Thank you, Melanie. Good morning, everyone.

Welcome to the call, and Melanie is going to give you instructions on how to tee up your questions. Go ahead, Melanie.

Can you talk a little bit about TSS? In the MD&A, you mentioned 18% sort of reduction at TSS.

Is this partially FX? Or can you talk a bit about the staff complement and how you're thinking about TSS at this point?

So TSS was the operating group that suffered the most from FX. We actually, put up their -- normally, we array the performance of each of the businesses on growth and profitability.

And obviously, on growth in U.S. dollars, they look terrible.

When we did it in that native currency, they look like they've made tremendous strides. So I'd say largely an FX-related issue.

Okay. And then can you talk a bit about the staff [ph] complement at TSS right now in terms of the R&D department?

And how you're thinking about R&D at TSS?

I think we think about it the same way we think about R&D everywhere, which is that it breaks down into 2 components: one is an investment in your existing products. It's sort of the maintenance and care of existing products and the other element of R&D's development of add-on products and future products.

And the tough part, obviously, is the forward-looking stuff because it tends to be very difficult to figure out exactly how much you should invest in that stuff. And that's why we have the initiative process that makes us think through the size of the addressable market for each one of those add-on products.

And managing the core maintenance and care stuff is fairly routine, unless you've got a new product, which -- and those tend to be quite buggy and then it takes a while to work through those issues.

Okay. Then in terms of sort of the SaaS part of the business, it's now about 13% of maintenance revenue.

Can you talk a bit about that in terms of -- is that one of the areas you're investing in R&D? Or are you mainly acquiring sort of the SaaS-type businesses?

I couldn't really generalize. We certainly have acquired SaaS businesses, and we've built them as well.

As we were talking through with some investors, the SaaS businesses we built we realized that a number of them came from seeds from little companies we'd acquired that had been early adopters of SaaS-type structures or business models. And we have been subsequently built enormously on top of them, but there are others that were built from scratch, too.

Okay. And then in terms of the acquisition environment, I think in your President's Letter, you mentioned feeling comfortable competing at the private equity.

Can you kind of talk about the current environment here and how you're thinking about private equity?

The way I think about them is they add value in 3 ways. They buy, and frequently, they're very good at managing the auction process and sometimes even cooperating in the auction process.

They add value subsequent to purchasing the firm, and borrowing money is part of that value added. And then they add value in the exit.

And so if they are getting a multiple bump, if they're buying low and selling high, that is sort of part of the joy of private equity. But then some of them also keep their portfolio companies for long periods of time, build them up, do tuck-in acquisitions and basically run the businesses better.

And so in the first portion, we're not as adept as them in the buying of companies through auctions. So we've got a learning curve to go up.

We do have some people inside the organization who have participated in that world and can help coach us through that. In the value-added portion during ownership, I think we're well positioned to compete very effectively with them.

We can, I think, run vertical markets software companies as well as the best of them, and I will suggest far better than the worst of them. And then since we never sell, we might have a different time frame and a different focus, and that may be an advantage to us if we don't have to position for exit.

Okay. So you mean, really, it's around looking at the first point and how do you kind of compete with them a little bit better maybe, and do you have some thoughts on that?

So you can adopt the same techniques that they do. The primary thrust, so far as I talk with brokers is to say lots of people know how to play this game and end up winning perhaps by not doing things that are particularly nice.

What we would like to do is to be known as a group that don't have the financial out, so to speak. We have committed financing so that you don't have to worry about us coming back and saying, "The banks won't lend us as much as we thought, we'd like a lower price."

We'd also like the brokers to think that when we put a price on it although it may not be the highest that we're not going to nickel and dime if our diligence supports what we've been told about the business. And so we're very explicit in taking the information that we've received and putting in our letters of intent exactly what we think we know about the business and have been told about the business so that there's no confusion later.

And then if you can be known as that dependable bidder who doesn't, at the end, try and gouge, I think we become a very attractive member of the small group that end up working all the way to the end to purchase a business. And then we'll win some of them, and we will not win all of them by any means, but we're willing to invest.

We believe that such costs are something that are worth investing if you're buying forever. Obviously, if you're just buying to flip or looking for multiple arbitrage, search costs can be more of a factor in your thinking.

