Constellation Software Inc.

TO OUR SHAREHOLDERS

In Table 1, we've updated the Constellation Software Inc. (CSI) metrics with the 2013 results. Weve
shortened up the period presented to 10 years. A long term review is worthwhile, but CSI is a much
larger business than it was 10 years ago, so it is easy to question the relevance of the older data. The
definitions of Adjusted net income (ANI), Average Invested Capital, ROIC, Net Revenue and
Maintenance Revenue appear in the Glossary at the end of this document. Unless otherwise indicated, all
dollar amounts are expressed in U.S. dollars. Several of the statements included below constitute forward
looking statements and should not be read as guarantees of future results. See Forward Looking
Statements.



ANI increased 20% in 2013. Cash Flow from Operating Activities per Share (see Table 3) grew far faster,
so we were less concerned with quality of earnings than we were in 2012. The shareholders Average
Invested Capital grew 19%. This was insufficient to finance the acquisitions that we made, so we
resorted to using increasing amounts of bank debt - more about this later. The high ROIC achieved over
the last decade suggests that we have very good businesses. If ROIC starts to erode significantly, then
either weve damaged our existing businesses, or our new acquisitions are less attractive than those that
we have made in the past. ROIC isnt one of those metrics that is necessarily subject to reversion to the
mean. Some businesses seem to be able to widen their moats at reasonable cost.

Organic Net Revenue Growth and Organic Maintenance Revenue Growth (see Table 2) are good cross-
checks of our business health. You cant easily get this information from audited financial statements.
CSIs Organic Net Revenue Growth was 4% in 2013, below our long-term average but better than GNP.
Wed like our Organic Net Revenue Growth to be slightly higher. Growing organically while generating a
high ROIC is, to my mind, the toughest task in the software business.

We achieved a near-record combined ratio (the sum of ROIC and Organic Net Revenue Growth) of 39%
in 2013. If we had to pick a single metric to reflect the performance of our businesses, this is the one that
wed choose.
Adjusted Net
Income (a.)
Average Invested
Capital
ROIC
Organic Net
Revenue Growth
(YoY)
ROIC + Organic
Net Revenue
Growth
2004 13 84 15% 9% 24%
2005 17 101 17% 18% 35%
2006 26 123 21% 8% 29%
2007 33 154 22% 1% 23%
2008 54 195 28% 5% 33%
2009 62 256 24% -3% 21%
2010 84 325 26% -2% 24%
2011 140 394 36% 7% 43%
2012 172 491 35% 2% 37%
2013 207 585 35% 4% 39%
a. Historical figures restated to comply with revised definition.
Note: 2010 and subsequent year information is presented in accordance with IFRS
Table 1
Maintenance Revenue grew an impressive 42% in 2013. We wouldnt want to do that every year. Growth
in Maintenance Revenue due to acquisitions was 34%, and acquiring that maintenance revenue consumed
all of our free cash flow for the year, and then some. As of March 31
st
2014 we had $485 million
outstanding on our debt facilities. We continue to seek longer-term capital to defuse the fundamental
mismatch inherent in buying permanent assets with short-term debt. We have not dismissed the idea of
cutting the dividend should other attractive sources of capital not be available.



The Total Organic Growth in Maintenance Revenue was 8% in 2013, a slight increase from 2012. Our
favourite businesses are those that are growing just slightly faster than their markets, gradually adding
market share and customer share (i.e. share of wallet), while generating a good return on the capital that
they have invested to produce organic growth. Small market share gains are much less likely to trigger a
scorched earth competitive response that erodes pricing and triggers wildly unproductive R&D and S&M
binges. We believe that we have struck that balance at many of our businesses.

