Yet Another Value Podcast - Speedwell Research's Drew Cohen shares thesis on FinTwit favorite, Constellation Software $CSU.TO

Episode Date: March 11, 2024

Drew Cohen from Speedwell Research, joins the podcast to discuss his thesis on Constellation Software (TSX: CSU), who acquires, manages and builds vertical market software businesses. For more information about Speedwell Research, please visit: https://speedwellresearch.com/ Speedwell Research profile on Constellation Software: https://speedwellresearch.com/companies/reports/constellation-software/ Chapters: [0:00] Introduction + Episode sponsor: Tegus [1:41] Who is Constellation Software and why are they interesting to Drew [6:05] How $CSU.TO is scaling their business model / competing with private equity [13:00] Reverse DCF, deploying capital, competing now with other billion dollar software businesses [21:02] Mark Leonard - is $CSU.TO a jockey bet / capital allocation / sellers [28:32] $CSU.TO - what takes this company out [30:57] AI risk? [32:52] Price increases / TransDigm comparison / competition risk [40:08] $CSU.TO vs. parking capital at index fund / likelihood of deploying at least 50% of their cash flow over next 10-ish years [45:07] Operating synergies with 6 verticals? Why not more spin-offs? [47:07] Additional worry about $CSU.TO - changing incentive system [51:58] Aside from Berkshire, what are other examples of Constellation-like culture [54:57] Speedwell's favorite write-ups he's done recently + quick thoughts on $RH Today's episode is sponsored by: Tegus This episode is brought to you by Tegus, the future of investment research. From the beginning, Tegus has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get to differentiated insights. Today, they’re taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log in to Tegus to get expert research, company- and industry-specific metrics and KPIs, SEC filings, and more, all under the same license cost. You can even take your work offline with an Excel Add-in that updates almost any model with the latest financial data — keeping all your custom formatting intact. Tegus is the fastest way to learn about a public or private company and the only platform you’ll need for fundamental research. To try it free today, visit Tegus.com/value

This episode is sponsored by TIGIS, the future of investment research. From the beginning, TIGIS has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log into TIGIS to get expert research, company and industry specific metrics and KPI's, SEC filings, and more, all under the same

license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's Tegus.com All right. Hello, welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker, also the author of Yet Another Value Blog. If you like this podcast, it would mean a lot if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on for the first time, Drew Cohen from Speedwell Research. Drew, how's it going? It's good. Thank you for having me. Great to have you. Always good to have a fellow. I go by Andrew, Drew, you know, whichever it is, but always good. But before we get started, let me just remind our listeners that nothing on this podcast is investing advice. That's always true. true. We're going to be talking about a Canadian stock today. It's a big one. I think it's the

biggest Canadian stock on the Canadian markets these days. So it is a big one. But just remember international stock, a little bit of extra risk. Please consult financial advisor, not financial advice. So Drew, I am actually super excited to have you today because I've been wanting to do a podcast on this company for three years now. And the stock just keeps going up and up and up. And I just keep being like, I need to get a podcast. I need to do a deep dive and never happened. And so super excited. The company is Constellation Software. And I'll just toss it over to you. Who is Constellation Software? And why are they so interesting? It's a great question. I would say it mostly stems from a somewhat mystical founder that goes by the name of Mark Leonard. His beard alone may help raise that mistake.

And so if you go all the way back to the early 90s, he's working at a VC fund called Venture West. And he basically, I'm going to give you the short version of the story. He has this insight that in their portfolio, these vertical market software companies, he has, are very consistently good investments. And the problem with them, though, is that they can never be that big. They're never going to be the 100x sort of an investment that a lot of VC funds really want to go after. And so his idea, though, is that since these are solid companies, why don't I just create a conglomerate of nothing but these vertical market software companies? I'll go into exactly what that is in a moment, but just create a portfolio of these and think like instead of a VC investor who's

trying to flip them and sell them and get them out of the fund eventually, think more like Berkshire Hathaway. And at this time, in the 90s, he's being influenced by some readings by Buffett and Munger. And so his idea is to start a sort of holding company of all these software companies. He wanted to call it Software Co. Luckily, he got some advice to not call it that name, literally call it anything else. And so he goes with Constellation Software, sort of an ode to an idea of having all these different pieces that are unique and individual, except kind of to get their creative sort of picture. And so Constellation Software was officially founded in 1995. And he goes out, he does his first acquisition, a company called Trapeze. It's basically, think of like a municipal

bus software, basically. And so it's really kind of a sticky thing, not very exciting. There's not a lot of people graduating Stanford going out to disrupt the bus software company industry, except at the time, the idea is basically we're not going to be paying a lot for these. He has a newsletter. He's quoted paying one to one and a quarter times revenue multiples for the software companies. A 20% free cash flow margin is pretty typical. So you could do the math on that. It's five to six times free cash flow. And we're going to just continue to acquire these. And I'll pause right there. But that's kind of the beginnings of Constellation Software and the idea behind it. No, that was absolutely fantastic. I enjoyed that. I feel like I'm on business

breakdowns. I know you've done one. But if you want to keep going from there, absolutely, because I love, hey, I love the history, but all my questions are more focused on today. So I keep going on. Not on 1995. Okay, let's go. All right. So this is 1995. I'm going to skip over the next couple decades. In short, though, he creates a sort of holding co system where initially they were doing a lot more of the capital allocation, except as it kind of got bigger and they acquired more of these software companies. And these opportunities are so small and niche that they figured out they had to delegate a lot of the capital allocation responsibilities down to what they'll call business units. And so if you were working at trapeze at

the time, maybe you found some other company nearby that's in an adjacent sort of software vertical. And you started getting the autonomy to go out and acquire other businesses that were similar. Originally back in the 90s, any deal over 2 million they had to approve, but much later was raised to 20 million. And a lot of these deals were done around 5 million. So that really does show that a lot of these individual business units were getting kind of the decision in autonomy to go out and acquire these small companies, provided that they hit set hurdle rates. And so Mark Leonard talks a lot about the hurdle rate. He never gives exactly what his hurdle rate is.

I believe it was in 2011. He said, we're looking for an incremental at least 20% plus. If you just look at their RICs, though, they're very strong, and that includes a lot of sort of growth investment that is also reducing that as well. And so that's Constellation Software. They continue to grow. Now today, they have 750 to 1,000 of these small vertical market software companies. as they get much bigger, you know, they have about $8 billion in revenue. That number has an asterisk

on it, though, because they consolidate some revenue. They don't entirely own. Long story short, they have about $1.1 billion in free cash flow. And now they're starting to do some of these larger acquisitions because the game now is how do we deploy all of this free cash flow at a high and accrete of REOC. And that's where I'll pause. No, that's fantastic. So look, I think this is anyone who's not unfing with, you know, I forget that some people are, you know, in the real world, touching grass, like not always on Finchard, but this is a Finchwick favorite. It is a Finchwood, darling, for a good reason, right? Like, I've known people who have owned this since, let's call it the mid-2010s.