So we don't mind investing to be one of the parties at the game at the end of the pursuit process. So that's my current thinking about how we do it, and I'm hoping the brokers community will welcome having us as one of the members of every bidding syndicate.

Mark, in the letter, you talked a little bit about thoughts around changing the bonus plan program or potential that you're positioning to the other members of the team. Can you walk us through little bit about what those changes might be and how you might implement them?

So what those changes might be will -- are dependent on awful lot upon what good [ph] things would eventually end up proposing. And the problem is that this is a nontrivial issue that probably involves short-term versus long-term tradeoffs.

My fundamental belief is that if we want the next generation of managers to be as impressive and as good as the current generation, we have to offer them the same wealth-building opportunities. I don't like the compensation methods that are generally used in industry and public companies, so we've always had a fairly idiosyncratic one that shareholders have viewed well because we haven't used options, and we have had employees buy shares.

The approach that I'd like to take would be one which provides the same sort of leverage for the next-generation managers that the last generation had if these new managers do as well as we did. One of the things I'm trying to do right now is tease out a bunch of case studies of businesses that were built inside of Constellation, which started small and from that seed grew both organically and through tuck-in acquisitions with prudent use of capital and developed into large, often, with multinational businesses that have complexity and big barriers to entry and lots of unique characteristics with managers who you would inspire to be if you were a young manager inside of Constellation.

And I just like to make sure that those cases are obvious to people and that they can see a career path, both in terms of developing expertise and having a wonderful working life and a way to build wealth. And so I'm trying to make sure that the bonus plan that we have for those folks will provide that --

Okay. I guess the other one that came up out of the letter that I had lots of questions about was your own comments about changes you'd made in your own compensation and where you were going.

Any other management changes that have been thought about or made or maybe perspective on, I think, the letter you're relatively explicit, but maybe some comments around that if it could help as well.

I'm not sure what the question is, but again...

I guess the question is, Mark, it appears or it seems like over time, people are saying, "Where is Mark going based on these changes to his compensation?" My assumption is you're not going anywhere based on this.

You're slightly scaling back work. So that's question 1.

And question 2 is have you made any other changes to the management structure? Or are they contemplated in the near term in terms of the senior management team?

Got you. So let me answer the second one first because it probably sort of answers the first one.

We've made no obvious changes in the management structure. I can't think of any senior managers who have left in recent memory.

We did have, though, one resignment a little while back, but -- a few months back, but yes, that was about it. And then in terms of my own work, this was something I tried to do a little over a year ago.

It didn't work very effectively sort of backing off spending a little more time outside of work. And I'm trying a little harder to do so.

So that was -- it just felt more comfortable doing it when I wasn't pulling down a multimillion-dollar salary. I felt guilty all the time.

Fair enough. The third one maybe goes to the longer term and something we haven't touched on a little bit with Stephanie, but I guess, we'd take it longer term.

In terms of the SaaS business, maybe you could talk about what the margins look like in your SaaS businesses. And I don't know how hard you're pushing on transitioning or how hard clients are pushing on transitioning you to SaaS.

We talked in the past that it's potentially a lower-margin business, but we don't have a lot of details around if you're incurring lots of hosting costs. Is there anything you're doing in there to sort of manage the potential, I guess, dilution that could come on the margin side on SaaS?

So the -- I don't think there -- they have to be inherently lower margin. Where they have disadvantage is in the commitment to adoption.

If you're paying a bunch of money up front, you're going to invest heavily in trying to put the system into place and get utility out of it. You're going to be very committed.

If you're paying $30 a month, there are going to be a host of other higher priorities that are going to get in the way. Frequently, you'll get infant mortality.

So that's the thing I don't like about SaaS. The other thing I don't like about SaaS are the multiples that the public SaaS companies trade at on prospects rather than history.

And because they traded such high multiples, it encourages, what I believe, is a rational investment in the growth of those businesses. So if you're in a market where you're competing with a rational investment in SaaS, you have 2 choices.

You either don't play and stick with the old model, or you play but try to find the spots where you have the least irrational competitors. And so that's what we try to do.

And we have some quite large SaaS businesses. So as soon as the frothiness of the public market regarding SaaS goes away, I think it'll settle down, and we'll start to see decent economics out of SaaS.

