Transcription
Welcome to Constellation Software's 2025 fourth quarter results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded.
On the call today we have Mark Miller, president and COO, Jamal Bosch, CFO, and Bernie Enzeroth, CIO. Mr. Miller, please go ahead.
>> Thank you very much, Drew. Uh, good morning everyone, and thank you all for joining the call. Uh, our press release went out earlier today, so hope you've had a chance to at least flip through it. Um, and I wanted to make a few remarks before uh we move into Q&A.
Um, so there's uh real noise in the market now about uh AI disrupting software businesses and we take that very seriously. Uh, but we think we're well positioned. Uh and although we're staying very disciplined about how we approach it, uh we've always run a learning culture at Constellation, best practice sharing across our operating groups as one of our genuine differentiators and I've seen more cross-portfolio collaboration around AI in the past year than on any topic in recent memory.
Over the past 12 to 24 months, we've directed our culture of best practice sharing to helping our businesses navigate the AI transition thoughtfully. We spent 2025 upskilling our development teams. Thousands of developers have built skills in AI augmented coding across our operating groups. We're entering 2026 with AI enabled coding becoming increasingly commonplace. The productivity returns are real and they're still growing as these skills embed more deeply in our business units across the world.
A typical example of this um that last week in Denver uh one of our operating groups hosted an AI accelerator program with 19 businesses and other operating groups participate alongside them. This week a joint Polaris and Jonas event is underway in the UK. So we're and this year we're planning on moving hundreds of teams through similar programs. We're starting to see opportunities for small language models, AI agents, and new applications for machine learning throughout our business. We're we're going to find opportunities that service out of deep customer relationships and our strong vertical market expertise. We're bringing forward our technology platform partners and AI providers to create cohesive, relevant, and applied solutions for markets that we know well and that we've operated in for years.
But I want to be direct about something. Building products and features faster will not be what differentiates us long term. That capability will become widely available. It's going to be table stakes. What will matter is what our businesses have spent many years developing. Deep vertical knowledge, a genuine understanding of customer workflows and processes, the data inside their solutions, and the trusted relationships they've built. I believe AI will help us do all of this better. When I look at where this leads, the opportunity I find most interesting is what I describe as knowledge networks. Connecting our domain expertise, customer process knowledge, and data assets in ways AI now makes possible. That's a long-term build and we're in early days, but the foundation is real. Our customers rely on us for mission critical software. We believe that the trusted partner position we've earned in our verticals is now extending to guiding them on how to safely and effectively bring AI into their own businesses.
Wanted to mention a little bit about capital allocation and uh and uh our uh our process is largely unchanged. We score prospects for quality as we always have. We've added an explicit AI lens, assessing each business for AI disruption risk and potential AI upside and modeling accordingly. We're also piloting AI tools to help us rank prospects by quality and readiness to transact. It's early and the jury is still out on whether it will prove its value over time. We've also developed a new approach to deploying large larger amounts of capital. What we're calling a permanent engaged minority shareholder strategy or PEMS. Our investment in Saber is the first meaningful expression of it and I have to thank Mark Leonard who's helping us uh with this strategy and helped us uh explicitly on this particular uh uh investment. Uh, but the logic is straightforward. Uh, permanent meaning we're long-term share long-term holders not traders will work to ensure these companies endure as institutions. We're engaged which means we care about governance management incentives and capital allocation and will actively work to have influence where we think it creates value. Minority we're not acquiring these these businesses outright. We want to partner with other shareholders and we hope many of them become engaged long-term holders alongside us.
So, just to wrap up here, um the fundamentals haven't changed for for for me it's been like three decades with Constellation. You got to know your customers, stay close to them, go deep in your verticals, develop your people, build leaders who can drive change. That's what this period calls for. Uh, the same things it's always called for and we have businesses all over the world hundreds and hundreds of them that are doing all of those things. The technology will be new. The pace is meaningfully different but we've got the right business to respond. And so that's all all from my opening remarks and I wanted uh Drew to uh to allow some questions now if uh if you could uh run that for us. Thank you.
