Constellation Software Inc. ($CSU)

Good morning, and welcome to Constellation Software's 2025 Fourth Quarter Results. [Operator Instructions]. Please note, this event is being recorded. On the call today, we have Mark Miller, President and COO; Jamal Baksh, CFO; and Bernie Anzarouth, CIO. Mr. Miller, please go ahead.

Thank you very much, Drew. Good morning, everyone, and thank you all for joining the call. Our press release went out earlier today. So I hope you've had a chance to at least flip through it. And I wanted to make a few remarks before we move into Q&A. So there's a real noise in the market now about AI disrupting software businesses, and we take that very seriously. But we think we're well positioned, although we're staying very disciplined about how we approach it. We've always run a learning culture at Constellation. Best practice sharing across our operating groups is 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, that last week in Denver, one of our operating groups hosted an AI accelerator program with 19 businesses and other operating groups participate alongside them. This week I joined Volaris and Jonas event is underway in the U.K. 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 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 described 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. I wanted to mention a little bit about capital allocation. And 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 larger amounts of capital, what we're calling a Permanent Engaged Minority Shareholder strategy or PEMS. Our investment in Sabre is the first meaningful expression of it. And I have to thank Mark Leonard who is helping us with this strategy and helped us explicitly on this particular investment. But the logic is straightforward. Permanent, meaning we're long-term share -- long-term holders, not traders. We'll work to ensure these companies endure as institutions. We're engaged, which means we care about governance, management incentives and capital allocation, and we'll actively work to have an influence where we think it creates value. Minority, we're not acquiring 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, the fundamentals haven't changed for me. It's been like 3 decades with Constellation. You've 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, 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 from my opening remarks, and I wanted Drew to allow some questions now, if you could run that for us.

[Operator Instructions] The first question comes from Kevin McVeigh with UBS.

Very, very helpful. I guess with -- just the more focus on AI. Mark, does that involve more reinvestment back into the business? A broader ecosystem of partners? And just -- I know there's a lot here, but just any thoughts as to monetization in terms of consumption across your clients, just broader stroke, again, very, very helpful comments.

I mean it's really early days on that. And our businesses, like always, are -- they're probably spending more time and money on this than they've spent on for a while on any specific best practice. So they're looking for opportunities with inside of their customer base to use AI as well as to drive revenues. As well as, of course, being able to develop products faster and quicker and provide customer solutions 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 network for each of those customers, 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. Explicitly, we don't really control that from 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 in the sort of decentralized network of companies we have.

The next question comes from Thanos Moschopoulos with BMO Capital.

Mark, to what extent have you started to see some of your businesses capturing incremental revenue from AR relieved capabilities? So be that in the form of new modules, usage-based pricing or customer-funded R&D. Is it very early days? Or are you starting to see examples of that?

Yes, really isn't -- we haven't really seen a lot of new revenues from that, right, so far. And on the converse, we haven't seen really much -- no loss of revenues from it, at this point. So it's been really, really just -- we're really just in the process of just bringing everybody up to speed and making sure they can use the tools, and they know as much as they can across our businesses.

Great. And with respect to the PEM strategy, is it safe to assume that all else equal, you'd still rather own a business outright? Or are you in difference so long as you're investing in the business with the minority stake where you trust management, you like the dynamics of the vertical and...

Yes, we're happy -- we're happy to have just to be a long-term shareholder in that business and work with their team on trying to make that a better business over time. So it's really sort of fits the Constellation way of doing things, right? We buy and hold forever, and we want to work with these companies in a similar fashion and hope to make them better. And we're really not out there to acquire them. We're out there to try to collaborate with them and their shareholders and make them better businesses. So I'm pretty excited about it. I think it's a new thing, and we'll keep updating you as we learn more as we continue to implement PEMS, hopefully, more often.

The next questioner comes from -- just to verify, [ Frank Stripico ], private investor. Okay, continuing. The next question comes from Stephanie Price with CIBC.