You can already see that in sales force where they've gone from monthly to annual payments, which has massively improved the working capital position of sales force over time. So -- and it is probably the most mature of the SaaS businesses out there, and so that's a comforting sign to me.

It says that ultimately, this won't be an irrational market, we're just going through a very tough time right now.

Okay. Fair enough.

Last one. Jamal, maybe you could talk just a bit about there's a big margin swing Q1 to Q1.

Historically, it's always ticked down. Maybe talk about the sustainability of that and some of the things that played into the lift in margin this quarter.

I mean, the biggest swing in margin, I mean, you can see is in the staff expense and the big drop in staff expense is the profitability increasing TSS, but headcount down 12% from what it was in Q1 last year. They incurred a lot of severance expenses in Q1 last year than they didn't incur this year.

I mean, we still have our typical higher payroll costs et cetera. So I mean, this was a pretty clean quarter I would say.

And then you're getting the benefits of headcount reduction activities that were done last year that now you're reaping the benefits this year and there is not -- there wasn't a lot of acquisitions done last year that are causing us the same impact to Q1 of this year. So...

I think the acquisition thing is an important part. We haven't been acquiring a lot of late.

And when we do acquire a business, it tends to grow through a period of time where it isn't as profitable. And then eventually, usually within 1 year or 2, it starts to be more profitable.

And we haven't got back depressing results.

I just want to refocus on margins again over the last year. There's no -- or could you break out on the margin line?

Have you seen an expansion on the gross margin line? Or do you think it's more due to OpEx?

So we don't do that kind of accounting inside our own business. We view all people as things that we manage.

And so our professional services cost and our maintenance personnel cost, we look at on a departmental basis the same way we look at R&D and sales and marketing and G&A. So there is no gross margin for us other than third-party costs.

And third-party costs have not spiked significantly year-over-year. So I think that answers the question.

Okay. And another way to delve into it.

The -- in the 2012 President's Letter, you had a chart showing R&D and sales and marketing spending as a percent of revenue. It seemed to range between, I think, this is over a 10-year period between 26% and 33% of revenue.

Where do you think we are now? And do you see -- I think you had a nice curve in there showing a bit of an uptick at that time.

Do you see the trend on sales and marketing and R&D heading lower? Or do you see it heading up?

The problem is that the R&D and sales and marketing spend are a function of 200 business units making independent decisions. And so we have, for instance, 3 or 4 very major initiatives running, which would be 60% of revenues R&D and more than the remainder of revenue is sales and marketing.

So obviously, burning money. And then there are other businesses that aren't spending anywhere near that much.

So I don't think it's a highly predictable event. It used to be -- what I was trying to illustrate with that particular graph -- and I will revisit it.

I haven't, but I'll have a look at it before the next call also. And, Jamal, make a note to make sure that I do.

What I was trying to illustrate was we did have a policy of doing the initiatives. The tracking are big R&D sales and marketing investments in the future.

And looking at the returns that we were getting on them and then feeding that back to the people who are making those decisions. And I think one of the advantages of that was they soon discovered that they weren't getting the returns they thought they were out of those investments.

And so that taught them the fallacy of big investments without fast customer feedback. It taught them to take a much more agile approach to product development.

And I think that lesson was learned. I think in the process of doing that, they also became much more focused on acquisitions and realized that they were generating far better returns on the acquisitions and so they shifted their attention that way and I think perhaps to the detriment of initiatives for a while.

And then they started to see a swing back and increased investment in initiatives. And that was where I left off the analysis.

I just thought it was sort of an interesting observation from the macro level, and I'll take another crack at it, and we'll chat about it next quarter.

Okay. Sounds good.

Switching gears to the large leveraged transactions. I mean, as you mentioned in the letter from a headquarter's point of view, you're quite lean.

So what's the potential management capacity to do large leveraged transactions in terms of the potential frequency? And maybe if you can provide some background on the process and the amount of time involved in investment in acquiring TSS and maybe some of the deals that you didn't proceed with.

If you can just provide some background to this capacity on doing those.

So the process in these things tends to be driven by the vendor's broker. Some brokers like a tight process where they make you sprint through as fast as you can and then decide with as little information as possible at the end.

Others will be more responsive in terms of the information they provide. One of the things we really like to do is understand what's happened to the customer base, and that requires a level of diligence that is very deep.