Attrition increased in 2013, up more than 1% during the year, but as you can see in Table 2, this was more
than offset by organic increases in Maintenance. That is encouraging, but bears monitoring. Over the last
few years we have purchased a number of software businesses (usually SaaS) that have a much higher
churn in their client bases because of factors inherent in their industry. By high churn, we mean that
they acquire a greater proportion of new clients each year, and lose a higher percentage of existing
accounts, than our average business. Sometimes the higher churn is because the clients switching costs
are low. Sometimes the higher churn is because lots of new potential clients are being created, and old
ones are going bankrupt and merging. If it is the latter, these software businesses may be very attractive.
If it is the former, then the software businesses are likely to be unpleasant, requiring tremendous effort to
stay in much the same place. When we analyse the attrition and customer acquisition economics at the
individual business unit level, the jury is still out on whether our high churn businesses are as attractive as
our low churn businesses.

A note of caution with regard to the organic and acquired Maintenance Revenue growth numbers while
the analysis in Table 2 is materially the same as our reported Maintenance Revenue for financial reporting
purposes, the individual components reflected in this table are generated by examining and categorising
thousands of records. This analysis isn't perfect, but we believe it is a fair illustration of the trends in our
maintenance base and, ultimately, the trends underlying the intrinsic value of our business.

A few years ago we added some GAAP/IFRS metrics to our regular letters to shareholders. We've
updated them in Table 3.
2006 2007 2008 2009 2010 2011 2012 2013
Maintenance Revenue (US$MM) 116 148 193 252 337 417 510 725
Growth from:
Acquisitions 17% 11% 21% 27% 26% 15% 15% 34%
Organic Sources
a) New maintenance 15% 9% 9% 7% 8% 8% 8% 10%
b) Price increases 5% 8% 8% 3% 6% 6% 5% 5%
c) Attrition - Lost Modules -2% -2% -3% -3% -3% -2% -2% -2%
d) Attrition - Lost Customers -4% -4% -4% -4% -4% -3% -4% -5%
Total Organic Growth 14% 11% 10% 3% 8% 9% 7% 8%
Total Maintenance Growth 31% 23% 31% 31% 34% 24% 22% 42%
Table 2

In 2013, revenue per share increased 36% and Cash Flow from Operating Activities per Share
(CFO/Shr) increased 52%. We dont aspire to grow revenue per share at this sort of rate in the future.
The growth in 2013 CFO/Shr was wonderful, but really reflects a catch up after a very disappointing
2012.



Having had the chance to review the tables, we hope you'll join us in thanking the CSI employees for a
wonderful decade.
Ideally, wed like CSIs stock price to appreciate in tandem with our fundamental economics. At any
point in time, wed prefer the price to be high enough to discourage a takeover bid and low enough so that
our sophisticated long term oriented investors are not tempted to sell. It takes lots of time and effort to
attract and educate competent shareholder/partners. The last thing we want them to do, is sell.
If a stock is over-priced and sophisticated investors sell, they are generally replaced by unsophisticated
investors who are ultimately disappointed. This may lead to a stock price that over-corrects and in turn
precipitate either a takeover bid, or more insidiously, a significant and predatory share buyback.
Buybacks are tempting to management and boards: they tend to improve the lot of managers and insiders,
while being applauded by the business press. I think they are frequently a tolerated but inappropriate
instance of buying based upon insider information. Instead of shareholders being partners, they become
prey.
In addition to our long term sophisticated investors, we also have a second constituency of less financially
oriented long-term investors, including some of our employee shareholders. Our employee bonus plan
requires that all employees who make more than a threshold level of compensation invest in CSI shares
and hold those shares for an average of at least 4 years. In practice, their average hold period has been
much longer. We feel an enormous obligation to protect our non-professional investor constituency. One
way we can do that is by trying to making sure that the stock price stays in a fair range at all times.
Total
Share Count
(000's)
YoY

