Thank you, Valerie. Good morning, everyone.

Welcome to the Q3 conference call. As you know, we go directly to questions.

So Valerie will now explain how to tee up your questions and calls.

Mark, your organic growth was obviously softer this quarter. Seems like it might have been weighted more on the hardware and professional services sides in terms of the softness.

Anything specific you'd call out? Is that sort of just normal quarterly volatility?

Or is there any changes in the underlying environment?

My sense was that it was just normal quarterly volatility. But Jamal, any observations from your side?

There were a few -- I mean, I've heard with health care there's some delays in spending. And so that could actually result in some real loss, I would say.

But a lot of the other misses, you're right, it was just timing, I think, of when large PS contracts are getting signed and when we'd start doing work. So...

Okay. So at this point, no fundamental change in terms of the longer-term organic outlook.

No, I don't think so. As we look at the forecast, it's still reasonably strong with a couple of exceptions.

And everyone, of course, is feeling very cheerful about 2016 but that's what we usually get at this time of year.

Okay. Your capital deployment towards M&A has been pretty strong this year, especially given what might seem to be a more challenging valuation environment.

Is there anything specific driving that? Is it just a question of having more people on your team looking at M&A?

Or anything specific you'd call out in terms of that performance this year?

Well, we certainly have more people working at it, we're actually offsite with an M&A conference today of 80-something people from around the Constellation organization. When we tot up the numbers, I think this time last year, we had something like 30 full-time equivalent doing M&A.

And right now, we figure it's around 42. So it's a big chunk more in the way of resources being spent on the M&A activities.

And we're looking at the activity and trying to run it a little more scientifically, trying to de-bottleneck the areas where we think we'll get improvements and throughput if we can add some capacity.

Okay. And just one last one for me.

You've talked in the past about how you've been studying other conglomerates in terms of trying to see what lessons can be learned, to apply those to Constellation. At this point, is there anything specific that you've picked up that has helped shaped your strategy?

Or is that still sort of a study in progress?

It's a study in progress. We've done 7 of them so far.

We're trying to do one a quarter. We've got a backlog of probably another dozen that have been suggested to us and have passed the initial screen.

There are lessons from every one of them, and I sort of pick the next one that we will look at based upon any particular lesson that I might want to communicate to the board, so I find that an interesting tool. We recently looked at TransDigm this quarter.

We were fortunate to meet Nick Howley about a month ago and spend some time with him. He was very kind with his time and great to talk about business, which, although quite different from our own, is a fundamentally terrific underlying business in how he organizes and compensates the people inside the business and finances the business.

These were all interesting insights that added color to what we do.

Mark, or I guess, Jamal, could you maybe talk a little bit about the integration profile and the timeline for on-boarding some of the larger recent acquisitions, like Datamine or Picis, just to sort of give us a sense of, is there anything different there? And maybe talk about the process of how you'd see them ramping up to your numbers?

I don't think, Paul, or maybe yourself make some assumptions about what the margins are with these acquisitions. But I mean, we haven't reported that.

I think there's some belief that some of these companies we're buying have more resources than they really are. And so -- I mean, Datamine was a depression on margins, and it's probably going take a couple of years to get them up to our levels.

But the rest of them, I don't think there was any change in that we're starting to buy companies that are worse off and are going take longer to integrate. So...

In fact I think some of the companies that we bought were quite profitable. And hence, there wasn't a whole lot of margin ramp expectation in our forecast for them.

Okay. Before we leave sort of the topic of margins for a second, on TSS, are we now largely at sort of a steady-state run rate?

Noticed that the decline in the number of employees seems to have sort of slowed. Is that -- are we more or less at the static state now?

I don't think you can think of TSS as a single business. I think you have to think of it as 16 business units, each run by a manager.

Some of those businesses will have significant organic growth. Others will have much less.

Some will be very profitable. Others will be much less profitable.

So it's a business unit by business unit discussion and the same thing applies to all of Constellation.

