Thank you, Valarie. Good morning, everyone.

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

So I'm going to ask Valerie to tee up the calls.

Mark, you've been placing more focus over the past year or 2 in terms of looking at larger-sized deals, and you said previously that it's been somewhat of a challenging experience. Can you provide us with an update in terms of your efforts on that front and whether there's been any lessons learned now that you've had some more experience bidding on larger assets?

Well, we're actually at the M&A conference, Jamal and I, so we're in a side room and we've got all the stats pulled together and analyzed. Bernie has been doing that over the course of the last week or 2.

And one of the things that struck us is that the larger transactions tend to be the ones that have lower IRRs. This isn't entirely surprising.

They tend to be more competitive. But they're also the ones that have the most disappointments in terms of the results versus what we forecast at the time when we do transactions.

And so it is an activity that only the most experienced and sophisticated investors inside of Constellation will be working on. My sense, however, is that we are working harder in this area than we ever have before.

It was not a good quarter in terms of the number of transactions that closed that we saw. There were roughly 10 very large vertical market software transactions closed in the quarter, and we'd only seen and participated in one of those transactions.

We obviously didn't win or you would have heard about it. But in terms of activity in large transactions that are earlier stage in the sales process, I think we're pretty active, and they're always going to be very low probability, hit rate type activities.

And they are going to consume the time of senior people that could be used elsewhere. So it's an experiment, and we're probably going to bash away at it for a couple of years and see what happens.

On a different topic, R&D staff expenses seemed to have declined a little as a percentage of revenue over the last couple of years. I realize there isn't necessarily a simple reason for that, but is there anything specific that you can highlight which is influencing your manager's willingness to invest in organic initiatives?

No. There's not anything simple that I can point to.

Nothing springs to mind.

Fair enough. And then just the last one on organic growth.

Your maintenance revenue has consistently had a 78% growth organic rate and is becoming a larger part of the overall revenue mix. Does it stand to reason that organic growth at an overall corporate level should consequently accelerate as the maintenance mix keeps growing?

Or is there a flaw in that logic?

I'm hoping there's no flaw in that logic. We will see.

Mark, just to maybe follow-on, and add it to look at sales and marketing and R&D. We've seen that declining over the years, and you've talked about maybe taking an experiment around this in terms of trying to reallocate funds between the 2 buckets.

And overall, they've both declined. What have you heard back when you've looked into it with the managers as to the decisions they're making, sort of some of the outcomes you've seen in the business?

So it isn't an activity that we look at in that fashion, Paul. There are a couple of hundred business units, and every one of those managers has their own competitive environment in which they're competing.

And they're making decisions around investments and whether they be rewrites or add-ons or things of that ilk or improving coverage or allocating between farming and hunting. Those are all decisions that they're making individually, and what you're seeing is the sum total of those decisions.

And if you say that sales and marketing and R&D are going down as a percentage of revenues or expenses, then I guess they aren't seeing the returns on those investments.

But our ratios that we look at, sales and marketing and R&D, which is not of gross revenue. It's of the revenue that they are driving or -- have not changed year-over-year or for a while.

So I'm not sure what metric. I mean, not hardware is influencing your answer or maybe some professional services where these items aren't relevant but...

Okay. Well, we were looking at -- on a net revenue basis, but we can follow up on that.

I guess, the one thing that did spring to mind is has there been a higher level of integration within the business units than in the past in terms of new acquisitions? I guess, what I'm thinking about here is, ultimately, is there margin expansion opportunity that they're driving at of the business incrementally?

Not -- this is like a 300 basis point change over a 3- or 4-year period.

If anything, I think the business units are being broken down into smaller units, Paul. So there's no drive for economies of scale or margin in that respect.

I think you do you get better focus when you do that. But I think the point Jamal was making was that R&D and sales and marketing generally don't focus on awful lot on selling hardware.

So we tend to pull hardware out of the mix when we look at the ratios of R&D and sales and marketing to anything else. And then a lot of the professional services sort of get sold through relationships that the professional services people have with the clients, the existing client base, and so there's not a lot of sales and marketing effort that sort of goes into those.

And hence, you could almost pull sales and marketing out and then look at the remaining revenues. The ratios of them to R&D and sales and marketing might be a more meaningful ratio for you to look at.

Okay. I guess, one other one that I was curious about to get your view or Jamal's view is maintenance revenues.

Presumably, the bulk of the renewals are going out across the portfolio in the period we're in now or in the coming month. What would we think about average price increase across the portfolio or across the broader group this year?

So we don't manage that at a corporate level. It's really a function of whether we've added function and feature to the underlying products and then delivering more value and are seeking to share that value with the clients.

And once again, it's made down at the individual business unit level. It may also be a function of competition and things of that ilk as well.

Also, just to be clear, we don't bill maintenance at the same time across all the businesses. There is some seasonality to it.

But many of the businesses just bill maintenance on the annual anniversary of the sale of the original product.

Just again, you've done 31 acquisitions year-to-date. In the present, you talked about potentially getting up to 100-or-so per year.

What do you see as the largest challenge in terms of just ramping up the number or the frequency of acquisitions to that level?

I think it's bridging the gap between making contact and getting to know the prospect and making sure that we're there when they eventually transact. So it's a lead-nurturing function, and I think we need to do that better.

There's huge room for improvement in that regard.

And then when you look at the growth in your database, you have a new database of prospects over time. It's actually been faster than revenue growth.

And would you say that the hit rate on that database has gone down over time as well?

Yes. It's a bit like SaaS.

When you first start selling a SaaS product, you find the perfect clients, you install it, they buy a bunch more, your ARPUs go up. Life is glorious.