I think if you were earlier than that, good for you, but, you know, the mid-2010s are really started getting popular. And this stock has just compounded, you know, I mean, it's literally, I say this, I start falling, it's up like 30% every year, right? It's been an incredible compounder. So I guess the questions I want to start with is, everything you laid out is great. But the first question, this is not like the organic growth here is kind of low to mid single digits on these businesses. And we can talk about how they're achieving that.

But you are buying this company because you are budding on Mark Leonard and the team going out and doing acquisitions. And when they were doing the $5 million, the $10 million acquisitions you talked about, I could see how that's a really inefficient market. But today, I mean, the proof is a little bit in the pudding. We can talk about the Optum deal that they just did. But today, they're a $50 million company. And I just look at this and I say, there is so much private equity. money. There are so many competitors for acquisitions. Like, how are these guys going to do? And you mentioned RIC. I've got a question of that too. How are these guys going to do these

incredible RICs that's going to generate all these values at like just this size and scale? You know, because everything reaches the limit. If they were $6 trillion instead of $60 billion, I think we could fairly say they couldn't do it. But, you know, how are they going to do? $60 billion is a big number. Yeah, that that's the entire question with Constellation software. And to answer that question, we basically reverse the assumptions and did a reverse DCF to see exactly what sort of assumptions you're applying in the current price in terms of how large of capital deployment they would have to do out in the future and at what ROIC. But to answer your question a little bit more directly, Mark Lender would say, look, there's been 70 plus of these large

VMS acquisitions in the past couple years. We've done three of them. Every year, we have a list of 50,000 plus vertical market software companies. And we don't know about 70% of the deals that are done in a single year. So simply just getting more coverage, even beyond what we already have, is going to be helpful to us being able to acquire more of these companies. And on top of that, it's just going up larger in scale. And so, yes, you're right. There is more middle market P.E funds competition for capital within this area. At the same time, though, there's not a lot of long-term homes for companies. And so it is a little bit more like the Berkshire-Hathaway kind of pitch where you bring your company here. We're not going to dismantle it and liquidated or flip it in a few

years. This is a permanent home to the extent that that does attract more talented people and certain special opportunities. It's not just the optimal blue transaction that they did. There's also the AllScripps deal a couple years prior. And beyond that, they are open to broader opportunities. And so while I would say your trepidation has been correct and it's been kind of very common amongst investors, they've kind of proven us wrong. And so you could look at free cash flow deployed. And it's actually been over 100% of free cash flow has been deployed. on acquisitions in the past three years. And that is, you know, it may make you pause for a second, but that's also in part because they're doing more debt on these acquisitions. They are able to

successfully scale up and they can't accept a slightly lower hurdle rate to help deploy more capital. And so that's kind of the answer in a nutshell. No, look, I hear, I do hear all that, but like the optimal acquisition, this was a force to venture from a merger, right? I can't remember if it was FTC or DOJ came and said, hey, go ahead. Yeah, Black Knight Ice merger. Yeah. I can't remember it was FTC or DHA, but they said, hey, you have to divest this. And Constellation just swoops in, and they got it on great terms, right? I remember the day that it came out. People were emailing around and they're like, wait, are these multiples correct? Because the multiple was like six times EBITDA, if I remember correctly, before some synergies. Yeah, it was something

very cheap. I can't remember the exact figure. And that sounds great. And like, you can win hanging around, but I look at these VMS, like Constellation is, as you said, it's got the Berkshire thing. But if you're competing against private equity firms, and yeah, maybe some people don't want to go for private, but Constellation has no leverage, right? So, and a private equity firm, like, Constellation's doing 30% ROIC. I don't understand why a private equity firm couldn't get together and be like, hey, we'll buy these things at 25% RICs and we'll throw 50% debt to equity. We'll make way more money than these guys. We can pay a higher price. Like, it just feels like the type of thing that should get priced out at some point, you know? And I mean, I guess the second thing is

you mentioned Berkshire and like, this is 50, but. billion, Berkshire's a trillion these days, right? So Mark Leonard can still have a thing, but when you've got all these under liens, like at some point, the one brilliant guy, like he can't be driving all these acquisitions. So I threw a lot out, you. I'll just no, I mean, what you're hitting at, private equity companies can do that and they do do that. But despite them and there being a lot of private equity money chasing these deals, they're still able to find opportunities. So clearly just the existence of private equity competition isn't sufficient to keep them out of the market. They still are able to close these deals.

and they've done basically one of these larger deals every year for the past several years now. And so you see that, again, if you're just looking at capital deployed on acquisitions, it's exceeded free cash flow. And then, as I mentioned, that is to an extent because they are starting to use a little bit more debt. Mark Leonard is very careful and specific with how he'll use debt. He usually doesn't want it callable. He has all sorts of preferences to keep more flexibility. And he wants it ring friends just to that specific asset.

But they are willing to do that and come down a little bit on the hurdle rate. But, I mean, ultimately, it is, that is kind of the entire investment thesis really in Constellation is whether or not you believe they'll be able to continue to get these deals and scale up. If that was an easy answer to this question, then Constellation would be a very easy kind of business to solve. So I don't want to dismiss that concern. I will say, though, that you could have had that concern three, four years ago and you would have been proven wrong that whole time, even maybe a decade ago. And so that that kind of is how I would answer that. And then again, we kind of just go back to the reverse DCF, where you could see, explain. what the assumptions are. And you can assume a much lower deployment of capital successfully

into these acquisitions. And you could see the associated return. And it is still, you know, higher than the risk rate. So to the extent that people really love the vertical market software companies and believe them to be very safe businesses, maybe there is an extent to which the investors accepting a lower perspective return. I'm just going to pull up. I'm glad you mentioned the reverse DCF because it was the next thing I wanted to ask you about. I just want to mention one think. I'm a really fast talker. And whenever I do the podcast, like one of the most common comments is, hey, Andrew, like, you're talking so fast. Some people will be like, you're drinking too much coffee before your podcast. Some people will accuse me of doing other stuff before the

podcast. Coffee might be true. I love that you're a fast talker because I know people hate on it, but it's generally because you're passionate and like you're enjoying yourself and talking. So I just want to say from one fast talker to another, this is the one episode where people can hit fast forward if they want and we'll be at the same speed. I appreciate it. Let's talk about the reverse DC up, right? So I guess, and again, this is a compounding business. Like, you buy it because you trust the horse.

You buy it because you're thinking about the growth. But the one thing, whenever I've looked at it, you know, the stock is up a lot over the past few years. Let's just use market cap, right? The market cap has tripled over the past six this years while the earnings had, yeah, I guess they've about triple, but a lot of this has come from, a lot of the growth has come from multiple expansion, I would say, right? Definitely in the last year and a half, yeah.