YoY

2003 4.16 29% 0.74 72% 19,428

2004 5.49 32% 0.59 -20% 19,891
2005 8.11 48% 1.21 106% 20,392
2006 10.01 23% 1.36 12% 21,065
2007 11.47 15% 1.62 19% 21,192
2008 15.60 36% 2.96 83% 21,192
2009 20.67 32% 3.85 30% 21,192
2010 29.92 45% 5.06 32% 21,192
2011 36.49 22% 6.49 28% 21,192
2012 42.05 15% 6.83 5% 21,192
2013 57.13 36% 10.40 52% 21,192
CAGR 30% 30%
Note: 2010 and subsequent year information is presented in accordance with IFRS
Table 3
Total
Revenue
per Share
Cash Flow from
Operating Activities
per Share
CSIs stock price has appreciated something like 68% per annum over the last two years while our
revenue per share and CFO/Shr have increased by only 25% and 27% per annum respectively. The
divergence between the appreciation in the stock price and the fundamentals prompted us to do an
experiment to see if the multiple expansion could be rationalized (revenue per share and ANI per share
multiples have roughly doubled during that period).
We contacted 8 analysts from the investment banks and brokerage firms that cover CSI and asked them
for their discounted cash flow valuation ("DCF") models. The analysts also use peer comparisons, market
multiples and other methods as part of their valuation process, so their DCF results dont entirely explain
their valuations for CSI. Nevertheless, the analysts models do tend to highlight their underlying
assumptions about the company. When we examined the average of the analysts assumptions for organic
growth, acquired growth, acquisition pricing, cost of capital, margins, tax rates, and terminal growth rates,
we found that we felt reasonably comfortable with most of their assumptions. The assumptions with
which we felt least comfortable were the future cash tax rates and terminal growth rates (both of which
seemed low to us). We adjusted for these changes to create a DCF model consisting of the average of the
analysts assumptions plus a couple of CSI tweaks, which Ill call the Consensus Model. The Consensus
Model generated a stock price that was at a slight premium to the current share price, though without the
margin of safety that we would seek when investing CSIs capital. The upshot of the exercise was that
one could mathematically justify the current stock price based on assumptions similar to those achieved
by the company in the past.
The more interesting part of the experiment was using the Consensus Model to do some sensitivity
analysis and to look at alternative strategies. In all of the following examples, we assume that only one
variable changes. In reality, our businesses are dynamic and changing one variable has an impact
throughout the business.
Varying the organic growth assumption has a tremendous impact on the intrinsic value of a CSI share.
Add in another 2.5% organic growth to the base line assumption and you get more than double the
intrinsic value. Subtract 2.5% from the base line organic growth assumption and you lose almost half the
intrinsic value of the stock. You can see why so many software company CEOs are growth junkies.
For anyone whos studied the industry, it is difficult to imagine a 5% perpetual swing in organic growth
that doesnt have an offsetting impact upon operating margins. That said, theres still tremendous
valuation and strategic leverage if organic growth can be increased with reasonable levels of investment.
If managers have the discipline to monitor the IRRs on their investments in organic revenue growth, then
theyve taken a critical step towards understanding the most powerful lever in software. Some of our
managers are there. I suspect others are using crude heuristics like make 20% EBITA, and you can
invest the rest. I dislike the latter approach, but many managers change their hard-won beliefs at glacial
speed.
If we assume that CSI makes no further acquisitions, the Consensus Model calculates an intrinsic value
that is roughly half of the current price. The magnitude of this valuation change surprised me, and
suggests that our stock price could suffer very significantly if our acquisition activities slow down or the
acquired businesses perform poorly. In the early days of CSI, I assumed that shareholders would be
somewhat ambivalent between receiving all of CSIs free cash flow as a dividend, and having us invest a
portion of it in acquisitions. According to the model, that is resoundingly not the case.
Another scenario that we tried in the Consensus Model was doing large TSS style acquisitions, at prices
similar to that which we paid for TSS. The underlying assumptions continued to be that we are able to
get these larger acquisitions to generate operating margins and growth equivalent to the small
acquisitions. Not surprisingly, the Consensus Model forecasts that making large acquisitions adds
significant intrinsic value, but not as much as doing many small acquisitions at lower purchase price
multiples. It also confirms our belief that if we cant make more small acquisitions, then doing the
occasional large one seems to make sense.