And so if we're given that opportunity, then we can put our best foot forward. And so we -- it is work, but it's weeks of work, not months of work.

And we're happy to do it. It's probably teams of 3 or 4 from a diligent structuring point of view.

And then as you get the lawyers involved, we have in-house counsel, I think we have a dozen, 14 lawyers on staff, something like that, who are very adept. We've done 250 transactions.

We use, obviously, local counsel, when were working outside of Canada in the States or even in the States. And so the fees start coming towards the end of the process.

They -- the brokers tend to run multiple parties through legal simultaneously. And since we do our own diligence, we don't tend to rack up a lot of fees with third-party diligence firms.

So that's an advantage, but it can also be a disadvantage when you go to the banks because they like third-party vendor due diligence and the like type reports. And yes -- so I'd say internally, it's not a huge drain, but it does get expensive towards the end of the process.

Okay, good to understand. Just lastly, a housekeeping question.

What was the purchase price in the annual revenue run rate of InterAct?

We don't disclose those things unless we absolutely have to. It's a competitive market out there, particularly for midsize vertical market software businesses.

Or another way to ask you, did they have a significant amount of cash on hand when you made the acquisition?

No, I don't believe so.

Mark, maybe as a follow-on to Paul's question. As you think about the business, are there any, I guess, scalability constraints that you worry about?

Any obvious bottlenecks that need to be addressed? Or is the organization really structured in such a way that's not all that much of a constraint to growth?

I love the model of bottlenecks as a way of thinking about businesses. And my sense is in our businesses, it's a dynamic bottleneck that sort of shifts around from department to department in each of the business units.

In terms of the M&A process, we don't seem to get choked up at any stage. The place I have the most -- we have the most management issues is around contention between the 6 operating groups as they prospect for acquisitions.

So we have, I think, 23,000 prospects staked out in sales force, and they're always looking for ways to put in more, and they've been adding on the order of 4,000 a year for the last 3 or 4 years. And they were always fighting to sort of claim particular prospects and then to nurture them, work them.

So that when they do come up for sale, they are acquired by that particular operating group. So all the operating groups are looking to deploy capital, and that's sort of a -- it's not a bottleneck, but it is a management time-consuming issue.

Okay, that's helpful. Maybe a follow-on in terms of the SaaS discussion.

And I realize there's probably no easy answer to this, but broadly speaking, as you look across the businesses, just trying to get a better understanding of how much of a pressure there is or how much of a customer demand there is pushing you towards a SaaS model versus the license maintenance model. And I'm sure the answer varies tremendously across verticals.

But broadly speaking, if we look out 3 years, 5 years, how high do you suspect that SaaS mix might become in your business?

I think the lower the ticket, the higher the SaaS component will be. Our personal trainer in fitness business, particularly our lower-end personal trainer in fitness business, it's entirely SaaS, all the competitors are SaaS, et cetera, et cetera.

And most of those folks work off their phones and tablets. And they don't want a server and they don't want a traditional system.

The more enterprised the system, the more tightly integrated with multiple other sources of data and customers and suppliers, the more likely it is to be a non-SaaS type solution. Vis-à-vis the customers, it's interesting the traditional vendors who I've heard of being most enthusiastic about SaaS are ones where they sold the system ages ago.

The client IT capability over time has, let's say, matured as the people involved in IT and who've coupled together the systems haven't necessarily been replaced, and they decide that outsourcing more of the IT function makes sense. And so they transition over to a hosted solution, perhaps keeping the legacy application, but through hosting.

I don't know if you call that SaaS or not, but it generally means that your recurring goes up, and you move to a model where the hardware gets taken cared of by the vendor.

That's helpful. And so I guess, in some of those markets, as we look out further ahead, I mean, do you suspect that the enterprise service products even 5 years from now will predominantly be more traditional?

Or do you think that the mix really will start to skew more towards the hosted model versus SaaS model then?

I think the transition is going to be glacial on the enterprise stuff.

So Mark, I just wanted to get sort of a high level picture what you think the sustainable level of growth for this business could be here if we look out the next, I don't know, call it 3 to 5 years.

It's so hard to call, Richard, because it's dependent upon acquisitions. X the acquisitions, I would hope that we could grow organically in the GDP plus 1% or 2% kind of range.