Yeah, I think about like a Costco or something, right? Great business. Nobody's doubting that. But a lot of the returns over the past in years has come from the P going from 15 to 50. Like literally, it's trading it at a 45 or 50 P. And I look at Constellation, I say, with that multiple expansion happening, like, you know, what's the stock price pricing in in terms of growth in terms of all this? So that's what the reverse CCF is for.

So I'll ask you that. And then we can kind of dive into different pieces of it. Yeah. Yeah, I mean, that's exactly why we sensitize around. So we focused on two variables. We did capital deployment, which would be what percent of free cash flow they're generating is actually being deployed into acquisitions. And then ROIC with the idea that the more you're spending on acquisitions,

the more you're accepting a lower hurdle rate. And the flip side of kind of the idea that I'm sure everyone's always heard, okay, a very small change in how much your compact. in capital that will be a very large amount out in the future, right? And so you could actually flip that and say that a big price increase in the short term, even something like 50, 80%, I think, since we originally wrote on Constellation, if you're amortizing that out over a long period of time, it actually comes out to a relatively small difference in your perspective return. So if you're looking at our original reverse DCF to the current one, you're looking at

roughly a one point difference in depending on exactly what scenario you want to hone in. you're looking at a one point difference in the Kager shareholder return over time. The second thing that'll say is the organic growth rate specifically on Constellation in the last year has actually been higher than what you might have assumed a couple years ago, whereas before 0 to 2% seemed like a fair base case assumption. In the last three quarters, they've been doing closer to 5 to 6%. One of the impetus is for the acquisition, kind of merger spin-off thing with Topicus, was that they thought that they could learn more for them on how to actually increase organic growth. And so to the extent that they did learn shared practices, you could see it kind of showing through in the

numbers. And so I don't necessarily want to get into specific scenarios. You can maybe point out some if you want, but they're all in the report. This episode is sponsored by Teegis, the future of investment research. From the beginning, Teegis has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragment and sources, just log into TIGIS to get expert research,

company and industry-specific metrics and KPIs, SEC filings, and more, all under the same license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value.

That's t-e-g-us.com slash value. Let me just push back on this a little bit, right? And I understand we're getting wonky. I'm sure people listen to this podcast because they want to hear me throw out a bunch of percentages and a data table that they can't take. But your assumption, right, where you say, hey, despite the big stock run up, it's only taken away, like I think you said, 1% Kager from the share price.

over time. If you're amortizing over half a century, yeah, which people are going to realistically hold it, is that they can take 100% or 50% or 80% whatever it is of their free cash flow and deploy it at 20% ROIC, right? And again, this does come back to kind of the conversation we had at the start where you said, hey, like they can find the world's big enough. But if they do that, if they're deploying at 20% RIC for the next seven years, right? And you run this out seven years. All of a sudden, that compounding of how much cash that they have to deploy, it just gets crazy. Like seven years from now, you have to be doing some really big deal. So I guess where I would push back is like, I'm not sure if they're going to be able to deploy this much

cash. Like, I understand maybe they can today, even though it's in taking increasingly large deals. But if you run it forward five years from now, like let's just use EBITI. I think they're going to do $3 billion in EBDA, compound that over at 20%. So, in about eight years, it's going to be $9 billion in EBIT. Those are big deals. You're having to do a lot to keep that turn wheel going. What if I told you, hey, I think they'll be able to deploy all their cash flow for the next two years and then 50% for the next five years and then kind of 10% and then everything else that's the return. I think that's the key question to the stock.

I know that's the key question to stock. I guess where does it break? Yeah. So on the reverse DCF, we did, we don't just hold it at 50. 50% indefinitely. We actually drop it according to the size of the cash flow. And so in the most draconian scenario, it starts at 50%. Then by time it gets to acquisitions over 15 billion, we're assuming only 15% of that is going to be deployed. So that's closer to 2 billion and change deployed in acquisition. So roughly double. And so then you could see if you're assuming 0%

organic growth, a 20% RIC. In that scenario, it's roughly a 7% return at the time that the price was struck. Okay. So, and I can't remember from, I'm looking at, I keep going back and I'm looking at the September 2020, like, if I told you just, as you and I are talking today, Constellation Trading at 3720 per share, like, what is your DCF model spit out in terms of returns under the standard DCF we're talking about? Yeah, I mean, so the three assumptions you're making, you got to do organic growth assumption, the how much capital you want to deploy assumption as well as the ROIC. It's going anywhere from about 6 to 12% on the full range of sensitivity. And then someone else could push back and say 2% organic growth is too low. Maybe I think it'll

really be four or five. I think they could use more debt and effectively using more debt. They're increasing what their return on equity is going to be. And so you could have a little bit of pushback there. And to your point on the larger acquisitions, there are, you know, multi-billion dollar software acquisitions that are out there. And that, you know, could potentially be a source of upside for them longer term. So even it is big numbers, you only need to get like one of these a year to really consume all your free cash flow. Those poor, poor consolation shareholders looking at perspective six to 12 percent returns after, two decades of 30% annual-less.

So just one last thing. And I hate to harp on this, but this is the key question to Constellation GoFAR. Like, you threw out kind of cashed like, hey, there are billion dollars acquisitions. You just need one per year. And again, I would just push back because they did get one done recently, right? With Optimal, that's great. But look at Buffett, right? All you need is $100 billion acquisition every year to keep unloading that elephant gun.

Like, yes, $100 billion is bigger than these guys probably need to deploy like $3 to $5 billion. But it does scale one, one point one right now. But it does scale and get bigger. But one, that's a big deal. Like a sales force would be competing with you. A name your company. And Microsoft's going to look at it. Every private equity from Vista, it's just like, I don't know. I think about the competition. Let me, actually, let's get away from that. Well, let me just say, I mean, the thing, the thing about, you know, the stock market investing in general is you get to pick your own assumptions and you can pick the assumptions you're comfortable with. If you don't feel comfortable with that assumption, it's very simple what your decision needs to be. I think there are other people that feel more comfortable with the idea that they could scale it up because they have shown that they've been able to do that over the last decade. But it's okay to have a disagreement on that. Oh, I agree with you. I'm just trying to get in my news. Let me ask, I want to ask about organic growth in the business, but this is Jockeybet, right? Mark Leonard, how much is this a jockey bet, right? You mentioned he pushes it down to the lieutenants.

