Constellation Software's 2026 First Quarter Conference Call $CSU $CNSWF

Ajouté : 2026-05-14

[00:00:02]Good day and welcome to the Constellation Software Inc. conference call and webcast conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

[00:00:17]After today's presentation, there will be an opportunity to ask question. To ask a question, you may press star then one on your touchstone phone. To draw a question, please press star then two.

[00:00:31]Please note this event is being recorded. I would now like to turn the conference over to Mark Miller, president. Please go ahead.

[00:00:40]>> Uh good morning everyone. I just wanted to uh start off uh by reminding everyone uh we have the uh annual general meeting coming up uh this Friday and uh we're uh hoping today to sort take some quarterly questions on the financial results uh for Q1 and so thank you all for attending and I have both uh Bernie and Jamal with me to help answer any of those questions. So over to you.

[00:01:11]Thank you.

[00:01:13]We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speaker phone, 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 two. At this time, we will pause momentarily to assemble a roster.

[00:01:48]The first question comes from Thomas with Captain.

[00:01:54]>> Hi, good morning. Um maybe one for Jamal to start. Um so just on the margins for the quarter, I know you have the Q1 payroll taxes and that there were some synchronous related costs at Lumen. Um is there anything else that you might call out in terms of um the margin dynamic this quarter or or nothing unusual of note?

[00:02:15]Yeah, I mean there were some a couple other uh acquisitions that were a bit of a drag on on margins like the Q1 cohort of acquisitions themselves were actually a negative margin for the quarter which you know we totally plan to improve them and it's a typical thing where we we improved margins over time but it was a bit of a bigger drag this quarter than than previous uh quarters. Um but if you look down the like the um line items of what's impacting margins you can also see hardware uh margins are slightly down. Again that's not one of our core products but but again it was 43% margins versus 46 and at about a 20 basis point impact on margins. uh professional services again, you know, if we're you making acquisitions and using uh thirdparty uh services and then also um on the sorry professional services and then also on thirdparty um maintenance you can see that's up a bit as well which again nothing material to call out but as we use a lot more of these thirdparty providers and um you know um for for coding etc like you'd expect that to to pop up a little bit as well.

[00:03:24]Great. Um, and then one for Mark. Um, now that it's been a few more weeks into the SAS apocalypse, um, have you been starting to see private market valuations for larger assets come down or is that, um, not a dynamic that that's transpired just as he has?

[00:03:39]>> Not really. Bernie and I were just chatting about it before the call and he was saying maybe slightly, but Bernie, do you want to elaborate on that at all?

[00:03:46]But not really.

[00:03:47]>> Not really. It's really at at the high end we could see it maybe plateau a little bit if not declining slightly in terms of valuations but at the low end where we play uh with most of our acquisitions uh not at all.

[00:04:02]>> Great. I'll pass. Thank you.

[00:04:09]>> The next question comes from Stephanie Price with CIBC.

[00:04:15]>> Good morning. Thank you. Um, just to that morning, just to that comment about the payroll taxes on on the last question, just curious if you've been discussing any changes to constellations bonus plan just given the public market reset. Um, and maybe related how you think about employee retention in the current environment.

[00:04:34]>> Yes, we haven't made any changes to the plan and and I mean I think I me personally I say this is a great buying opportunity, right? I don't think we need to change the plan as a result of that. So the formulas for the core management team stays the same. We still buy shares in the market same way we always have. Um and again we believe in the company and so yeah there there no there haven't been any changes to the plan.

[00:04:58]>> Okay great. And then Constellation typically sees kind of larger deals in more difficult environments. I know this is a a very interesting ton right now but can you talk a little bit about the large deal pipeline and the appetite for for bigger deals at this point?

[00:05:18]Well, we're invited to a lot of um uh auctions that are out there by the investment bankers and sometimes we're able to play, sometimes we're not. Um valuations are still high. Um so we try to get what we can, but competition is still fierce. So, um, yeah, the the only thing I'd add to Stephanie to that is that I think we also have better talent to work on those larger transactions than we would have had, let's say, 5 to 10 years ago. And you need it because they're they're complicated. They're there's some hair on them and they're they're usually spread out over multiple geographies and sometimes are carveouts from large companies and uh having experienced people who are capable of doing that is probably something we didn't have. So that helps us a bit but again it does come down to valuation for us and uh I do think we're on the field uh at least more let's say playing playing than trying to win those than we maybe we were 5 to 10 years ago.