>> Yes sir. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Kevin McVey with UBS. Please go ahead.
>> Great. Thanks so much and really thank you for for the remarks. Very very helpful. Um I I guess you know with just the the more focus on on AI Mark does that involve you know more reinvestment back into the business you know a broader ecosystem of partners and just I know there's a lot here but just any thoughts as to monetization in in terms of consumption across your clients just broader stroke again very very helpful comments I mean it's it's really early days on that uh and our Businesses like always are u they're probably spending more time and money on this than they've spent on um for for a while on any specific best practice. So they're looking for opportunities with inside of their customer base to to uh use AI uh as well as to to drive revenues as well as of course um being able to develop products faster and um and and quicker and provide customer solutions. Uh at at a more rapid pace than we previously could. And then some are taking it a little bit further and they're talking a little bit about that. I talked about it becoming sort of a knowledge uh network uh for for each of those customers and and they're working a little harder on that which means sort of doing machine learning and building AI agents. So it really depends on the business. Um explicitly we don't really control that from from uh Constellation headquarters. We allow our businesses to make that decision and they have many coaches throughout the world to help them think through those things as well uh in this sort of decentralized network of companies we have.
>> Great. Thank you.
The next question comes from Thanos Mashopoulos with Capital. Please go ahead.
>> Hi, good morning. Um Mark, to what extent have you started to see some of your businesses capturing incremental revenue from AI related capabilities? So be that in the form of new modules uh usage based pricing or customer funded R&D. Is it very early days or are you starting to see examples of that?
>> Yeah, really isn't uh we haven't really seen a lot of new revenues from that, right? You know, so far and and on the converse, we haven't seen really much lo no loss of revenues from it, you know, at this point. So, um it's been really um really just uh we're really just in the process of just bringing everybody up to speed and making sure they they can use the tools and uh they know as much as they can across our uh across our businesses.
>> Great. And uh with respect to the PEM strategy, um is it safe to assume that all else equal, you'd still rather own a business outright or are you indifferent so long as you're investing in a business um with a minority stake where you trust management if you like the uh dynamics of vertical and and
>> Yeah, we're happy. We're happy to have just be a long-term shareholder in that business and work with their uh with their uh their team on trying to make that a better business over time. So uh it's really sort of fits the Constellation way of doing things, right? We buy and hold forever and we want to work uh work with these companies in a similar fashion and hope to make them better and uh we we're really not out there to acquire them. We're out there to try to collaborate with them and uh and their shareholders and make them uh better businesses. So I'm pretty excited about it. I think it's a it's a new thing and we'll uh we'll keep updating you as we learn more uh as we continue to implement uh PEMS hopefully uh um more often.
>> Um great pass. Thank you.
The next questioner comes from just to verify Frank Serpico, private investor. Please go ahead.
Okay, continuing. The next question comes from Stephanie Price with CIBC. Please go ahead.
>> Hi, good morning.
>> In the in the current environment, just curious about Constellation's ability to kind of push through price increases. Um, in the past, uh, you know, you've been able to to increase maintenance prices on acquisition and then maybe do annual price increases. Have customers been pushing back on this in the current environment just given AI and and kind of the uncertainty out there. How do you think the strategy evolves over time?
>> Um I've no feedback on that from our our business. So it's really there's I've seen no changes from uh that at all Stephanie.
>> Okay. Okay. And then just in terms of the valuation uh of Constellation right now I assume you've run the math on on putting an NCIB in place. Um, how do you kind of think about an NCIB here and and buying back Constellation shares versus going out and and continuing the M&A strategy?
>> Great question. I'll toss it over to Jamal. So,
>> yeah. So, we have uh created a a subcommittee within the board to look at this and and there is a number um but at this point in time we believe there are ample opportunities to deploy capital as opposed to buying back our own our shares. But if that were to change in the future, we'll we'll reassess. But at this point, yeah, we are not uh looking to put in in place an NCIB.