They have, they have carte blanche do deals up to $20 million, which is great. Those are probably the best deals, but unfortunately, you know, it's not really moving the needle at this point. But Mark Leonard, he goes away tomorrow, you know, how, what do the returns for Constellation look like after him? Is it a deep bench? Is this such a jockey bet that it kind of starts to destroy the thesis? How do you think about that? I would say to the extent that they need to move outside of software in order to be able to continue to deploy capital, because they actually did talk about it at one of their AGMs,

that's annual general meetings, potentially an oil bet that looked really attractive when oil prices were negative. And it had some sort of tax treatments that made it a good, potentially good investment. And so to the extent that they go outside of software, which Mark Leonard has always said that he is open to doing. if he does find another avenue that they feel like they can reliably deploy cash flow to high R.I.C. They'll do that. So I think Mark Leonard might be needed to make a sort of shift like that. But currently as it stands, as long as they continue to do more similar acquisitions, most acquisitions, it doesn't seem like with the extent of like these larger sort of spinoffs he's very involved with. Let me ask just back to capitalization, right? This stock has compounded at 30% per year for the past 10 years. They've done it without any debt. I think they did institute a share buyback at one point, but I don't think they ever like really got

aggressive. No, they never did. I thought they had one authorized, but they never executed on it. Mark Leonard has always had a lot of trepidation around buying back stock because he felt like he always knew more than the shareholders. That's been a debate they've had. Yeah, that takes it away. I was pretty sure they had one authorized, but yeah, I was just going to say, it does, it just strikes me as funny, right? You've got this business that does 30% returns on capital. They've got this advantaged acquisition pipeline. You can't, you kind of can't be advantaged at acquisitions without being pretty financially sophisticated. You never buyback shares. And you just imagine this model if it was run like, you know, kind of John Malone, solid, hey, we're going to keep

leverage consonant two times EBDA and buyback a ton of shares. And you just imagine that upside and stuff. I don't know where I'm going with that. But yeah, I don't know either. I mean, he's never, he's never been big on the share buybacks. They have the same amount of shares outstanding as when they originally IPOed. So he's always felt that return should just come primarily from acquisitions. And he's even been reluctant to do a dividend with the exception of a special dividend they did in 2019 when they had excess cash. And then investors kind of were like, well, are you giving us back money if you're saying there's still more investment opportunities for you, but you're setting your hurdle rate at 20%. And ours is probably at like a low double digit.

And so they've kept their capital mostly since then. And then the other decision they've had internally is whether or not they should spend more on organic initiatives internally. They've had this, like, Keep Your Capital program where they did a sort of experiment to see whether or not the returns on investing on existing software was as good as acquisitions. And they basically came to the conclusion that it was decent and adequate, not quite as good as acquisitions, but it was a good buffer for capital should they need a place to park it. That is, it is a little surprising to here, like keeping, I didn't know that about the program where they tried to keep, it is a little surprising to hear, hey, keeping capital and investing

it more into organic growth has a worse return than kind of going out for acquisitions. And I understand that you can do equity, but most software companies you would talk to or if you just think about it, like most asset light businesses, any capital you can retain to increase organic growth tends to be great because the returns on invested capital tend to be unbelievable in these like anything that doesn't have, hey, I'm literally going and building out of businesses and stuff. I'm most surprised that retaining a little more capital didn't result in, like, you know, taking a capital-ish-like business from their organic growth rate is in the mid-single digits.

Taking it to the high single digits has incredible, incredible returns from an exit, from a terminal value, from your growth. I'm just surprised by that. Yeah. Well, he's said I will, you know, always trade off EBIT margin for growth. And so he's fine taking some on the expense side because when it's software, it's through the P&L, not cap-X. but the other thing they have noted is that it's a five to seven year payback period on a lot of their internal developments. And, you know, if you're buying something at closer to, you know, a 133% free cash flow yield,

that's kind of like a three-year payback. And so I think it's mostly just a byproduct of how cheap they're able to get a lot of these smaller companies. But I do think that calculus has changed in more recent years. He a lot of this information, he hasn't really talked too much openly since about I believe it was like 2017. You had one in the last question. Last question pushing back on the acquisition side, right? I guess. This is the other thing. I came out of from the buyer side, right? Why doesn't private equity everything competed way? Let's talk sellers. You did mention a little bit, you know, people, I'll never forget. Was it a NYSE when they, they were like, hey, maybe we should just sell to Warren

Buffett because, yeah, he's offering 20% cheaper, but we could sell to Warren Buffett. And how nice would that be as directors to say we sold to Warren Buffett? Or, you know, there are really families who actually do believe we sell to Warren Buffett because we can retain some type of family involvement, maintain the culture like that. That is a really. real thing, VMS, you know, software, you mentioned the first thing they did was bus software, right? I kind of think the family dynamics might be a little less than, hey, we, you know, all the kids grew up running the convenience store down the corner or something. So I guess the other pushback on, you mentioned, hey, it's better to buy stuff at 33%

cash flow yields than invest in internal growth at five to seven year paybacks, right? So I guess the other side, I would just be like, hey, why are people going to sell to you at 33% cash flow yields. And then I'll add on the question you know is coming, like, okay, yeah, maybe you can do that when you're dealing with a seller of $5 million in revenue. But when you're dealing with a $1 billion software acquisition, unless it's a four semester and it's on a very tight timeline, like, why are they going to sell to you at a 20% free cash for yield, a 25% free cash for yield? Because, you know, we could start talking synergies and stuff, but these tend to be in standalone silo. So I'll toss all that over to you.

Yeah. So for the small companies, it's a different answer than for the large companies on the small companies. It's mostly the fact that there's not just a lot of natural buyers for these, at least permanent homes. You can maybe sell the private equity. Then they're going to try to flip it in a few years. A lot of these people built up their businesses over many decades, know all the employees and even the customers and they care about them. And so in terms of getting a permanent home for them, Constellation is really one of the few places. Additionally, if they do want to continue to run the company, maybe, you know, kind of get some sort of generational wealth planning and order. Constellation will help with that and they could continue to work

at the company for another few years with autonomy until they leave and they have the reputation for that. And so that's the answer on the small side. On the larger company sides, I mean, you're right. A lot of it is a sort of price war. There was a company, I believe it was like Redney Software that Constellation made a bid for in 2016. And then once that went public, someone else raised their bid and they ultimately lost that. And so that is very much the question. There seems to be some sort of niche specialized opportunities that pop up now and then. And then your question's going to be, can you count on these to continue to happen? I don't know. But they seem to have happened enough in the past that they've been able to deploy their cash flow.

And so on the large company side, it is kind of more sort of idiosyncratic opportunities where, for whatever reason, private equity hasn't plugged that hole. I mean, there's a lot of opportunities out there. So they're eventually going to get something. And they've had a good record on that. The stock market's a competitive place, right? Right now, I mean, I feel like everyone I follow on Finchwit is long constellation software. It's been long consolation software from 2018, since 2018.

and they're just like pressing the easy button their portfolio goes up 30% every year and they don't have to think about it. But I came to you in five years and said, Drew, it collapsed. Constellation collapse, right? It didn't, it hasn't done well. The stock's down 50%. What do you think breaks this company?

