Thank you, Melanie. Good morning, everyone.

Welcome to the Q3 conference call. As you know, we go directly to Q&A.

So Melanie is going to tee up the calls now.

Just maybe, first of all, on the TSS business. The EBITA margins as reported at 17.5% are obviously a big jump from 10% last quarter.

Just wondering, Mark, if you can help us understand why the big increase there? And whether any of the one-time items are specifically related to TSS?

Well, certainly, there are some seasonal items in there. So my suspicion is that we will see this Q3 pattern again with TSS.

And as to the one-time items...

Just the -- yes, the vacation accrual was at $2 million that I was referring to. That was TSS-related.

Yes, that probably though is one of the seasonal items that we'll see year-after-year-after-year. So it's one-time per annum, Scott, as opposed to one-time.

And on the $4 million to $6 million expected severance in Q4, I don't know to what extent you can discuss that, Mark. But really what is the expected to be the annualized savings off of that type of investment?

And then what time period should we phase it in?

It varies over the -- all over the map, Scott, depending on the particular instance. And there are at least 16 separate businesses that we're tracking under TSS, so very hard to give you a hard number.

But they do look at, obviously, the payback and return on such expenditures and are pretty scientific about it.

Okay. Just, Jamal, could you give us a sense of what we should see as far as the current tax rate over the near term?

And then, I'm just curious as to whether you have any sense of what level of M&A investment is required to sustain that kind of rate.

Let me -- the rate that you'll see this period pumped -- bumped up to, I guess, I always look at that current tax as a percentage of any before tax, and you say it's 24% this period. However, if you exclude some of the one-time items like the $2.5 million prior period stuff, it's down to 18%.

The anomaly you're going to get now is that -- or at least in -- or materially in 2014 is the shred our application. So we built up these R&D tax credits in the past.

And what we're trying to point out -- I try to point out in the MD&A there is you're going to have about $13 million that we'll utilize of R&D tax credits to shelter current tax expense, but that won't show up in the current tax expense line. It will just reduce what we actually pay the government.

So if you take that into account, then you're back down to sort of the 15% cash tax rate. Now assuming we don't pay or make any more acquisitions, that number will gradually increase.

And if we don't make any acquisitions over the next few years, I mean, that number will bump up to -- we'll start paying full tax in Canada, so it will be somewhere in the mid-20s or so as a CSI rate. But I mean, I couldn't tell you what -- I mean, we don't forecast acquisitions, so the number will likely go up.

I mean, if we make some huge acquisitions and bring that IP into Canada, we'll be able to bring it back down, right? But as of right now, we just -- it is 15% and it will creep up towards mid-20s if we don't make acquisitions.

Okay, that's helpful. Just one last one, Mark, and that is the status of any minority investment discussions ongoing with the prior TSS investors.

Where does that stand?

The discussions are ongoing. I think we've got most of the major items ironed out and it's just the question of getting them papered as we have time.

Mark, your organic growth decelerated a little this quarter, and I was wondering how much of that might be currency. Do you have an estimate as to what the organic growth rates would look like on a currency adjusted basis?

I don't. Maybe Jamal does.

Yes, I mean, I do calculate that on a CSI-level basis and the number wasn't material enough for me to disclose it. Individually, like say, TSS, for example, like they -- I think the hit was about a 3% hit to their organic growth.

But again that was offset by positives in other currencies at a CSI level. See, that's why I don't disclose it.

So it shouldn't be drastically different at a CSI level.

Okay, that's helpful. And license growth in particular looked a little weak.

I think in the public sector it might have actually been down organically. Anything you'd highlight there, Mark?

Or just some quarterly volatility?

Yes, I don't really look at licenses. I don't find them very indicative because the world is changing.

There's a lot of SaaS model stuff happening out there, particularly in the add-on world. Plus when discounting happens, it tends to happen on licenses not on maintenance and services.

So I'm afraid I didn't spot that numbers, you did.

Okay, fair enough. And maybe as a more broad question.

As you talked to your business units, any commentary that you can share with us with respect to what they're saying about the spending environments? And how that's evolved over the last 3 months?

So they forecast optimistically while saying depressing things. So it's a combination of when it comes down to putting it in numbers, the numbers are reasonably encouraging.