>> Okay, perfect. And then maybe just one more followup just on just on the PEM strategy and and the minority position versus a a outright sale or or a acquisition like just similar to to Thanos's question earlier.
>> Uh sure. is Bernie. Some of these businesses are so large um at this point um we we wouldn't be in position to uh make a full acquisition. So, and our cash flow is increasing every year and uh we've got to find a home for it. So, we're continuing on our strategy for full acquisitions and uh we got an extra capital to use on pens and so uh we're going to use a combination of the two um to allocate our capital.
>> Perfect. Thank you very much. I'll pass the line. The next question comes from Jerome Jerome Dru with DeJardan. Please go ahead.
>> Morning.
>> Hi, good morning. Thanks for taking my question and hosting this call. Uh back to the AI conversation a little bit. In your M&A process, have you changed your medium to longer term assumption on the useful life of software acquired? Maybe to take into account any change in perceived risk around the impact of agentic AI could have on software. I know you mentioned that you're assessing uh any businesses for disruption risk, but I'm talking maybe more in general is if there's been changes in assumptions.
>> Uh the assumptions are what we see on a company by company basis. It's not uh general across the board, but what we do is we qualify prospects as we've always done. Uh this time with respect to AI disruption uh on the downside and upside to see what AI could do to the businesses that we're looking at and we're modeling accordingly and this is always when we model its short-term and long-term. Um, so really nothing has changed except that we do look at it through the lens of what AI could do to the business and um, and we apply what we've done internally to our own businesses to the businesses that we're looking at for acquisition and um, if there's upside we apply that and if there's downside we apply that too and it all goes into the model.
>> Yeah, we're we're obviously continuously learning from our existing businesses and we'll apply any of the lessons we learn to anything we're looking at. Um, any modeling we're doing for future investments.
>> That's uh that's great. Thank you. Um and as the market is trying to assess how robust the portfolio is uh do you know or can you share what percentage uh of the company's revenue originates maybe from either public sector clients or maybe software requiring regulatory approvals?
>> Yeah, we don't differentiate it and that internally that way. So I don't have that metric for you but um but again but going back to what Mark said I don't think that is going to be what protects our companies right like so it's going to be that customer relationship investing your product bringing things to market so whether it's public or regulatory approval that that's not a key measure for us.
>> Yeah.
>> Thank you.
The next question comes from David Quan with TD Cowan. Please go ahead.
>> Good morning. Good morning.
>> Hey Mark. Um just wondering as you look at deploying AI internally um you know should we expect any kind of margin improvements related to the productivity gains that you're seeing? Um probably most notably in R&D or are you really kind of investing these gains into accelerating the proc?
>> Yeah, we're really investing into accelerating product roadmaps where where our businesses have uh started using AI to its full potential. So I think that would that's our focus because when you you know we're we're buy and hold forever and we're trying to uh increase our position in inside the customers by providing them uh more more tools that help them run their businesses whatever those might be. So our preference would be to continue to focus on that and uh where there's not opportunity to do that you're going to like always try to uh focus on increasing productivity through whatever means you can like that's a great measure for an individual business very hard to look at overall a constellation though when you're looking at that you kind of look got to look at on a business by business basis productivity.
>> No, that's helpful. Thanks, Mark. And on the M&A front, um, pretty strong start to the year, over 800 million in closing pending deals there. Um, were there many other kind of larger deals like Synchronos, um, you know, that were on the larger side relative to your typical deal, but too small for you guys to press release?
>> Yes, there were a few. Um but we don't get into detail uh with respect to to the businesses that we've acquired.
>> Okay, thanks. And then one last question. Just wanted to know I guess to what extent you guys are spending more time looking at these public company opportunities whether it be acquisitions or investments like like you're doing here with Saver. Um just comparing to what you might be seeing on the private company side as it relates to valuations.