What is the big issue in your mind? Because I know what nobody thinks the stock can go down 50%. And if we put aside Great Depression, the whole market going down 50%. But I think just about anything again, what takes this company out? Well, I mean, there's the question on the valuation in the business. The valuation could easily be cut in half 50%. And you could still argue that maybe that's a fair valuation, especially if you expected them to not be able to deploy capital as much in the future. As far as the actual business itself, though, collapsing, I think that that is a much harder question to answer. There's really no singular risks, maybe, I don't know, a crazy cyber attack, some sort of scandal. Mark Leonard leaves and someone else somehow becomes the CEO and institutes a really poor culture. mass employee exodus, it's really not too easy to think about things that could actually destroy them. And we didn't talk much about the actual vertical market software businesses themselves. What's the largest vertical market they're in right now? And like kind of what could happen

there? I don't know. I mean, specifically, I don't know what vertical market by like revenue concentration. They don't give much data around that. But they are really diversified across almost every single market you could think of. They have six business groups. And even within that, they're diversified across all of them. And so you're really talking about something. going wrong in all sorts of different industries in order for you to really displace that. I know some people have had like an AI fear, whether or not like AI can write this. That's my next question. All right, there we go. Whether or not AI can write this sort of software. And maybe it can help write the software, but writing the software isn't necessarily

the tricky part. A lot of these markets, you have to have professional services, you have to install it, you have an employee base that's used to using a specific service. And even just the transfer of going from one service provider to another, since it is mission critical, it risks them losing data, losing revenue, losing customers. And these are, again, areas where they cannot afford even like a one-day loss. It's not like they are going to care so much about a cost savings if it potentially, you know, ruins all the bus scheduling for like a few days while they, while they transfer it over. So these are very sticky businesses.

Every time I see AI risk, I mean, yes, there is AI risk. But when people think like you and me, we're running a bus company and we're just going to be like, oh, you know, we're paying consultation software. Let's just type into chat GPT 7.0. hey, like, replace our VMS with your own internal legit. I just laugh because you don't understand how sticky these are and how ingrained these things are. Like, I was listening to a call the other day as a bank CEO. I can't remember which one, but of a pretty good size bank.

And they're like, hey, did you know that there are about 4,000 banks in the United States, right? And something like over, under 100 of them, or maybe it was under 200, are deploying a modern cloud-based ledger for deposit. Like, almost every bank instituted a deposit ledger 30 to 40 years ago, and that's still what they do. Or you think about, like, the nuclear weapons, a lot of them are still done on floppy disks. Like, once something ingrained and installed, it's so difficult. And as you said, yes, maybe you can switch over to something else, but you're not going to do it just by typing in chat GPT. Like, it's going to be a long time. You're going to have to hire consultants.

Like, it is a very sticky business. I kind of laugh at the simple era, I risk. I don't doubt that maybe AI could help make it unsticky to whichever stuff, but just us writing it, it's insane to me. And then it's also, what is the benefit? Like, is your cost saving so much that you're going to risk potentially losing revenue? And then there's always the risk you switch over and it's not better. And then you're stuck with the service that doesn't actually have any people that work there

to help you fix it. And a lot of cases, there, Constellation Software also is this professional service revenue line, which is where people actually create customized software for these businesses. They'll help them integrate it. in the case where it is an on-prem service server, they'll help actually go there, integrate the server and software with everything else. And so there's real boots on the ground

that actually help them run the business and help everything run smoothly. And so you're not going to replace that with just an algorithm. So I think a lot of people, this is more a trans-dime TDG for those who are listening trans-time thing than these guys, but I think it is real here, right?

Trans-Dime, what they discovered was, hey, if we buy up these niche aircraft parts that cost a dollar, and we raise their price to $10. Nobody's going to care in the context of a $500 million airplane, right? And I think a lot of people might say with Constellation Software and these guys, because of the stickiness we talked about, right? The stickiness, the headache of switching.

I think Constellation Software has consistently gotten 5% plus organic pricing, right? So I think some people might say, hey, yeah, they've got a great culture. They've done great on acquisitions. But where the real juices come is they've been more willing to take price increases than maybe the prior teams that they bought from had, right? If you and I are running into the VMS and we're selling to our friends and we've been working with these guys for 20 years, maybe we're really hesitant to take a price increase. And then we sell it to Mark Leonard and not that he's a shark, but all of a sudden like clockwork, kind of like sees candy. Every day, every year after Christmas, the price is up 5%. The price is up 7%.

Because that price increases is really what drives most of their organic growth here. So I guess I just turn that giant bundle I just wrapped up. I turned that over to you on price increases. Yeah, I mean, there's no way we would really know what the price increased cadence was prior to constellations. I haven't read anything on that. I mean, you're right. Price increases are an important portion over organic growth. I will say that, sure, and though, I mean, the other fear that I hear more often is that these are kind of custom businesses they're buying.

They're kind of ringing the life out of them like a really aggressive private equity company raising the price. Very similar to the price. Yep. And so, you know, churn is about 7%, but then it's also offset by new customer modules and new customer additions, which brings it about close to zero. And then the rest does come from price increases. And so that is a piece of it. Yeah. How much of the churn is customers going out of business or, you know, I say going out of business, which instantly people think bankrupts and that does happen. But a lot of it is also, hey, Andrew and Drew's bus shop got bought by the bigger bus shop. The bigger bus shop already had the BMS. So they just, you know, a natural synergy. has put Andrew and Drew's bus shop up. How much is just customers going out of business versus customers? Andrew and Drew are pissed off at the price increases and we go and hire a new VMS person. My impression is most of it is people, quote unquote, going out of business. It's not switching providers. That's my impression too, but it's always interesting because I think the number I always have in my head is if you're a software business about actually probably just under 7% of your, unless you're selling Fortune 100 or something, probably just under 7% of your

customers are just going to go out of business because some are going bankrupt, some are getting acquired, all that type of stuff. These are a lot of legacy industries, too, they're involved in. You know, they'll sell software to cable providers and TV stations. And so these aren't exactly the industries of the future, some of them. Just to bring it back to the price increase, like, again, this is more a trans time worry, so I'm putting on there. Like, my worry of trance time has always been. And sometimes it seemed like it's going to come close. You get a congressional subpoena that says, why is the defense budget up, you know, a kajillion percent over the past 10 years? And then you get a congressional subpoena on trans-timates. That's like, please explain all of your

price increases over the past 30 years. And then you've got, you know, Donald Trump's Twitter coming out and saying, these guys are taking advantage of you of the American public. And then on the other side, you have AOC's Twitter or Elizabeth Warren Twitter that said, why are we letting these monopolists, like raise prices for no increase in value, and like they kind of collapse under the weight of I always, you know, you and I have never been involved in a congressional subpoena. I think when you run a company that's going to hit with subpoenas and all this, like, you kind of have something that collapses or it shines a light on it. I don't think that's a risk here. It's hard for me to imagine that just because that's a nice thing about

diversification and buying really small businesses. But I have always just worried with these things that take a lot of price. You run into the, you never know where the limit is. And one day you hit the limit and it all just kind of collapses in some way, shape or form. Well, I mean, they would say that we still are improving our software offerings and updating it regularly and all of that. It's still a very small portion of the overall cost of each individual business. And then on top of all that, these are not consumer services. So you're not going to see politicians care too much about chicken coop software pricing going up. I agree with you. I think like versus a transzyme where they could actually affect the state department budget or, you know, a big Boeing or an Airbus.