Okay. I guess the final one I'd toss out this morning is, Mark, maybe it's worth getting your perspective now that you're through 10,000 employees, talk about how you manage and monitor the operations across the business.

You talked a little bit about the M&A side of it and the growth there, but maybe the organizational structure that's behind growing out the rest of the businesses, the number of employees keeps ramping.

It's a big question. So the best way to answer it is to say you have a culture of not managing and monitoring.

What we really want are a collection of small teams that are self-managing, run by trusted individuals with experience and integrity. And gathering together 200 leaders that have those characteristics and getting them to run business units is a nontrivial task, but it's also one that, as that high wheel starts going and working, tends to be a thing of beauty.

You have one business unit manager, and if they can buy an equivalent business in the next 3 to 5 years and coach it to perform as well as the one that they're currently running, then all of my M&A problems go away. All of my integration problems go away, and it becomes an organization where you just need the ability to reach into the occasional faltering business unit and provide coaching or sometimes replacement managers.

But for the most part, it's self-managing and self-maintaining. And that's what we hope to get to.

What it does require is that those operating managers become capital allocators, so a task of teaching capital allocation to people who perhaps have come up through the ranks and that has not been their natural activity. The point I make to folks, though, is that any operating manager inside of a company like Constellation does do capital allocation every day as they do R&D, sales and marketing on initiatives, because those initiatives don't pay off for 5 to 10 years.

And so they are, by their very nature, investing now for a payoff many years down the road, and that's the same thing that you do when you do an acquisition. It's just a make-or-buy decision.

And so I think we've got people who are naturally predisposed to be capital allocators because there've been in the software business with very long-time horizons, and we're just teaching them some of the nuances that come along with mergers and acquisitions, and that's why we're offsite today. About 1/3 of the people here are business unit managers who are trying to figure out how they can deploy their capital, so that they end up running something bigger and hopefully more successful.

And the last one I'll sneak in is, any update on the compensation and the thoughts around compensation model we've talked about since, I guess, this spring?

Yes. So we're moving along, talking, modeling and trying to figure out how to do it.

One of the lessons I learned about compensation early on inside of Constellation is that, once you put a system in place, if you change it, the paranoia associated with changing compensation is enormous and it takes years for people to trust you again and to realize that what you've done was to their benefit. And so whatever we do, it won't affect the existing compensation system.

It will be additive to that system. And we wanted to create an environment where people who aspire to be general managers inside of Constellation, to run business units, hopefully will be running a couple of hundred more 5 years hence.

People who aspire to be in those roles will make decent money and have a chance to build wealth and careers. And we want that to be very, very clear to everyone who either comes up through the ranks and enters those particular roles or joins us from the outside, does an apprenticeship and enters those roles or comes with an acquired business and enters those roles.

And we want those people to be lifers. That's what we're looking to do, and the comp system has to be designed to pull that off.

So I'm not in a hurry to do it, but I do really want to get it right because I don't want to have to change it once we've got it in place.

I just wanted to look on -- or focus on margins. Just looking out over the last couple of years, if you look at -- between 2009 and 2013, margins are basically flat.

And then the last 2 years, it seems like margins have expanded more than a couple of hundred basis points. What's changed in your model in the last couple of years to drive such an increase in margins?

I think I've said constantly over the years that my aspiration wasn't to have higher margins. It was to have higher organic growth.

And I think that if there were a trade-off there, that would still be in my aspiration. The trick, of course, is to find places where you can invest intelligently to get organic growth, even if it means driving down short-term profitability.

Certainly, if we do change the compensation scheme for general managers in the organization down to the business unit level, that is going to put some pressure on margins.

So do you think over the last 2 years, I mean the -- obviously margins have expanded. Organic growth seems like it slowed a little bit.

Do you think there is, over the long term, a correlation between those 2, and we may have seen it in the last couple of years, definitely?

I think they are correlated but just over long periods of time. We actually went after the last call, because someone had sort of posed the question, and did a bit of statistical work to see if we could find the correlations, and we weren't happy with the results.