The final scenario that we ran involves the use of non-common share capital (i.e. debt or something
similar). The assumption is that we raise enough capital to maintain revenue growth rates in excess of
20%, and that we operate with a balance sheet that is not highly levered. The Consensus Model for that
scenario adds hugely to shareholder value, even if we use high cost debt.
Models are only as good as the assumptions that go into them, and theres no substitute for thinking
through the above scenarios on your own, with your own underlying assumptions.
The biggest surprise for me in the modeling exercise was that our multiple expansion over the last two
years can be justified by our acquisition engine. Id rather the market was paying for our acquisition
capabilities in retrospect rather than in prospect. Nevertheless, it is clear that acquisitions have added
tremendous shareholder value over the years, particularly during times of economic crisis and/or
recession.
Which brings us to the topic of funding. Wed like to be in a position to acquire aggressively should
attractive opportunities arise. Weve asked CSIs Board for permission to raise non-common share capital
to replace our revolving line of credit. Theyve given us that mandate.
Last year I mentioned that Id feel comfortable using debt to finance our growth if it were long term, non-
callable and the interest payments could be deferred for short periods. I followed up in the letter to
shareholders with an invitation to potential investors to work with us to design such an instrument. During
the course of the ensuing year weve had discussions with a variety of institutions and investment
bankers. And while we got past a few hurdles, we inevitably came up against the institutional imperative:
no matter how logical and appealing an instrument may be, if it is novel and works, the sponsor gets a pat
on the back. If it is novel and doesnt work, the sponsor loses their job.
That led us back into a dialog with our investment bankers. They began to understand what we wanted: a
very long term instrument that we could issue in tranches whenever we needed, that was liquid and would
trade at close to intrinsic value at all times so that our investors could get liquidity without taking a
haircut, that was tax deductible for CSI as we expect to otherwise pay lots of cash tax, and that can be
redeemed by CSI with reasonable amounts of notice if we are producing more cash than we can
intelligently invest elsewhere. Ill refer to this as a Non-Traditional Instrument or NTI. The novelty of
the NTI was still a concern to the investment banks, but they felt that they could overcome that and sell it
to retail investors if the yield were sufficiently high and the transaction fees sufficiently large. Once the
first tranche of the NTI was sold, there would be a precedent trading in the market, and the investment
bankers felt that the terms of subsequent NTI issues would likely be more attractive to CSI.
As our discussions progressed, the yield and the transaction fees proposed by the investment banks got
higher and the terms less attractive. Based on my previous experience during the CSI IPO, I expected
further concessions would be required before an offering was completed. I approached our board with an
alternative: make the terms of the NTI even more attractive than those proposed by the investment banks,
and market it to our existing shareholders. Any overpricing would accrue to our own investors rather than
strangers and intermediaries. If our investors have appetite for an NTI issued at a discount to face value
with an above average coupon by a company with a strong balance sheet, they could purchase the NTI
and subsequently liquidate at close to face value whenever they choose.
My experience selling CSI shares over the years is that you can sell a novel investment to the
sophisticated few, and that over time both the size of the audience and the level of trust grow. I think that
will also be the case with the NTI.
Finishing on a quite different note: I'm happy if I "find" one good book to recommend to friends, family
and employees each year. Currently, Im shamelessly flogging Daniel Kahneman's Thinking Fast and
Slow. His book is about a life (actually two) well spent. He tells the tale of his intellectual journey via a
series of behavioural economics experiments. He helped me appreciate the efficiency, speed, and
inherent conceit of intuitive judgment, and its infrequent but often abject failures. Understanding the
major findings in behavioural economics provides profound insights into investing and managing, and
this book is the most pleasant way I've found to acquire that knowledge.
We will be hosting the annual general meeting on Thursday May 1
st
. Many of our Directors and Officers
and a number of our employees will be in attendance. We look forward to talking about our business and
answering your questions. We hope to see you there - perhaps with a camera.