Like these guys, if they're selling, hey, we take the bus, the bus prices up by 5%. You know, it's such a small line item. Though I could kind of see local politicians being like, why are we paying 20% more for our bus IT or for, you know, the software vending machine IT? Like, I could kind of see that, but I think here the diversification is a nice, nice protection against that, hey, you're a price gougar headwomen. But I have always worried about that. Yeah, I mean, there's a lot of risk. That's not one I'm particularly too worried about, to be honest, just because it's not a consideration service. I mean, the big one is mostly just having to do with the competition, how much they could deploy capital and really just what the implied deployment is and RIC is. There are copycats that have popped up. Some employees have left Constellation software to work at the copycats. VALSoft is one. And they're basically, they know the constellation model. They just want to try to copy them. And so that, you know, to the extent, competition continues to drive down returns. That's always worrisome. I've always also wondered if you get like a reputation, right? Like, let's, again, let's use you and me. We're running a big

business and it's a Warren Buffett style business. I have always wondered if you go to Buffett and you're like, hey, we'd like to sell your business. And he says, all right, here's my offer, take it or leave it. And he offers us a billion dollars. And you and I, we probably take it and we head to the beach, right? But I have always wondered, why not just be like, perfect? Thank you, sir. I'm going to go over to private equity for Max and be like, Warren Buffett just offered me a billion dollars. I bought 1.2 and we'll call it a day, you know, or you call up in Constellation's point.

Mark Leonard just offered me 20 million for my business. Call up ex-Marc Leonard lieutenant and be like $22 million and you've got yourself a deal, right? Because that is one of the ways, that is one of the ways competitions works, right? You find an undervalued niche and eventually there are lots of buyers in and stuff. I've just kind of wondered, go to the best person, have them price it, and then give somebody else the call option. Yeah, I mean, and that's why Buffett loses a lot of deals, and that's why Constellation loses a lot of deals.

They're not going to win people that are the most price-sensitive. And so to the extent that you're ready to go sell the software company, you've worked 30 years to build, and you just want the highest dollar. You may not end up at Constellation, but if you're talking to Constellation, you like the people there. A lot of time they're establishing relationships with them over, you know,

sometimes a decade, many years, just for the moment and opportunity when they are ready. You know someone you trust them. You're not worried they're going to try to screw you in the deal, then, you know, you're just going to go with Constellation. Otherwise, you might say, okay, VALS off, give me another $2 million. I'll go with you and I'll accept the potential headache that I don't really know you that well.

And maybe it's worth it because I'll get a little more money. Another question, and this is more stock focus than business focus. And I think people can tell, A, you do great research and it's all on the, it's a lot on the business focus side, though obviously you do the reverse DCF to provide some valuation framework. Let's say you're an investor, you're listening to this. you're like, okay, like, Andrew's asked a lot of questions, but Drew has answered them all really well, right? Like, I believe this is a business that is advantaged.

I believe this is a business that can employ, deploy a lot of capital at great returns for a long time period, right? But then they might think, oh, Drew's reverse CCF, which implies deploying a decent bit of capital at really good returns, spits out 6 to 12 percent annualized from today's prices, right? Let's take the mid range of that. 9%. That's basically the market value, right? And, like, as an investor every day, it's opportunity costs and you're trying to generate alpha over the long term. Why do an investor today kind of choose Constellation Software based on everything we told the risk of investing in a single company versus, you know, your DCS spitting out market-like returns? Why wouldn't they just go park it in the next fund? And I'll remind readers, listeners, this is not investing advice.

We're just discussing opportunity costs. Yeah, I mean, they may not. It's on them to decide whether or not the assumptions and the risk they perceive within Constellation for the given perspective of return. is worth that or not. Some people may believe that they would prefer to own a company that they could see exactly how they were able to grow and the assumptions involved in all that versus just kind of hoping an index fund returns what it has historically. But that's entirely on an investor's choice in their own opportunity costs. If they were going to generate alpha through this, I think the big piece would actually be, it's not the RIC assumption. It could be

the organic growth assumption, right? You mentioned how you've only got zero to two and they've historically been able to perform that. But it would really be, hey, well, recently, not historically, but yeah. It would be, hey, I really think they'll be able to deploy $2 billion in cash flow instead of $1.5 billion. Or, you know, they'll be able to deploy 80% of their cash flow instead of 50%. What do you think the likelihood of them being able to deploy kind of all of their cash flow over the next seven years into acquisitions is? I wouldn't want to give a percentage. I couldn't tell you exactly what that is. I mean, that's, ultimately, that's the key question, right, is to the extent they could do that. They have, again, been leaning more into debt, which

has allowed them to get even larger acquisitions. And so they've lowered their hurdle rate a little bit on the larger acquisitions, which opens up the opportunity set for them to continue to do so. And so to the extent you're looking at the last three years and saying they've deployed 130% of free cash flow, roughly speaking, if you expect that trend to continue, then it will. But, you know, you never know, right? Because the market could totally change. It could get more frothy and they are very disciplined in their acquisitions and hurdle rates. So if the opportunity is not there, they just won't deploy it. Let me push it. Let me ask it a slightly different way. If I told you, I think the stock is fairly valued if they can deploy half their free cash flow into

acquisitions from here, right? So that means if they deploy more than 50% over the next, and this is not a one-time thing, right? This is over the next, like, 10-ish years. If they deploy more than 50%, they'll obviously greater returns, they'll outperform the index. And if they deploy less than 50% they would underperform. Would you take the over or under on that? Of them deploying 50% of their free cash flow? Oh yeah. I think they'll be able to do at least 50. If they for some reason couldn't deploy 50% of their free cash flow, what do you think they do? Right? Because let's say the market just frost up like crazy. Everyone's paying crazy multiples. They just can't buy anything. Do you think we start a dividend program? What do you think the, because as you said, they don't really

like share buybacks and they're not running. Yeah. So they'll have a lot of cash. They don't like share buybacks. However, there's been some pushback at the last AGM that as long as they broadcast it far in advance, they might do that. I'm not sure they're itching a buyback stock at current prices, though. So at least historically, what they've done is a special dividend. With the exception of one recurring dividend that they instituted really because they're worried they're going to get bought out by a private equity company. So for really stock marketability, they've mostly liked more discretionary capital allocation decision. That gives them more flexibility on where the capital ultimately goes. So I think you could see a special

special dividend happen again. But, you know, it's also worth mentioning we didn't touch on it. They've done these other like spinoffs with Topicus, Lumine, and these sort of acquisitions have allowed them to kind of extend the runway a little bit as to potential deals they could do, because these are the sort of deals that a private equity company can't do where they're buying a stake in them. They're sometimes helping them with capital, sometimes divesting certain assets out into them that makes sense within that company. And that is kind of a more unique way that they've been able to deploy capital that is not really replicable for a P.E. Fund. Would it kind of make sense for them to, they've got six verticals? I mean,

