okay. And a question for Jamal.

Taxes were higher this quarter, and you explained that, that was due to the Australian tax credits. And so to be clear, going forward, should we still be looking at a 10% to 15% rate, or is your guidance changing on that front?

Yes. I still think we're in that range.

Definitely, it's starting to trend up. In terms of the differential between Q1 and Q2, I would say there's truly like about 1.5 points to 2 points that's gone up just because we've got business now that are fully taxable in the U.S.

and the rates are going up. So I still think the upper limit holds, but we're probably trending closer to the upper limit than the lower than we have been in the past.

And long term, unless we're acquiring increasing amounts, I think you're going to see the tax rate trend upwards.

Okay. And just one last one, in the notes in the financials, you didn't disclose the contribution from the 2014 acquisitions because it wasn't material.

So just curious as to what your thresholds for materiality would be?

So we're using sort of what the OSC uses as -- so if it's 20% of our net income, for example, on a consolidated aggregated basis, we would consider that material.

Mark, maybe talk just a little bit about if we drilled down into public for a minute. The transportation group, particularly Trapeze, looks like they had a record user conference this year.

Is that -- how should we think about organic growth in that area? And you've talked a little bit more about R&D.

It looks like they've obviously hired a CTO in that business, and the business appears to be ramping. Maybe talk specifically about Trapeze for a minute and the growth prospects there?

Sure. So I think the process is, I was talking about earlier, to foster organic growth.

I think they're the most advanced of our groups in terms of doing that, as they centrally managed activity. So in other words, creating a group that takes ideas and winnows through them, and helps the people who generate those ideas put elevated pitches around them and determine whether they're going to pursue them or not, and then flush out the ideas and look for sponsors among the user community and things of that nature.

So the whole innovation process at Trapeze, I'd say, is more advanced. That doesn't mean that in some of our other individual businesses, they don't bubble up some great ideas and make them happen without a whole lot of process.

But I'd say, as a repeatable activity, Trapeze is definitely ahead of most of the other groups. I don't think that necessarily comes down to a CTO, by the way.

I think product ideas come from customer intimacy, a cutting-edge code, and I think the Trapeze guys are trying to be as close to their customers as they can.

Understood. Yes.

I wasn't trying to single out one person, I just looking more as this is the prototype for the group. What I was thinking about more was if you look at the size of their user conference, the size and sort of development of this group, is there a logical investment here where actually -- maybe even take margins down for little bit and you build, I know you don't like cost structure, but you build some of that into the core, and then try to drop some of those processes back into other groups like Harris and sort of buildup larger companies because Trapeze is clearly a large, standalone software company in its own right at this point?

Yes. Our North American transit business is amongst our largest individual business units and hence, can afford a level of infrastructure that many of the other business units can't afford.

That's partially because the addressable market in that particular vertical is quite large. If you take one of our small verticals, let's say the Gallery's software business, it's a small addressable market that doesn't have the same kind of cash to throw around that the transit authorities do.

And they're managing assets that are much smaller from the transit authorities. So you're never going to see a market size in that particular space that's comparable.

But my sense is that they are trying to innovate and using a lot of the same processes that Trapeze uses inside the Gallery's business to grow their business organically. And I think you'll see the same across many of our smaller verticals as well.

So the trick is to scale those processes so they work in tiny little verticals and very large verticals, and we sort of run the gamut from 20 person businesses to 400 person businesses and we think we understand how we work at both ends at that extreme.

Last one for me is just -- we touched a little bit on the fact that with TSS, you have a partner involved there. How should we think about how you're going to evaluate that process as to whether or not you do -- not just that deal, but specifically in the future, because I'm thinking about private equity firms for example, may or may not good partners, but there's a large number of vintage deals out there that are likely looking for a new home at this point or refunding.

How would you think about partnering with another organization, private equity or otherwise, going forward? Like is this is sort of a 2-year evaluation for the board to sort of see how this one works out first, or would you move before that?

Yes, I'm hoping both the board and the shareholders are evaluating it. Free cash flow ultimately will be the determinant of whether this has been a success or not.

We paid a lot of money for TSS. We've been able to make that slightly less burdensome by standalone debt inside the acquisition that cuts both ways, right?

Leverage makes things better when you run the thing well and makes it worse when you run it poorly. We anticipate that things will go well and we hope that, inside of a couple of years, we'll be very happy with the experiment and we'll consider others.

Finding the right partners is non-trivial. I think anyone who's partnered understands that.

I was just hoping to clarify, in terms of your threshold for press releasing acquisitions. Have you changed the threshold that you'd consider press releasing acquisitions this year versus prior year years?

I'm thinking it was the beginning of this year, we went to $10 million, is the size, and it used to be $5 million.

Okay, that's good to know. And also, I think, in July, Trapeze acquired a company called Sigtec Holdings in Australia, but I didn't see a disclosure in the MD&A about that deal.

Is that because it was below the threshold?

Yes, it would have been part of the group of the acquisition, although we group everything together.

July.

Oh, in July. What was the one in July?

Maybe it's just timing on the press release that came out in July, but the deal closed in June?

Let me double check that later.

Yes, Jamal's looking right now.

Okay. Moving on, just on the standalone debt financing for TSS, the interest rate is based on a leverage table.

What's sort of the base case we should be thinking about for the interest on that debt?

I don't have that at my fingertips. And what I found historically with these tables is they never work out quite as you think they do.

You sort of end up tripping up a step or 2 on the tables.