It looked pretty damn random. So I know for a fact that we are trying to drive organic growth inside a number of the business -- inside a number of the operating groups, have programs around it, have people that are working at it full-time.

It's just really, really hard. It's not something that you mandate.

It takes years.

And then just revisiting the hurdle rate, I mean, you mentioned that you were [indiscernible] hurdle rate in larger acquisitions. Was there any change to the hurdle rate on organic initiatives?

No.

No. And on organic initiatives, they are so fuzzy in terms of measuring the IRR that even a change in hurdle rate -- your chance of predicting the ultimate IRR on those is very, very low.

We're horrible forecasters when it comes to initiatives. That doesn't mean you shouldn't do it, and it isn't really for forecast IRR that you do forecast with initiatives.

It's to think through the evolution of the initiative. Where do you cut it off?

Where do you apply more fuel to the fire? What are the key assumptions that went into your initiative about competitor response, pricing and market penetration and things of that nature.

If you don't think those through at the front end, you just keep going for as long as your wallet will bear. And that's my experience from the venture business speaking, and my experience at Constellation.

And so I primarily didn't do it for forecast IRRs. It was a useful benchmark when it came out of the forecasting.

But -- and then the change in the forecast IRR was a very sobering metric that I could use with the managers to make them confront how difficult these initiatives are. But actually, a hurdle rate isn't particularly a useful phenomena.

And then on -- following up on Paul's questions on the compensation, could you just refresh us on the current compensation? I think it's, like, it's ROIC-based plus a kicker for organic growth.

It seems like you'd like the change to potentially be a greater kicker on organic growth, or maybe a little bit less so on ROIC.

So I mentioned earlier that one of the things I learned was that you don't muck with the system. The mistake I made early on was making comp based off of ROIC plus total growth, not organic growth.

And the problem with total growth is that acquisitions become something of a focus with people and perhaps, too much of a focus, at least from the point of view of bonus. And so if I had to do it again, I would, for sure, have built the system based on organic growth as opposed to acquired growth.

That probably would have meant more cash funneling up to head office and more of the M&A function at head office. One of the challenges with that is that having capital is one thing.

Having people is another. And I think it probably would've pushed us towards doing more and more and larger deals.

Given that we got locked into this total growth model, we elected for capital deployment that we pushed down to the operating groups and ultimately, we hope, down to the operating -- to the business units. So we've got this sort of non-centralized but centrally monitored capital deployment function.

Seems to be working. These aren't particularly difficult businesses to understand, and so it doesn't take a rocket scientist to do the M&A analysis.

And if you've been operating one of the businesses, you certainly have a sense of what levers you can pull if you're looking to improve the businesses you buy. And so given the hand we're dealt with and where we have capital deployment down at fairly low levels inside the organization, what I'd like to see is that the folks who are running the business units are paid in much the same way that the senior people are.

In some of our operating groups, that's already the case. In others, they have a mix of MBOs that they're compensated on, and I'd like to see them more compensated on return on invested capital and total growth.

That said, what I'm looking for is to add a kicker to that particular process, whereby the bonuses historically for the business unit managers who are performing might have created a net worth in Constellation shares of $0.5 million over 5 years, if the stock appreciated in the 12% range. What I'd like to see is that a 5-year horizon for a high-performing general manager could be twice that.

And so that means adding a bonus kicker in there somewhere. So that's one of the ideas we're kicking around, thinking about.

Obviously for those who don't perform, there won't be any. But for those who perform superbly, there would be more.

And what we're hoping is that people who stay for 5 years end up electing to stay for 10 and 25, build very significant net worth, become significant shareholders of Constellation and invest, not only their money, but their career with us.

Well, it seems like it's quite a task that you're faced with over the next little bit, so thanks for taking the questions.

On organic growth, Mark, there's been a bit of a slowdown over the last 4 quarters in organic growth on constant currency basis, making a bit of a trend here. We appreciate that your growth profile is an aggregate of many verticals.