Typicus and Lumai? I can't remember. Lumine's not included in that now, but yeah, so seven now. They've, I mean, my God, I remember looking at them when they spun and I had some friends who had huge winners on them. Would it make sense to just split all six verticals into separate companies so all of them could kind of be more focused, judge their own returns on capital, that sort of stuff. And Mark Leonard could be the executive chairman of six different ones. But would it make sense? Because I don't sense that there's crazy amounts of operating synergies between having six verticals inside of it. I would say Topakis was kind of the first experiment without Lumine as kind of the second. And so I don't think they're against that an idea.

What they basically have done for now is they've said if it makes sense to spin it off and there's like a clear reason to, which has been because they could acquire something that they don't think they would have been able to. Otherwise, they've done that. So Lumine was, they carved out some assets from Valeris. They merged it with something called Wide Orbit, and then that created Lumine. And so that was kind of a deal that wouldn't have happened otherwise. And so it is possible that they do more of that. He doesn't seem to believe that it needs to be a big conglomerate. I don't believe they would do it just to get, you know, like a higher valuation or something like that. It would have to be because it actually will somehow

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Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's T-E-G-U-S.com slash value. You mentioned when I was talking about organic growth, and I can't remember if we got cut off or not, that the organic growth is throwing them up there, throwing them up there and kind of hanging them as I worry might happen to TDG at some point wasn't your biggest worry. You mentioned your biggest worry was probably on deploying acquisition capital. What's your second biggest worry here? I mean, the incentive system and constellation

is such that if you're senior, you're kind of forced to spend 75% of your cash bonus on stock. And the more overvalued the stock gets, the more you, as we're going through the math, the more you kind of have to assume to make it work. And so at that point, if they're forcing them to buy stock that has pretty ambitious assumptions, they may have to change their incentive scheme, which could ultimately hurt what is, in my opinion, been a pretty important driver of Constellation, which is having everyone aligned incentive-wise for the same goal. And so part of that addressing that is the spinoffs, but those have also kind of had a similar dynamic as of late.

Can I get philosophical with you for a second? Yeah, let's do it. I love insider ownership, right? And when you say Constellation and you look at the stock chart up into the right, and you tell me that all the employees are literally forced to take their cash bonus by stocks in the open market. I'm like, wow, what great alignment. But at the same time, like, if I went and told you, hey, like, what companies have had the most equity culture I can think of? Like, it would be Enron. It would be Lehman. There are others. But it's just funny because if I said, hey, Drew,

I've got this great company. It's a roll-up. They take a little pricing. They're great at M&A, a great equity culture, their Canadian focus. If I told most people that, be like, oh, my God, I'm staying away from that. We've been burnt a thousand times by that. There's Valiant. There's like four other different Canadian roll-ups that have burnt. And all of them had like kind of similar structures. And then there's consolation.

And I'm not accusing them of anything untoward. I'm just why I said I'm getting philosophical is because it's just funny. Like, this has worked. It's been great. I think the proof is in the pudding. But at the same time, like what separates a consolation from let's use value again? A Valiant where, you know, high level, there's a lot of similarities between the two. Yeah, I don't remember exactly, but I'm pretty sure with Enron, the management team was net sellers of stock.

And that was... Yeah, I mean, maybe I shouldn't use Enron because there was kind of... But Lehman, I mean, I know people who were at Lehman and they say, look, the first day you sat down and they were like, look, here's your stock gift. Here's the most important thing. You're at Lehman. This stock is, it's a compounder. We do 20% returns on equity every year. you never sell your stock.

You never sell your stock and you're going to retire rich. And like all the guys owned tons of stock or, you know, some of the banks that blew up last year, you can go look and they were literally buying stock like two weeks before it was a zero. And I just kind of Silicon Valley Bank, right? Like the stock was just up and everybody would talk about how great it is. First Republic, everybody talked about the culture there. And yeah, they weren't forcing management.

But I do think there's something similar there. And it's just, it strikes me how in one sense, in one case, it's like the sign of things are about to go off a clip. And in another case, like, this is a great culture, long-term shareholder-oriented mindset. Yeah, I mean, I don't know that you could just look at the ownership and that is sufficient in it of itself to make any sort of claim as to the sort of company it runs. Obviously, you want incentives aligned between the shareholders. And, you know, you could, I think, you know, if you're talking about Lehman and all that, there, I don't know exactly their comp structure, but I'm pretty sure a lot of it was more in an annual cash bonus. versus sort of a long-term equity ownership where they would get the majority of their wealth from.

And so it is, I mean, to the extent that that exists in other companies, okay, that's true. In terms of philosophically, I personally would prefer to see a larger insider ownership, knowing that they're going to benefit from the growth of the company the same way that the shareholders are. And more importantly, that they're not getting these sort of, you know, options far-dated out or out-of-the-money options where they're more encouraged to do something risky or with the capital because of, you know, the sort of asymmetric payoff or, you know, in a way that would dilute a lot of the shareholders. And so I wouldn't knock consolation for that, but if you want to, I guess, I guess you can. I'm not knocking.

I was just being successful. It just, it's interesting. And I hear you, because like you said, you wouldn't want them to use options, which I hear you, though, the other thing is like, if they're having to go out and if Constellation stock goes from like 30 to 40 times EBITA and they're going having to go out to, buy, use their cash bonus to buy shares, like that can encourage risk taking on their end as well. So it's just interesting. Okay. Well, if you're paying all cash for the stock, you're not going to want. You're going to feel the pain more if it goes down than if it's an option where

it's struck at a higher price that you haven't. Yeah. That was my point there. But hey, that's my fear too, right? Everyone, when you talk about consolation, they mentioned Mark Leonard and they, Berkshire is the one that always comes up, right? And that's because they've done a great job with capital allocation, maybe not in terms of Warren Buffett's just like pure stockpigating, but in terms of buying, they have the diluted silos where all the cash comes back and all that type. So if we put Berkshire to the side, name two other companies that you think have the most constellation-like culture, or you can say constellation has the most them-like culture.