When it is words, it's all doom and gloom are just around the corner.

Well, I guess, my question is we've heard from some other companies that there's been maybe a deceleration in the past quarter and so I'm just trying to figure if you guys are seeing that from what you're hearing?

I really believe that professional services are your best bellwether in software companies. And so just keep an eye on what all of the software companies PS is looking like year-over-year.

As things start to decelerate, they, obviously, do everything they can to keep that PS, professional service business going, but it tends to start slowing down as they move on to more and more marginal projects. And accounting can do magnificent things for license recognition, and so it's a somewhat untrustworthy thing to look at.

But I just encourage you to just sort of focus on the PS revenues and how they're tracking. My sense is that we aren't seeing any great panic in the professional services groups across the board.

Obviously, there will be spots where people aren't as happy as others.

Mark, maybe you could give us a little update on where the overall business is in terms of SaaS as a percentage of maybe both in Public and Private? We talked, I think now, a couple of quarters ago about initiatives in that area.

Yes. So we are using SaaS economic models in a lot of places.

We're tracking it. The challenge that we have is understanding the COGS that go against it because I like to understand what the net revenues are from both maintenance and SaaS-type activities.

And we had intended to start disclosing that information but the numbers just aren't crisp enough for my comfort at this stage. Let's just say that it's a growing and rapidly growing compared to the rest of the business piece of what we do.

And you are forced to go that route by the enthusiasm that the world has for cloud and SaaS-type products and positioning. And so I think it's going to be a trend for probably the next 4 or 5 years until the economics of SaaS become, I think, obvious to everyone.

Are there any of the business groups that seem to be sort of, I guess, leading the charge that we can look at where the customers sort of understand the operating models, challenging on the COGS side. But in terms of the customers, sort of pushing in that direction where you're looking to maybe offer a change to them in terms of delivery method?

Or is it sort of across-the-board, you're looking at this as an option to sort of change things up?

Well, I'd say across-the-board, our add-on products tend to be both hosted and SaaS economic models preponderantly. So more than half of the add-ons would be going that route.

And so that's irrespective of the vertical. Then in terms of the verticals where you get the fastest traction for SaaS models, they tend to be low-ticket and low professional service requirement verticals.

And so it's not hard to figure out, which of those inside of our 6-year-old verticals would be most likely to end up with a model of that nature. The problem with low-ticket, low PS, low professional services businesses is that they also tend to have fairly high attrition.

So you're hopping on a treadmill, where you're adding clients as quickly as you can, but they're also dropping off the other end. And so SaaS becomes a race where the cost of customer acquisition is offset, to some extent, by customer attrition.

Okay, great. The other one for me, it's a small one, just on hardware.

I know over time, you moved away from, and you called it, the one-timer from last year in QuadraMed. Maybe, how are you thinking about hardware and sort of transitioning that out or not as the case might be in terms of the various verticals?

So I think it varies an awful lot. When you service a customer, you provide a bundle and that bundle, in our case, always consist of some software.

But around it, we may hang services and it could be a call center, it could be all kinds of things. You also hang hardware in some very specific vertical markets.

And to be a viable competitor, you just have to have that offering sometimes. So I've no problem with hardware, I just prefer that it be hardware that can't be easily unbundled and that does provide value to the client as part of the bundle.

I just -- historically, what's been the relationship between profitability and acquisitions. And do you typically see like a higher profitability in periods of lower acquisitions?

A couple of questions in there. So when we acquire a business, it seems to go through a 2- or 3-year period, where the profitability improves.

I'm generalizing here. Sometimes we acquire businesses that are highly optimized and that you couldn't hope to continue to run at the level of profitability that we buy them at.

That's quite rare, though. So most of the time, the businesses do improve their profitability over a 2- or 3-year period, and we actually just finished studying this for the acquisitions that we've done over the course of probably the last 5 to 10 years.

So it's a pretty good data point. When we're busy doing acquisitions that could be, during a time of depressed economics, it could be when the GNP has contracted, in which case it's going to be hard for us as a capital goods business, to make a lot of money during those periods.

And so very hard to talk about how profitability and acquisitions, as a whole, relate.

And looking forward and relating to that, I think in the past you commented that, there aren't economies of scale in your business. So outside of TSS, just looking at the margin expansion over the last year, I guess, is a lot of that coming from the gross margin line?