It's probably difficult to narrow down a single cause. But if you can comment about those verticals where organic growth is slowing down or even contracting, are you moving with the market?

Or is this more a function of a competitive environment?

So there's certainly some competitors who are doing phenomenally well from an organic growth perspective. We were studying Tyler this quarter, did a profile of them and what a magnificent company that has been with phenomenal double-digit organic growth, doing a lot of things right and a lot of things that we would like to emulate.

I don't believe we're substantially below the market in terms of organic growth across the board. I think there are certainly some verticals where we are.

And we also had something of a headwind in that we acquired some businesses that were shrinking. And so when we calculate organic growth, we calculate it off the run rate prior to our acquisition.

I think it was trailing 12 months before acquisition, Jamal?

Yes.

And so if you buy a shrink -- a large and shrinking business, it shows up as particularly ugly organic growth. And so that will pass if those businesses stop shrinking.

And in at least one instance, the real estate business, we're going to invest in sales and marketing. That would drive down the profitability and, hopefully, reverse the contraction of that business.

It's a business we're in already so we understand it somewhat, and we think those trade-offs are worthwhile, but a little daunting, obviously, as you -- we don't normally buy businesses to depress their profit, but this is one that we did.

Okay. Maybe a follow-up to that would be in the past, organic growth has been a large driver of your operating leverage.

And it seems like on this call, you're saying that, as of late, that has been less so. And even if there are others, maybe if you can comment on how much headroom do you have there on margin expansion beyond the current 27%, which seems to be at 10-year highs.

And what might be driving that?

I think I just finished saying that I didn't think there was any headroom, and that margins were very high.

Okay. So on previous occasions, you spoke a little bit about ramping coverage of monitoring and grooming relationships with a potential large-sized target.

And you talked about ramping that coverage from 50% to 100%. Can you maybe give us an update how far you are in that process?

And when do you expect to see a point where you're comfortable with?

So we monitor it quarterly. I think there were 7 vertical markets, software transactions over $100 million in the last quarter.

We saw 6 of them. We're aware of 6 of them.

We participated in one of the processes. I would've liked to have participated in more, but given the prices that they went for, that's probably okay that we didn't.

I certainly would have wished that, that seventh one we would've been aware of before it happened. So I think we're doing a decent job of driving up the lead generation.

We're talking about it today at the M&A session, but I'm sort of hoping that we could double lead generation over the course of next year, maybe even more. And then obviously, the relationship building thing is very different depending upon what segment of the market you're working on.

For very large clients or suspects, it requires senior management time. For the brokers, it requires a very professional approach where you treat them as business partners because you know they'll be back time and time again to show you stuff.

And for the very small businesses, it's -- if they're competitors, we can afford to put operating group and business unit general manager timing to them. And for the nice little businesses that are in new verticals, it's more of a numbers game.

We need to have bright, young folks working the phones, going to trade shows and sending e-mails.

Mark, it seems like the issue of cloud is becoming increasingly more prominent in sort of quarterly calls of late. Does that play a role in terms of your organic initiatives?

Like, is that something that you're thinking could drive this organic growth rate higher?

We have invested in many SaaS rewrites, and I have yet to be able to point to one and go, "Wow, that was spectacular." So a bunch of them are okay, and a bunch of them have been real flops.

So it's a -- it's not an easy space.

Okay. And I think you mentioned -- what was the company's name that you're studying this quarter?

Was it Tyler?

Well, Tyler was the competitor that we studied. But the high-performance conglomerate that we studied was TransDigm.

Yes, and I guess in those cases, I guess Tyler, what helped them drive that double-digit growth? Like, was it sort of one strategy they embarked on?

Or was it multiple strategies that made it work?

I'm not an expert on the company. The primary observation that I heard was very well-run sales and marketing, great coverage, very deep on the sales and marketing side, and intensely focused products that were national in scope and very capable.

Thank you, Valerie. I appreciate it.

Thank you, everyone, for attending, and look forward to chatting with you all in February or March. Bye-bye now.