But I guess when you sort of spec out the business and you forecast it going forward, you guys have probably targets in terms of where you want to be in the acquisitions. So from that perspective, is it the 20% or is it something that you can't really pin down still?

No, literally, you can't. If we get another '07 or '08, we hope that we will be buying willy-nilly.

And if we get a bubble, then one hopes to be out of the market entirely.

Okay. Fair enough.

I don't know if you can comment on this, but if you look at the markets globally and where you see the sort of most opportunities today, is that -- it seems like you're making a better, bigger push in Europe, other valuations a bit bad [ph] there right now and just a perspective on that will be helpful.

I think we've just been in North America for a long time, and so we feel we have pretty good coverage. Now the intriguing thing to me is if we actually look at leads, the North American leads are consistently strong and have continued month after month after month.

So that's very encouraging. In Europe, we didn't feel we had done a great job of coverage, particularly in Germany and Northern Europe.

And so we've invested in resources to do it better. And I think we're not yet at the sort of level that we're at in North America, but I would say inside of 3 or 4 years, we will be.

My first question is on SaaS. When we look at your maintenance revenues over the last few years, the attrition rate has ticked up.

I'm just wondering if that is related to what you referred to as commitment to adoption. And is that related to SaaS specifically?

And how should we think about your attrition rate and maintenance going forward?

So definitely, our SaaS businesses have higher attrition. We can break that out.

We can look at that. Within attrition, I think the commitment issue is a problem.

And we do get fairly high attrition in that first year or 2. So infant mortality, I think if you talk to any of the SaaS businesses, will be a problem.

And so that sort of answers that. How do you think about attrition going forward?

I think you should think that attrition is a bad thing and that having to backfill for attrition is costly. And therefore, low attrition is better.

Okay. My next question is on TSS.

TSS made a -- what appears a notable acquisition in April. It looks like they are migrating or adding some new verticals.

Can you tell us about the impact on their financials in Q2? And also you said that their operating profile is now in line with the rest of the business.

Should we take that as an indication that their margins are now closer to a 20%?

So they did do an acquisition, a fine little business in the Netherlands, a vertical but we know a little bit about because we have a similar business in Québec. It's a quintessential Constellation deal, one where we are buying into a new vertical for them.

And we will clearly talk to other people in adjacencies and hope that we can build our expertise in that particular vertical. And it won't ever be a $50 million business, but it should be a tremendous small business, which, run well, will be an asset that we will enjoy owning forever.

And the consistency in other numbers, if you can just give us some bit -- a bit of color on that, that's appreciated.

They had a very good first quarter. They are the only operating group who is forecasting lower margins for the remainder of the year.

I'm not sure if that's budgeting or the like because I haven't dealt with them long enough. Inside of our other businesses, we try to use rolling forecasts that reflect what the managers really think they're going to do because we don't penalize people for missing budgets.

What we're looking for is numbers that we can actually use to make intelligent adjustments in the business from quarter to quarter to quarter. And that kind of thinking is different than the budgeting world where you try and set your budgets as low as possible and then exceed them.

And so I'm not sure they're fully adopted to how we do the rolling forecasts, and so I don't know what their lower forecasts for the coming 3 quarters mean.

And my last question is on organic growth. We heard in the past that this is important to you, and that you like to see that higher.

Can you help us reconcile that with sort of migration towards your acquisitions, leveraged acquisitions where the immediate priority of those acquisitions will be to cut costs and probably focus on cash so that leverage can be reduced in due time and not so much on product development, which can firm up growth in that particular division and help the overall firm?

Yes, I share your implicit concern. I've never run with leverage.

It makes me really uncomfortable. In essence, what we've got, and TSS is an example, are management teams that are volunteering because they're shareholders and participating directly in the equity of the leveraged entity, our management teams that are volunteering to live with the extra stress of a debt load.

It, for sure, makes decisions tougher about short-term, long-term trade-offs, and I don't envy them that position. Obviously, if they can un-leverage the business and achieve the same similar sorts of profile in terms of organic growth as our other businesses, that would be terrific if they wish to continue to run the company.

Thank you very much, Melanie. We have our AGM today, so I look forward to seeing many of our shareholders there.

We have, as we usually do, most of our managers in attendance, and we look forward to answering your questions. Thank you very much.

Bye-bye now.