I'd tell you what, why don't we try and get something in the next MD&A about the interest cost and the standalone debt?

Okay, that would be helpful. And then just lastly, the rights offering, you put out the primary perspective.

Have you had feedback from your investors on that and what sort of -- if you could just sort of elaborate on your -- the structure around the rights offering?

Sure. So we filed the prelim, we're working on the final.

We hope to get it done soon. The problem with non-traditional instruments is there aren't good precedence and you have to ask about everything to the appropriate authorities.

And so it's been a much slower process than I'd hoped. Hoping we will get the final file shortly.

And vis-à-vis interest, the market will tell us, right? The rights will trade, and there will either be lots of interest or there won't.

And Paul, just so you know, Sigtec closed on June 30.

So it is included in Q2?

Yes.

Just a couple of housekeeping questions for me, if I could. We've heard in the past that 5% year-to-year organic growth is hard to come by without recurring organic growth growing at 7% plus.

Has that been the case so far this year? And if we can get a comment, maybe on breaking that down a bit in terms of what's driving that recurring revenue organic growth?

Yes, so we give you the breakdown of organic revenue growth once a year in the May timeframe in the presence letter? So if you go back to that, you'll see it.

It's a really difficult process to carve up all over the recurring revenue and understand what's happening inside of it, so we only do it once a year. And since maintenance tends to be a very significant piece of our overall revenues, and we try to grow the maintenance component as a percentage of revenues, that may be where the 7% or 5% came from that you're quoting.

I see. And just on the TSS side, the restructuring that was being completed this quarter.

We've heard on the previous call that the restructuring being completed in the last quarter was part of the management initiative there before the acquisition. Is this still the case or is this restructuring part of your initiative at TSS?

No, no. It's their plan and they're executing it.

And obviously, we are trying to share what we know about vertical market software businesses with them, and they are fast learners. And I am sure there are nuances of what we think and do that are being incorporated into their plan as they recast it each year, but basically, it's their plan.

I see. And just one last one for me.

Really, has your experience with the European labor laws and the integration of TSS over the last few months influenced sort of your future plans in doing business there? Can we expect that, if there are any larger acquisitions coming down the pipe, they will be more North American focused?

I don't think the -- I think it's something that you build in to your models and your investment thesis. And so if there's a higher cost of shifting staff around in Europe, you build that in.

So I don't think it influences whether we would do a large acquisition there or here.

Mark, could you maybe talk about the -- on the opportunity side with respect to acquisitions, what the geographic split may be in that pipeline and how that's different on a year-over-year basis?

So on the European pipeline -- well, you can't call it a pipeline because these are, to us, what we call suspects. So we contact companies and we start to engage in conversation.

Hopefully a decade later, we have a transaction. So they're very long plays.

And in terms of those generation of suspects, we've been doing reasonably well in Europe. I'd say somewhere between 20% and 35%, depending upon the month, are coming out of Europe.

We're certainly active there. We believe there's opportunity there.

I think it's going to be important to us long term.

And just switching gears a little bit. On the maintenance renewal rates, has there been any change in terms of how that's trended over the past little while?

And what's the ability like lately to get to pricing increases on those maintenance renewals?

Those aren't things that I monitor personally. I'm sure someone, somewhere inside the organization does, but it's not a real focus.

I tend to look at the attrition once a year as we get the stats in. But the way we run is highly decentralized.

We've got this large number of individual business units with General Managers running them, and I'm hoping that they know which of their clients are thinking about leaving and are following their maintenance renewals, and are trying to decide if they've added enough value if they can put through price increases, things of that nature. So it's not a central activity, Richard

Okay.

But once a year.

Okay. And then just one question.

I think you touched on R&D at the beginning of the call, but TSS has a greater proportion in R&D. Are you -- it sounds like you're just going to let that kind of operate this down and I think -- but I guess, would you sort of consider upping your own R&D?

Or how do you think about R&D in general, as you sort of look at organic growth going forward?

And so R&D isn't a dial or a lever that I have my hand on. It's one, obviously, that I monitor.

It's an investment generally in both sustaining R&D and in initiatives, things that are aimed at future revenue generation. And it's the latter component that I believe is the toughest part of running a software business.

So I'm really keen on understanding how our people do that initiative investment and I encourage them to try and do it as rationally as possible. Measurement is the only way you end up doing that well.

And so I encourage them to track initiatives and to recognize the fact that some of them aren't working and to triage them and to try and get customers involved in financing such things as much as possible.

Just following up on the European question, I guess, for Mark. I mean, do you have any preferences on areas where you're looking?

Or where the better opportunities are, evaluation-wise, between, let's say, Nordics, Benelux, U.K, from a pipeline perspective?

No, really not. Those all sound like good places to do business.

And they're all rational in their expectations or...

When you're selling the business that you built over 20 or 30 years, you think it's the prettiest thing out there and hence, are looking for big prices and there's a process of sort of coming down to reality. And sometimes we end up being the winner as the expectations ratchet down, and sometimes we don't.

Okay. And then, I guess, for Jamal.

I mean, have you seen any issues on the collection side or from a DSO perspective between the TSS customer base and what you're historically used to from a North American perspective?

No. I mean, the metrics in TSS are actually pretty stellar from that perspective.

So I mean, we, from a CSI perspective, there's been some deterioration in working capital from a web and inventory perspective, but nothing that I would say TSS is causing any of our working capital to go.

Thank you, Valerie. Thanks, everyone, for joining the call.

Look forward to chatting with you in 3 months’ time. Bye now.