>> Uh nothing's really changed. Uh we're looking at both uh as we said earlier uh private companies and public companies um both for acquisition and for pens. Um and we haven't really seen on the private side any change in pricing um so far and competition for those businesses is still very strong. Um so nothing's changed there. Um there's just been a little bit of um change in pricing for publicly traded companies as you well know. Um, and so we there might be some opportunities there.
>> Great. That's thanks. I'll pass the line.
The next question comes from Paul Triber with RBC Capital. Please go ahead.
>> Good morning and and thanks for thanks for hosting the call. A couple of questions on on PIMS. you know the do you view a single board seat as sufficient from a governance point of view when making a a minority equity investment and then what's the recourse if the company is is well entrenched in in a suboptimal strategy? Um, yeah, what's your what's your recourse in that in that scenario?
>> Yeah, I think it's going to be situational. We're we're just going to have to determine what to to do based on the situation we're in. I don't think they will all be the same and we'll just adjust accordingly based on the based on what uh yeah what what we're we're dealing with.
And a second question related to pimps is how does the irr on pimps rank in in general versus other calor deployment strategies?
>> We're we're using the same u measure to look at uh pms versus our own acquisitions. So, uh, we're we're still maintaining that discipline and and we haven't veered from that at all.
And then just one last question just on on PIMS. I mean, you mentioned buy and hold forever, but obviously, you know, these are public investments, so there is liquidity. Are you as part of the strategy? Is it is it contemplated that there could be an exit at some point for for whatever reason? I mean our preference would to be to hold on but it
>> yeah preference would be to hold on forever but um you never say never and things could change um but for the for the uh time being our uh our expectation is to hold for forever. Yeah.
>> Okay. Thanks for taking the questions.
The next question comes from Richard C with National Bank. Please go ahead.
>> Morning, Richard.
>> Oh, hi. Good morning. This is uh Mike Stevens on for Rich. I just wanted to touch on you you guys have discussed style drift and the evolution of the model. Just wondering if there's any recent examples or updates uh that you wanted to highlight on on that concept.
>> Not really. It's it's really the same modeling that we've done in the past and we're just looking at a at a closer view of what AI could do to these businesses that we're looking at. And um really there's not much more to ask.
>> Okay. And then on the Altera acquisition um obviously it's it's faced some expected uh customer attrition. It's good to see the positive returning organic growth in the quarter. Uh just wondering uh any update on on how that business is going and you know whether organic as a whole can kind of either stop declining or turn positive at some point.
>> Yeah, the business is running pretty close to what the investment thesis was from a returns perspective. Um, it was never contemplated that this would be a strong organic growing business and and that hasn't changed either, but but again with with AI and and and new things to come to market possibly, but no, but don't look at the current quarter as a trend like like it's still expected that this is going to be a it's a tough market that this business competes in. So, the the thesis has not changed.
>> Okay, appreciate the insights.
The next question comes from Sam Sana with Jeff. Please go ahead.
>> Hi, good morning and thanks for taking my question. Maybe first just um the organic growth was was healthy in the quarter. I'm just curious if you could unpack kind of what's driving that organic growth rate at the current level and just as we think more near-term if that's the right way to think about organic growth for the rest of 2026. And then I have one follow-up question.
>> Yeah. I mean the maintenance organic growth number for the year is right in line with it's been every other year for the last x number of years right adjusting for inflation and COVID. So, so that 5% FX adjusted maintenance organic growth and recurring organic growth number I continue to think is a a good um number to for future uh organic growth. Uh from a total organic growth, what was it like 2 3% which again is is pretty much in line with uh with prior years. So nothing's really changed.
>> Understood. And then the on the M&A strategy, I guess, you know, the word disruption and the impact of AI is has come up on this call multiple times. I'm curious if you're seeing a change on the on the sell side in terms of are are you seeing private companies either more willing to sell in this environment where there are more uncertainties? Are you I guess how does your top of the funnel from a deal perspective look and are they willing to take a lower multiple to account for that risk? Just help us understand how that's helping or hurting your own M&A strategy.