In the current environment, just curious about Constellation's ability to kind of push through price increases. In the past, you've been able to increase maintenance prices on acquisition and then maybe do annual price increases. Like, have customers been pushing back on this in the current environment just given AI and kind of the uncertainty out there? And how do you think the strategy evolves over time?

I have no feedback on that from our business. So it's really -- there's -- I've seen no changes from that at all, Stephanie.

Okay. Okay. And then just in terms of the valuation of Constellation right now. I assume you've run the math on putting an NCIB in place. How do you kind of think about an NCIB here and buying back Constellation shares versus going out and continuing the M&A strategy?

Great question. I'll toss it over to Jamal.

Yes. So we have created a subcommittee within the Board to look at this, and there is a number. 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 reassess. But at this point, we are not looking to put in place an NCIB.

Okay. Perfect. And then maybe just one more follow-up just on the PEM strategy and the minority position versus a -- a right sale or acquisition. Like just trying to struggling a little bit around why a minority versus a full acquisition just similar to Thanos' question earlier.

Sure. It's Bernie. Some of these businesses are so large. But at this point, we wouldn't be in a position to make a full acquisition. So -- and our cash flow is increasing every year, and we've got to find a home for it. So we're continuing on our strategy for full acquisitions. And we've got an extra capital to use on PEMS and so we're going to use a combination of the two to allocate our capital.

The next question comes from Jerome Dubreuil with Desjardins.

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 any businesses for disruption risk. But I'm talking maybe more in general, if there's been changes in assumptions?

The assumptions are what we see on a company-by-company basis. It's not general across the board. But what we do is we qualify prospects as we've always done. This time with respect to AI disruption 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 it, short term and long term. So really, nothing has changed, except that we do look at it through the lens of what AI could do to the business, and we apply what we've done internally to our own businesses to the businesses that we're looking at for acquisition. And if there's upside, we apply that. And if there's downside, we apply that, too. And it all goes into the model.

Yes, we're obviously continuously learning from our existing businesses, and we'll apply any of the lessons we learned to anything we're looking at, any modeling we're doing for future investments.

That's great. And as the market is trying to assess how robust the portfolio is, do you know or can you share what percentage of the company's revenue originates, maybe from either public sector clients or maybe software requiring regulatory approvals?

Yes. We don't differentiate it internally that way. So I don't have that metric for you. But -- but again, going back to what Mark said, I don't think that is going to be what protects our companies, right? And 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's not a key measure for us.

The next question comes from David Kwan with TD Cowen.

Mark, just wondering, as you look at deploying AI internally, should we expect any kind of margin improvements related to the productivity gains that you're seeing, probably most notably in R&D? Or are you really kind of investing these gains into accelerating the product roadmap?

Yes. We're really investing into accelerating product road maps, where our businesses have started using AI to its full potential. So I think that would -- that's our focus, because when we're buying hold forever and we're trying to increase our position inside the customers by providing them more tools that help them run their businesses, whatever those might be. So our preference would be to continue to focus on that. And where there's not opportunity to do that, you're going to like always try to focus on increasing productivity through whatever means you can. Like it's a great measure for an individual business. Very hard to look at overall Constellation now when you're looking at that. You kind of look at look at it on a business-by-business basis productivity.

No, that's helpful. And on the M&A front, pretty strong start to the year over $800 million in closed and pending deals there. Were there many other kind of larger deals like Synchronoss 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, but we don't get into detail with respect to each of the businesses that we've acquired.

Okay. And then one last question. Just want 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 you're doing here with Sabre, just comparing to what you might be seeing on the private company side as it relates to valuations?

Nothing has really changed. We're looking at both, as we said earlier, private companies and public companies, both for acquisition and for PEMS. And we haven't really seen on the private side, any change in pricing so far, and competition for those businesses is still very strong. So nothing's changed there. There's just been a little bit of change in pricing for publicly traded companies, as you well know. And so there might be some opportunities there.

The next question comes from Paul Treiber with RBC Capital.

A couple of questions on PEMS. Do you view a single Board seat as sufficient from a governance point of view when making a minority equity investment? And then what's the recourse if the company is well entrenched in a suboptimal strategy? What's your recourse in that scenario?