Mark Leonard April 30
th
, 2014
President
Constellation Software Inc.



Glossary

Effective Q1 2008, the term Adjusted net income is derived by adjusting GAAP or IFRS net income
for the non-cash amortization of intangibles, future income taxes, and charges related to appreciation in
common shares eligible for redemption (a charge that we no longer incur now that CSIs common shares
are publicly traded). Prior to Q1 2008, Adjusted net income was derived by adjusting GAAP net income
for the non-cash amortization of intangibles and charges related to appreciation in common shares eligible
for redemption. The computation was changed to include future income taxes since the majority of
future income taxes relate to the amortization of intangible assets, and thus are being added back to more
closely match the non-cash future tax recovery with the amortization of intangibles. All previously
reported Adjusted net income figures have been restated in the table above to reflect the new method of
computations. We use Adjusted net income because it is generally a better measure of cash flow than
GAAP or IFRS net income and it is closely aligned with the calculation of net income that we use for
bonus purposes.
Average Invested Capital is based on the Companys estimate of the amount of money that our
shareholders had invested in CSI. Subsequent to that estimate, each period we have kept a running tally,
adding Adjusted net income, subtracting any dividends, adding any amounts related to share issuances
and making some small adjustments, including adjustments relating to our use of certain incentive
programs and the amortization of impaired intangibles.
ROIC represents a ratio of Adjusted net income to Average Invested Capital.
Net Revenue is gross revenue for GAAP or IFRS purposes less any third party and flow-through
expenses. We use Net Revenue since it captures 100% of the license, maintenance and services revenues
associated with CSIs own products, but only the margin on the lower value-added revenues such as
commodity hardware or third party software. Maintenance Revenue primarily consists of fees charged
for customer support on our software products post-delivery and also includes, to a lesser extent,
recurring fees derived from software as a service, subscriptions, combined software/support contracts,
transaction-related revenues, and hosted products.

Forward Looking Statements

Certain statements in this letter may contain forward looking statements that involve risks, uncertainties
and other factors that may cause the actual results, performance or achievements of the Company or
industry to be materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Words such as may, will, expect, believe, plan,
intend, should, anticipate and other similar terminology are intended to identify forward looking
statements. These statements reflect current assumptions and expectations regarding future events and
operating performance as of the date of this letter. Forward looking statements involve significant risks
and uncertainties, should not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether or not such results will be achieved. A number of factors
could cause actual results to vary significantly from the results discussed in the forward looking
statements. Although the forward looking statements contained in this letter are based upon what
management of the Company believes are reasonable assumptions, the Company cannot assure investors
that actual results will be consistent with these forward looking statements. These forward looking
statements are made as of the date of this letter and the Company assumes no obligation, except as
required by law, to update any forward looking statements to reflect new events or circumstances. This
report should be viewed in conjunction with the Companys other publicly available filings, copies of
which can be obtained electronically on SEDAR at www.sedar.com.

Non-GAAP/IFRS Measures

Adjusted net income and Organic Net Revenue Growth are not recognized measures under GAAP or
IFRS and, accordingly, shareholders are cautioned that Adjusted net income and Organic Net Revenue
Growth should not be construed as alternatives to net income determined in accordance with GAAP or
IFRS as an indicator of the financial performance of the Company or as a measure of the Companys
liquidity and cash flows. The Companys method of calculating Adjusted net income and Organic Net
Revenue Growth may differ from other issuers and, accordingly, may not be comparable to similar
measures presented by other issuers. Please refer to CSIs most recently filed Managements Discussion
and Analysis for reconciliation, where applicable, between the IFRS, GAAP and non-GAAP/IFRS
measures referred to above.