>> Uh, no, today we haven't seen any changes. Um, expectations are still the same. Um, volume is still the same. Uh, it hasn't really changed much. I mean, we're using tools to score leads in our funnel, but really that that hasn't really changed much um, so far because it's still early days in those tools that we're using. But other than that, expectations are still the same. And they haven't dropped despite what's going on in the markets.
>> Great. Thank you.
The next question comes from Keith Lambert, a private investor. Please go ahead.
>> Thank you. My question my question is on the new capital deployment strategy. Is this change in in the investment universe driven by either the slowing availability of BMS traditional BMS targets or is it driven by in any way concerns that management support of the long-term value of terminal values of BMS businesses due to AI?
>> Uh no, it's it's not driven by uh AI. It's it's driven by we you know we like we like the company and we thought it was a a good investment for our shareholders and we do you know need to look also at uh other ways to deploy capital as Bernie suggested over time and it's a an alternative way to deploy capital in businesses that uh we can get our head wrapped around because we do understand vertical market software.
>> Yeah, I guess my question though is would would it not be better to focus on what you're have a proven capability on which is acquiring BMS target?
>> Well, we're doing that. Uh we're not changing our at all. It's not a it's not a distraction at all for us. It's uh it's it's just incremental as as you know as time has passed. We've we for example we we never really did a lot of larger transactions in VMS and we've been able to do those as well. So it's just an evolution of uh Constellation's uh long-term strategy uh is is really and it's another another way to deploy capital and we'll do it rationally and uh we won't allow it to distract us.
>> Thank you.
The next question comes from Rick Vandasian with Offsides Macro. Please go ahead.
>> Hey, good morning. Thanks for taking my question. First, can you just give the market some color? We've talked about Saber quite a bit here, but does this only go so far as a minority stake and board seats, or is there a larger plan here? And secondly, has there been any dialogue between the both of you since you guys filed your 13D?
>> Uh, it's a larger. So, so the question would have been around the larger.
>> Yeah. No, I mean it's it's really like we we're gonna it's going to be situational. We're going to look at each of these companies situationally and uh we're really just trying to continue to uh focus on, you know, what makes sense and it will each of the PM's um investments will uh we'll we'll work with the uh company to see what makes the most sense based on the situation uh they're in. And uh
>> and that that I mean it's really going to be situational and each company has its own its own ways we can maybe add some value and we hope we can we can help and work with the company and the shareholders to improve the uh the uh the you know future of the company with a long-term lens in perspective here like it you know we're not going in to try to uh to to do something quickly where we want to think think about long term like we think about everything.
>> Okay. Like I'm not I'm not that familiar with your company. So I'm I'm just curious if this is a typical playbook that you guys typically take minority states.
>> It's you we I mean we did it earlier on um more uh in the early days and it's going to be it's going to again it was situational then too but um it's something new and we're we're going to something new in the sense that we're we sort of formalizing a strategy around it. Going to continue to uh learn as we do it and uh and uh I think it's uh again it's just another another option for us to deploy capital uh for our shareholders. Okay, one more if I could. Just big picture. Um, software SAS companies obviously under a lot of pressure lately. There's this talk of unknown terminal value in your space. Can you just give the market um, and you did this in the opening remarks? I appreciate it. Could you give the market just a little bit of a handhold on what's going on here lately? Is the market wrong on this terminal value and it's sell now ask questions later or or is this is there going to be dispersion among the players in the market some will win some will lose just any color on that would be uh very helpful I appreciate your time
>> yeah I know you know what you have to think about with us is we're very decentralized and we trust each of our businesses to sort of um you know have a strategy around this and learn from each other and our coaches push them hard on uh making sure they're they're they're moving things forward. But we don't look at it as as it's going to be a situation where as always some of our businesses do better than others um adapting to disruptions in their markets and uh we'll make sure that we uh we as a conglomerate we will move put the capital uh in the hands of the people who we feel uh will continue to invest it at at good returns for our shareholders. So we've got to we we will sort of adapt our our business as we see see changes to it as we always have and we might you know and uh so there isn't any I don't have any good solid one answer to that question but I think we have a very welldesigned organization to adjust and adapt these there isn't like one product here that's driving constellation there's there's thousands and thousands of products out there that we offer our customers that are that are run in multiple countries all over the world with with different heads of development adjusting to it. So, we'll just uh adjust as we uh as we uh see fit. I mean, any comments uh Jamal or Bernie on that. So, it's good.