Yes, I think it's going to be situational. We're just going to have to determine what to do based on the situation. I don't think they will all be the same, and we'll just adjust accordingly based on what -- yes, what we're dealing with.

And a second question related to PEMS is, how does the IRR on PEMS rank in general versus other capital deployment strategies?

We're using the same measure to look at PEMS versus our own acquisition. So we're still maintaining that discipline, and we haven't veered from that at all.

And then just one last question just on PEMS. I mean you mentioned buy and hold forever, but obviously, these are public investments, so there is liquidity. Are -- as part of the strategy, is it contemplated that there could be an exit at some point for whatever reason?

I mean -- preference would be to hold on, but it...

Yes, the preference would be to hold on forever, but you never say never, and things could change. But for the time being, our expectation is to hold forever, yes.

The next question comes from Richard Tse with National Bank.

This is Mike Stevens on for Rich. I just wanted to touch on -- you guys have discussed style drift and the evolution of the model. Just wondering if there's any recent examples or updates that you wanted to highlight on that concept?

Not really. It's really the same modeling that we've done in the past, and we're just looking at a closer view of what AI could do to these businesses that we're looking at. And really, there's not much more to add.

Okay. And then on the Altera acquisition, obviously, it's faced some expected customer attrition. It's good to see the positive recurring organic growth in the quarter. Just wondering, any update on how that business is going and whether organic as a whole can kind of either stop declining or turn positive at some point?

Yes. The business is running pretty close to what the investment thesis was, from a returns perspective. It was never contemplated that this would be a strong organic growing business, and that hasn't changed either. But again, with AI and new things to come to market possibly. But no. But don't look at the current quarter as a trend, like it's still expected that this is going to be a -- it's a tough market that this business competes in. So that thesis has not changed.

The next question comes from Samad Samana with Jefferies.

Maybe first just -- the organic growth 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.

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 that 5% FX adjusted maintenance organic growth or recurring organic growth number, I continue to think is a good number for future organic growth. From a total organic growth, what was it, like 2%, 3%, which again is pretty much in line with prior years. So nothing's really changed.

Understood. And then on the M&A strategy, I guess, the word destruction and the impact of AI has come up on this call multiple times. I'm curious if you're seeing a change on the sell side in terms of R, are you seeing private companies either more willing to sell in this environment where there are more uncertainties? 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.

No. To date, we haven't seen any changes. Expectations are still the same. Volume is still the same, hasn't really changed much. I mean we're using tools to score leads in our funnel, but really, that hasn't really changed much so far because it's still early days in those tools that we're using. But other than that, expectations are still the same. They haven't dropped despite what's going on in the markets.

The next question comes from Keith Lambert, a private investor.

My question is on the new PEMS capital deployment strategy. Is this change in the investment universe driven by either slowing availability of VMS, traditional VMS targets? Or is it driven by, in any way, concerns that management have the long-term value of terminal values of BMS business due to AI?

No, it's not driven by AI. It's driven by -- we like the company, and we thought it was a good investment for our shareholders. And we do need to look also at other ways to deploy capital, as Bernie suggested over time, and it's an alternative way to deploy capital businesses that we can get our head wrapped around because we do understand vertical market software.

Yes. But I guess my question though is, would it not be better to focus on what you have a proven capability on, which is acquiring VMS target?

We're doing that. We're not changing our -- at all. It's not a distraction at all for us. It's just incremental. As time has passed, we've -- we -- for example, 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 Constellation's long-term strategy, is really -- and it's another way to deploy capital, and we'll do it rationally, and we won't allow it to distract us.

The next question comes from Rick Bandazian with Offsides Macro.

First, can you just give the market some color? We've talked about Sabre quite a bit here, but does this only go so far as a minority stake and Board seats? Or is there are a larger plan here? And secondly, has there been any dialogue between the both of you since you guys filed your 13D?