And then as you start pursuing increasingly incremental clients who are a less good fit with your particular product positioning, particularly if you don't customize it, you end up with poorer and poorer and poorer economics on the sale and support and attrition of SaaS clients. Well, the same thing applies to looking for vertical market software companies.

Initially, you have companies that are absolutely bull's-eye-type companies. They meet all of our criteria.

And over time, as you build up pressure to increase the number of suspects in the funnel, you end up with increasingly marginal suspects. So the quality of what we've added in 2015 and '16 is probably nowhere near as good as it was back in the day.

Okay. Looking at this at a high level, I mean, you made a couple of changes to your capital deployment strategy.

Things like pushing capital allocation decisions further down to the business unit, managers and keep your capital programs. Have you seen a tangible impact from those changes yet?

And how are you looking about the potential impact from those changes going forward?

I think the number of transactions is probably going to increase. The number of NDAs that we've signed is up about 30% year-over-year.

So I think it's certainly increasing awareness. I had the opportunity to meet with business unit managers this last quarter, about 3 of our operating groups, and as I sat down with them individually and talked to them about their aspirations for doing acquisitions and what they need in the way of resources and how they feel about the prospect of doing acquisitions, I was excited.

I think there's lots of opportunity for us to help a bunch of those people become capital allocators who will do a great job.

And just lastly for me. Along the same thought.

Year-to-date free cash flow is up 26%, which is a fantastic result. Your capital deployed in acquisitions and other uses of cash have lagged on a year-to-date basis.

Do you think at this point you need to change anything in regards to your capital allocation strategy or perhaps looking at returning some of the capital to shareholders?

I think that's the perpetual how embarrassed are your directors willing to be question. So if the cash piles up and gets to be a larger sum, at some point will shareholders call for it to be returned to them so they can take a crack at investing it?

I think if you look at our marginal return on incremental shareholder's equity, however you calculate that, I think you'll find it's pretty handsome, even with the drag of sitting on some cash. And so hopefully, the shareholders will give us some leeway.

If you do it on a straight mathematical basis and you pile up cash waiting for a crash, I think you can make the case that you can wait 3 or 4 years with excess cash lying around because of the incremental returns that you'll eventually get when you deploy that capital when the opportunities are attractive. But it's a tough judgment call.

And I'm sure we'll be criticized if we end up holding cash at some point.

Mark, of the 9 of the 10 deals that didn't pan out, was there sort of a commonality to them? Price or something else here?

You're talking about the large transactions that we didn't get to see?

Yes.

So I was actually surprised at how many of them were not in our database. Usually, when there's a large transaction, the vast majority, like 90%, are in our database.

So some of it, I would suggest, particularly this quarter, a number of them that we missed, we missed because we weren't aware of them, weren't in contact with them, had not expressed interest in those particular businesses. So that's not a good outcome.

That talks to sort of our ability to get stuff into the database. That isn't, as a rule, something I've worried about a lot.

But we'll poke away at it and see if there are holes in terms of our coverage at that level. The area where we're focusing the most, as I mentioned previously, is making sure the do cover on a regular basis the companies we already have in the database and that we get the opportunity to participate when there are transactions of those private businesses for the most part.

Is that something new in terms of not being on your database? Or is that -- has that sort of been the history, like it's happened in the past this way too?

Are you talking about the elephants not being in the room?

Yes, the elephants.

Yes, I think it's the first time I've seen it where the percentage has been so low. Usually, they're pretty obvious, right?

Identifying all the large vertical market software companies in the world is not an exercise that takes a crack team of Harvard MBAs. I mean, you could do it with a couple of analysts and some Internet research in a couple of weeks.

So I was surprised.

Right. Just sort of shifting gears here.

If you look at the total revenue base, what percent of that base now would be, let's call it, SaaS subscription-type revenue versus what it was 2 to 3 years ago?

I haven't done the numbers, Richard. And one of the things that is painfully obvious to us is that when we -- you look at those businesses, the economics of them are not getting substantially better.

And so it's not something I really focus on.

Okay. And then just sort of a last sort of question from me.

If you sort of look down the road here the next 5 to 10 years given the size of the company and the markets seemingly a bit more competitive, what do you think is a reasonable or sustainable sort of growth rate here going forward? Is it 15%, 20%?

Do you have an idea what that would be here?

So I just prepared a speech on forecasting for 100-and-something people who were at this M&A session that we're running. And I'm told that you should look at base rates before you answer questions like that.

And when you do look at base rates in the software industry, I think what you'll find is that over the last 5 years, if you grew at north of 20% per share -- revenues per share, you would be in the top decile. And so I think that would be an extraordinary performance if we were to come anywhere close to that.

The more common numbers you see are far, far lower than that. Our objective is to deploy our capital with as high a rate of return as possible, and we're going to try and maintain the rates of return that we've seen historically.

And that will probably constrain our growth unless we get a major setback in the marketplaces, whereupon we'll go shopping.

Mark, what would you say is the biggest advantage of the parent company? Is it like you described earlier?

Having the experience to look at the large transactions? Or is it more having the oversight over the different operating groups?

Yes. I didn't mean to suggest that only Constellation is looking at large transactions.

In fact, I would say the operating group general managers are probably looking at far more than even Constellation is looking at. Probably each one of them is looking at more than Constellation is looking at.

So all I meant to say was that our most experienced capital allocators, people who have invested hundreds of millions of dollars and done diligence on dozens, sometimes hundreds of transactions, are the guys who are going to be looking at the big ones.

Thanks, Valerie. Thank you all for attending.

Hopefully we'll get to chat again in 3 or 4 months' time. Bye-bye now.