I'd be a hard press to think of another company where they so explicitly bring down the capital allocation decisions to the individual units. I would actually push back on the premise of your question. I do know that it gets compared to Berkshire a lot, but it is very different in that the way Berkshire operates, they say, once you're done with all of your, you know, regular maintenance cap-X spend, send all of the money back to Omaha. I'm going to allocate it. Constellation in many ways is the inverse of that where Mark is saying, stop sending us money. We have too much money. The opportunities are out there in the field. Go and he's instituting stuff like to keep your capital program to try to get them to continue to deploy capital. He will do some of the high-end

kind of larger acquisitions and all that, but they very much want to create a system where the capital is more distributed across the company. And there's a lot of individual capital allocation decision makers, at least off the top of my head, I can't think of another company like that. There are a lot of mini constellations out there are companies that people pitch as a mini consolation, ignoring the spinoffs. But these are companies that are pursuing very similar constellation strategies, right? They want to buy older or legacy something tech. They want to buy them for cheap multiples, improve the prices, all that sort of stuff. Are there any legacy or sorry, are there any of these constellation kind of clones or knockoffs that you are aware of that

you think are like kind of have found the right sauce? Nothing I've looked at. I know there's some out there and people will tout that. I haven't dug into depth into. any of those. Just wonder, what's the next Speedwell research piece? Coupong, uh, Korean, uh, South Korean e-commerce company, which is more Amazon than Amazon. You better be careful because if you recommend that stock and then you sell it before Bill Ackman tells you to, you're going to be in trouble.

Oh, the Harvard thing. Yeah, yeah. The endowment thing. Yeah. For people who don't know, he made a like literally series A investment in them, did fantastic. Donated it to Harvard, but he was basically like, do not sell this. If this goes up, he had a deal where if it went up, he could allocate like the profits as well. And they sold it. And he was, he was just furious. And, you know, he would have been right. Though you can understand why an endowment was like maybe we don't want to set the precedent of our donors getting to choose what we do with the stocks they donate as well.

But so I was making a joke. There was a casual joke. There was nothing meant behind it. Uh, cool. Well, Drew, this has been a ton of fun. We'll have to have you back on for another one. What's the other? I feel like having seen a lot.

lot of your pieces. I feel like Constellation is your favorite company you've written about. You've definitely done the most follow-up. What's your favorite company? If I'm wrong, about- Oh, yeah, you're wrong. I actually, I actually don't like talking about consolation that much. Well, I am insulted. What's your favorite one? Well, I mean, I'll just say the reason wise, because you can't get into like all the fun, like competitive factors of the business. You're kind of just like, oh, well, like the allocation decisions. Like, all you can ask is acquisitions and return on capital and when do the acquisition stop. It's not like, it's the same problem I have when people come and want to talk like an industrial company. I'm like,

that's awesome, but I can't really ask a lot of questions on it because we're going to have to talk about industrial supply and demand and that's pretty much it versus everyone can have an opinion on Facebook. But what's your favorite one you've written up? A favorite one. I mean, I like RH a lot, copart a lot, floor and decor a lot. Less love one, Walker and Dunlop, but that's an interesting one. Evolution, that was a recent one. I really liked that one as well. We did a 160-page report on meta as well, and that was in January, 2023. So that was an interesting time to write that one. So I spend a long time on the company, so I guess they all become my favorite.

What do you think about RH right now? I'm trying to answer that question without giving valuation or stock-specific commentary. In terms of the business model and Gary Friedman, I think that he's done a tremendous job turning around that company. Most people do not know that they literally used to sell dog food in a mall store footprint. And so they were kind of a dying brand. They were nearing bankruptcy. And so in two decades, he was able to take that company to what it is today, where they have galleries that do over 100 million in sales. People see these big galleries.

They think they're lost leaders. They're not lost leaders. They make a lot of money. He figured out putting restaurants in the – figured out putting restaurants in the galleries would also help stoke demand. And so now you have more of a reason to visit them and help them stay top of mind. because you have a higher frequency service coupled with something that maybe you're only thinking about once a decade. And so everything he's done and a lot of the moves he's done have really been just genius. And that's a much fuller discussion. But in terms of his business acumen and building

up that company and what it is today, it's very impressive. Do they have statistical proof that putting the restaurants in actually is helpful? Yes. Okay. I follow restaurants. Every like 18 months, I'll look at it because I just, I'm with you. I love everything that Gary's done. I love reading the calls where I just remember the one from like 2002 where he's like hell in a hand basket is coming we've all got to batten down the hatches and get prepared the economy's going to go to shit by the way our next big investment is caviar on yachts for rich people to experience our wares and I would always be like what but I love him you know he's obviously done the share buybacks he's timed it incredibly well but every time I look at it like I just

wonder like the you know the stuff in is it Colorado where they're doing the ski lodges I understand it's different, but I've never seen, it's just hard for me to believe you're going to sell more furniture by having people come to a high-end restaurant and that a furniture company can profitably operate a restaurant or like use it as a subsidy to get well, think of it as advertising. So they've done a lot of these things where even the restaurant, they had their first one in Chicago in 2016, people are like, why the hell you're putting a restaurant in a furniture store that's stupid? They lines out around the block. Even today, it's pretty hard to get a reservation. And so it turned out that if you created a really cool space,

really well designed, a high upscale environment, people just wanted to be in it. And so that's what they've seen. They've done a guest house in New York. So that was another experiment of a similar kind. And it's, you know, very few people. And so it's similar sort of thing. I'm talking about my butt here because I haven't looked at them. I think the last time I looked at them was about a year and three months ago. So I'm a little, but just because a restaurant has lines outside the door. I mean, generally it's a good sign, but it doesn't mean that it's a great use of capital, right? Because they do over 10 million in those restaurants, just in revenue. Yeah, it'd be tough not to be profitable, 10 million. And, you know, they do talk about the foot

traffic uplift from that. There's a lot of people that'll end up looking around. And so that's just a main way that they've driven a lot of people to go and visit their stores in the first place. And so then, of course, when you do want furniture, provided you're in the right income bracket, you're thinking of RH in the future. So, I mean, that's part of it. It's also just shifting the idea from buying furniture to buying space. And so part of what happens when you have an 80,000 plus square foot gallery is you can kind of conceive of the space. You have in-house designers that you can use for free if you're part of the RH membership

program, which only, I believe, 250 now they just raised it. And that allows you to then have someone who helps you design everything within your home. It's much more convenient. And so you're not going to all of these different undisclosed places where very often you can't even get in without an interior designer. So there's that whole aspect as well. It's kind of changing the, quote, like job to be done. well, we are, we are way off topic here, but Drew, I know what I think we'll have to have you on for the second podcast, but this has been great. People can subscribe at Speedwell Research. There'll be a link to, are you going to have a public link to the, the 2022 Constellation Report that people can maybe pop onto?

No, but they can purchase it at Speedwallresearch.com. You could buy a membership or a single report. We do have some updates and other free content at Speedwell Memos.com. And you could check out our podcast, the synopsis, if you want a full in-depth, that. episode on Constellation Software. Perfect. Well, there's the pitch. Drew, thanks so much for coming on. We'll chat soon. Yeah, this was fun. Thank you. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.