>> You can't really appine on terminal values. It's being applied to publicly traded companies now. It's just there's some going to be some winners, there going to be some losers. It's all in how you use the tools to uh get closer to your customers. And as a good as a as a good conglomerate, we want to make sure we're putting the capital behind the people who are winning. And if you're losing, we'd uh we'll take your capital and put it elsewhere, which doesn't sound very nice, but it's uh that's what we'll do.
>> Have a great day. Thanks.
>> Thank you.
Excuse me. I see it's the top of the hour. Is there time for uh any other questions?
>> Sure.
Okay, we have a question from Roy Winer with BP Capital. Please go ahead.
>> Hey Mark, congrats on a good quarter and resuming the conference call. Um I wanted to ask of changes um how do you see your leadership style different than um Mark Lonard and maybe for us related question as you think about um AI implementation. Do you think this calls from perhaps a more centralized approach approach within the the company and like do you see AI as a place where you know there's more like scale advantage to learners?
>> Mhm. Well, so just a quick comment on the Mark Mark situation like you know always hard to fill Mark's shoes but he he came from being an investor uh and I came from being a product developer. Uh so uh so we came at it from two different angles and I probably uh am more product oriented which but you know which that that would be the the the only difference. We both have all very shared values and very very belief in decentralization and and buy and hold forever. So none of that has changed which is really the fundamentals of our our company. Um, so, uh, as far as a large, uh, centralizing, um, you know, development or centralizing AI tools, we're not really a big fan of that because it's going to, as soon as you make a decision like that, it means you're taking away the ability for that business leader who could be in some country somewhere working with a specific group of customers to move quickly to give them what they need. Uh because then they're going to rely on some sort of a centralized uh let's say agent or development tool, but we will share good best practices when you're sitting around. For example, last week they had an event in Denver. They're all like they're all very keen on showing up each other that they can beat them and do better. So there's a competitive uh a competitive belief within our organizations that our business units that they'll do better, but we're very hesitant to centrally control anything here. Uh we really want to measure it and share best practices fast and um you know, obviously I would talk to our our leaders throughout the world about AI uh and what they're doing about it. So um yeah, it's kind of a it's kind of an interesting time for me as a developer, as a background. I kind of enjoy it because historically it would be always hard to talk to people about uh what they're doing about products, but this gives us a little bit to this gives us something to poke away at. So, I'm uh I I have to say I'm enjoying it a little bit because I'm a big fan of listening to customers uh and and developing products for them that make sense inside of our businesses. And it's a real opportunity to do that here if they uh if they if they learn and they from each other as to what what to do uh to help to use these AI tools to uh accelerate development or you know maybe expand into other areas of the customer because they're more able to do that now than they were before.
>> Thanks everybody. As there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to Mark Miller for any closing remarks.
>> Yeah. Well, thank you very much and you know I I obviously want to thank all the employees across Constellation for all all they do and how hard they're working and and learning and adjusting uh as as uh through this uh through through AI and and what whatever else they're dealing with. And of course, thank for all thank you to all of our shareholders for uh for uh you know continuing to uh to uh invest in us and uh and uh we will we'll continue to uh update you. We're looking forward to the AGM on May 15th which uh uh looking forward to uh seeing whoever can come there and it'll be also available uh uh as a hybrid on online as well. So thank you very much and thank Bernie Jamal for helping out with this call. The conference has now concluded.