It's larger -- sorry, the question would have been around the large -- Yes. No. I mean it's really like we're going to -- it's going to be situational. We're going to look at each of these companies situationally, and we're really just trying to continue to focus on what makes sense, and it will -- each of the PEMS investments. We'll work with the company to see what makes the most sense based on the situation they're in. And that -- I mean, it's really going to be situational. And each company has its own ways. We can maybe add some value, and we hope we can help and work with the company and the shareholders to improve the future of the company with those long-term lens in perspective here, like we're not going in to try to do something quickly where we want to think about long term like we think about everything.

Okay. Like I'm not that familiar with your company. So I'm just curious if this is a typical playbook that you guys typically take minority stakes?

It's -- I mean, we did it earlier on more in the early days. And it's going to be -- it's going to get with situational then, too. But it's something new, and we're going to -- something new in the sense that we were sort of formalizing a strategy around it. We're going to continue to learn as we do it. And I think it's -- again, it's just another option for us to deploy capital for our shareholders.

Okay. One more, if I could. Just big picture, software SaaS 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 -- 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 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 very helpful.

Yes. I know -- what you have to think about with us is we're very decentralized, and we trust each of our businesses to sort of have a strategy around this and learn from each other, and our coaches pushed them hard on making sure they're moving things forward. But we don't look at it as it's going to be a situation where, as always, some of our businesses do better than others adapting to disruptions in their markets. And we'll make sure that we, as a conglomerate, we will put the capital in the hands of the people who we feel will continue to invest at good returns for our shareholders. So we've got a -- we will sort of adapt our business as we see changes to it as we always have, and we might -- and so there isn't any -- I don't have any good solid one answer to that question, but I think we have a very well-designed organization to adjust and adapt. There isn't like one product here that's driving Constellation. There's thousands and thousands of products out there that we offer our customers that are run in multiple countries all over the world with different heads of development adjusting to it. So we'll just adjust as we see fit. I mean any comments, Jamal or Bernie, on that?

We can't really opine on terminal values that's being applied to publicly traded companies now. It's just there are going to be some winners, there are going to be some losers. It's all in how you use the tools to get closer to your customers.

And 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'll take your capital and put it elsewhere, which doesn't sound very nice, but that's what we'll do.

Excuse me. I see it's the top of the hour. Is there time for any other questions?

Sure.

Okay. We have a question from Roy Weiner with BP Capital.

Mark, congrats on a good quarter and resuming the conference call. I wanted to ask of changes. How do you see your leadership style different than Mark Leonard? And then maybe perhaps related question, as you think about AI implementation, do you think this calls some, perhaps a more centralized approach within the company? And like do you see AI as a place where there's more like scale advantage to large players?

Well, so just a quick comment on the Mark situation, like always hard to fill Mark's shoes, but he came from being an investor, and I came from being a product developer. So we came at it from two different angles. And I probably am more product oriented, which -- that would be the only difference. We both have all very shared values and very, very belief in decentralization and buy and hold forever. So none of that has changed, which is really the fundamentals of our company. So, as far as a large centralizing 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 because then they're going to rely on some sort of a centralized, let's say, agent or development tool, but we will share 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 it's 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. We really want to measure it and share best practices fast. And obviously, I would talk to our leaders throughout the world about AI and what they're doing about it. So that's kind of -- 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 what they're doing about products, but this gives us a little bit -- it is something to poke away at. So I'm -- I have to say I'm enjoying it a little bit because I'm a big fan of listening to customers and developing products for them that makes sense inside of our businesses. And so a real opportunity to do that here if they learn and they -- from each other as to what to do -- to help to use these AI tools to accelerate development or maybe expand into other areas of the customer because they're more able to do that now than they were before.

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.

Yes. Well, thank you very much. And I obviously want to thank all the employees across Constellation for all they do and how hard they're working and learning and adjusting as through this -- through AI and whatever else they're dealing with. And of course, thanks for all -- thank you to all of our shareholders for continuing to invest in us, and we will continue to update you. We're looking forward to the AGM on May 15, which -- looking forward to seeing whoever can come there, and it will be also available as a hybrid online as well. So thank you very much, and thank you, Bernie and Jamal, for helping out with this call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.