Or gross margins have been fairly consistent over history? Or is it more from the OpEx line?

So I don't really think about gross margin at all in our businesses. I tend to think about people-related costs, which are the vast majority of our costs.

And, of course, you can argue there's a fixed or variable depending upon what school you come from. And as to economies of scale, I said that we're modest and I think you have to drill down into individual business units.

I believe that teams of 40, 50, maybe up to 100, tend to be eminently manageable and nimble and do wonderful work. I find that when you get up to 400 or 500 people, you need to have rocket scientists inside those teams because it's really hard to coordinate the activities of that many people in a single pursuit or business unit.

So I'm constantly amazed by people who run 1,000-person or 10,000 single business units. We don't have many big ones.

We have lots and lots of 40-person and 50-person and 100-person business units. I'm not sure that when you start pushing past there that you get tremendous economies of scale.

If you're addressing a large vertical, where the total available market is sufficient that you can push past there without hitting diminishing returns, then I think what happens is you either subsegment the market and come up with differentiated positioning and make good money out of doing that, or else you figure out how to manage the complexities of scaling up the business. And I think either of those are viable strategies.

They -- I just think the latter, the scaling up the business, is inherently difficult and sometimes dangerous. So you probably can get bigger economies of scale.

If you seek them out, you can slap together 2 or 3 businesses in similar spaces, eliminate some product lines, drive everything through a single product line, have a smaller R&D group, have a smaller support group, have a more coordinated sales organization. I think, the challenge is that you're going to get subsegmented by your competitors.

One more from me. You're generating quite a bit of more free cash flow this year than you're deploying in acquisitions.

In lieu of acquisitions, what would you do with the cash? And then just related to that, could you just revisit the dividend and then your thoughts on the appropriate capital structure just in regards of leverage or not?

So dividend is definitely a board matter as opposed to a "what would I do with it" matter. I do not, particularly like share buybacks on the record, as saying that it's an opportunity for insiders to take advantage of outsiders, particularly those who are least informed.

So my preference if you had to redeploy capital to shareholders would be dividend over share buybacks. As to capital structure, I don't believe all leverage is made the same.

There are banking facilities and debt facilities that have hair-trigger covenants and make you act very differently than other kinds of debt or fixed return instruments. And so I don't think one can answer your question without specifying the kind of instrument that you're using to leverage.

Just 2 quick ones, I guess on the DSOs, it looks like it's been the lowest in a while, which is a great sign. I thought it would've ticked up given the addition of the TSS business.

So what are you doing differently from a collections standpoint, I guess, other than happy customers, that you've been able to get the DSOs down here, which has obviously helped the cash flow? And what sort of targets would you have going forward for DSOs?

So working capital generally, and I think you have to look at it generally because there are tradeoffs between deferred revenues and AR. Working capital generally is one of the areas where we can optimize our businesses, where we can try to run them better.

We have had programs at all of our businesses to focus on working capital over the course of, perhaps, 3 or 4 years. Before that, obviously, we cared about it, but we just weren't as focused on it.

It's now part of our primary report card. What I tend to see happen is the businesses that have the largest projects also tend to have the largest AR and WIP and inventory and deferred revenue-type numbers.

And so they're the ones that are the most challenging. And as I've told you before, when bad things happen in software companies, it's usually WIP and AR, where they go to hide.

So, obviously, very pleased with the numbers coming down, would like to see them come down further. The metric that we actually follow suggests that it did pretty flat when you take into account all the working capital accounts over the last little while, and we wouldn't mind seeing them improve a little bit further.

Okay. And then just a follow-up, I guess, on the severance cuts in Q4 and stuff going forward.

Would it be across-the-board at TSS? Or are there specific countries or products that would take the brunt of the cuts?

So TSS has almost entirely their revenue is in The Netherlands, and that would be where they apply.

And were there any product weaknesses after you took over that you sort of need to trim either on the development side or within specific sales forces of their broad offerings?

They have so many products, as you can imagine, across that many business units. It's impossible to generalize and the key is to have each of those business unit managers run their businesses in a way that creates a portfolio of product.

There'll be some that are maturing, some that will be brand new, and it's managing those portfolios that's a big piece of the job.

Mark, my question is about the rights issue you did for the notes and I'm just wondering, from your perspective, how that's gone and if you see that as a useful tool that you will rely upon more in the future for financing.

It's gone very well, that had been I had hoped. I hope there were no stranded rights out there and that the vast majority have been exercised.

Certainly was pleased with the first tranche, which got the majority of them exercised. I believe it's a useful instrument.

It is tax-deductible. It has the long-term orientation that we need because we use capital to buy businesses that we keep forever.

So very happy with the instrument. If I'd had my druthers, it would been a U.S.

dollar instrument just to -- put in some natural hedges and there would've been some slight differences in some of the terms and conditions, but because of rules and regulations in past practice, we sort of ended up with a couple of compromises, but it's very close to what I was looking for. So very pleased that the shareholders supported us and helped make it happen.

Okay. And with respect to TSS, it looks like year-to-date in particular in the third quarter, there was a big investment in working capital.

Could you comment on that?

What happens at TSS is they have a very strong seasonal pattern to their working capital, with it being very strong in Q1 and then much -- sorry, I'm talking about cash flow, very strong cash flow in Q1 and then negative cash flows in the subsequent quarters. And so I think you're just seeing the seasonal pattern playing out.

Basically, deferred revenues are coming down during the course of the year.

Mark, I just wanted to touch base on TSS in terms of the integration. Where is it relative to where you think it should be right now?

Are you kind of halfway there, 3/4 of the way there? Maybe give us some color on that.

So I think history is probably your best guide to that. We find that over a 2- or 3-year period, what we have to teach, the best practices that we bring to the table, tend to get taken into the acquired organization, and I think that's the same case here.

We're dealing with bright, well-educated folks, who are keen to learn, and lots of our managers have been over to share with them what we do in certain circumstances and a lot of their managers are coming the other way and best practices travel through people. They don't travel through a playbook and I think it will take a while, but I'm very hopeful and very encouraged by the attitudes that we're encountering.

And given the size of TSS, does that sort of change the way you view sort of, acquisitions and the pace of acquisitions here going forward over the next 12 months?

Yes, it definitely means that I'm not going to be looking for another one for me to spend time on. But it doesn't mean that the operating group managers within my work won't be out talking to large potential acquisitions.

And particularly, if it's a vertical that they know and love, they're always doing that. We actually just had a session on Friday, where we had north of 70 people in from all over the world, from all of our organizations, to talk about mergers and acquisitions and how to do them better.

How to work the suspects and stay in touch with potential vendors, how to do integrations and what has worked, what hasn't worked and it's something around, which we're trying to put more and more process and around, which we're trying to innovate all the time.

Okay. And I guess, the last question, I guess, is maybe an update on the acquisition environment in terms of the levels of activity and maybe a bit of talk on the valuations out there in the marketplace.

So activity is high, but you'd expect that. We've -- I think it's 25 people, plus or minus, a couple who are doing full time M&A.

In addition to that, we have roughly the same number who, on a part-time basis, are engaged in the activity. We're thinking about adding some more.

One of the questions that obviously comes up is, where do you hit diminishing returns? And certainly, we are seeing that in terms of quality of leads being generated and the close rates on those leads.

But the issue is, have you gone too far? And if you experiment around the edges, that's the best way to figure out when you've gotten there.

We believe that the environment does affect these things. Certainly, the stock market, being where it is, tends to create a lot of expectations, a lot of the excitement around SaaS and cloud and creates expectations as well.

And most of the verticals are toying with, experimenting with, trying SaaS and cloud type rewrites. So tons of money going into this space right now, and people don't like to sell their business when they're investing.

They like to sell it once the prospect of rapid growth and profitability is just around the corner. So I think that could be contributing to some of the slowness we've seen.

Certainly, if we only invest what we've done so far this year, roughly, let's call it, $25 million a quarter and generate good rates of return on that, we'll be very, very happy. If we could do a couple of hundred million per annum, I think we'd be happier.

But then, if periodically, we succeeded in doing a large transaction that we found attractive, even better. But there are going to be cycles to these things and it's hard to predict.

Thank you, Melanie. I appreciate it.

Thank you, everyone, for attending, and we look forward to speaking with you once the Q4 results are in. Bye-bye now.