[00:06:18]>> It's great color. Thank you.

[00:06:23]>> Thank you. The next question comes from Jeron Troy with Tess Chardens.

[00:06:30]>> Hey good morning. Thanks for taking my question. So, uh just want to ask about the broader software strategy there.

[00:06:37]We've seen Salesforce launch a headless solution. Uh they're focusing on offering API access that can be leveraged by by agents. I I understand horizontal and vertical solutions might be different in terms of how they will approach their integration in an AI world. But do you expect this the strategy you could take this one as well or maybe VMS is so different that you don't need or you don't anticipate as much change to the UI paradigm over time?

[00:07:05]>> Well, it's it's it's like I would say it always depends on which business you're in inside of Constellation. You know, we have many many businesses uh and some will have to build agents and some will have to modify the user interfaces, but many many won't. I mean customers are obviously hesitant to change their user experience because it's something that uh their their their their team uses all day to run their business right so um changing user interface um is an a way the user inter interact with the software is a big decision for a client and they take it under you know take take some consideration before they do that. uh and and one of the things that I always find in talking about artificial intelligence and the changes in technology is you know essentially um you have to convince customers to change their user experience as well which in some cases it requires budgeting approvals uh multiple levels of discussion inside of that customer for our mid to largesiz customers in particular. So, so it's, you know, it will evolve as uh as the as the market evolves and we just make sure our people are uh as as uh as educated as they can be on these new ways of uh building software uh and adjusting to those changes and we'll talk a little bit more about that at the ATM as well. Get a chance to talk about some real examples on Friday.

[00:08:30]>> That's great. Thanks. And then second one uh another one on the evolution of the software model going forward on for deployed engineering. This something you you believe in. Could it be initially maybe bringing a bit more cost when when you kind of adjust to the new model and have some be started leveraging the strategy more?

[00:08:51]Uh definitely. Yeah, there'll be some more cost in in doing that initially because you're going to be kind of retooling where where they need to do it and some are doing it in advance just to make make sure that if there are some changes inside of their markets and new needs for uh new ways of interacting with with our products. They're using it. are also using it to also try to expand inside of the customers as well, which is uh which is uh what I'm hoping to see more of for our more um our more let's say close to customer innovative uh businesses across the world that they use it to step into other areas of the customer and interact with them uh more because we do have uh uh because we're so vertical we have so many different teams uh in this decentralized environment of constellation who are out really close to customers in many countries around the world in many different markets trying to figure out how to make customers uh businesses run better.

[00:09:49]>> Great. Thank you.

[00:09:53]>> The next question comes from David Quan with TD Coin.

[00:09:59]>> Thank you. Uh good morning. I was wondering if you could talk about the first how the first couple months have gone uh with Saber. um you know how are you working with their leadership team in terms of stren strengthening their business and and how receptive I guess and cooperative have they been?

[00:10:15]>> Yeah, I I think um I think generically we really don't want to comment on Saber. Um David, it's just something that uh uh yeah is left to our our we have a representative on the board there and uh the conversations between uh um Saber and our our uh our director are I think going to be kept uh p private and confidential.

[00:10:40]>> Okay, I understand. Um from an M& standpoint, obviously you had a pretty strong start to the year and and also for for Q2. Um, as it relates to the Q2 to date, uh, closing pending deals, um, other than the Derby soft deal, are there kind of any larger, chunkier deals that I guess weren't large enough for Constellation to to press release, but maybe were much larger than your typical run-of-the-mill deal?

[00:11:07]>> Yeah, there were a couple of larger ones, I think. Yeah, we're not going to disclose the amounts, but there was a couple larger ones and a whole bunch of small ones. Yeah, >> great.

[00:11:18]>> Yeah.

[00:11:20]>> Okay.

[00:11:20]>> Thanks, Joel. Um, and then, um, are you guys just seeing anything different in the M&A environment that's allowed you to be this active on the M&A front over the last few quarters you hear, or is it really just kind of like the es and flows of your M&A strategy in the overall market and you're just kind of going through a good patch here?

[00:11:38]>> Yeah, it really is the latter. um it just comes and goes up and down um as the market evolves. We don't see more transactions than usual. We don't see less transactions than usual. It's just the same amount uh across the market as we've always seen. So, nothing nothing's changed. There's a real disconnect between the test apocalypse uh publicly traded stuff and and and private markets. Um but um yeah, it's it's just es and flow of the market >> and it's like any you know Sorry. Sorry, David. Go ahead.

[00:12:11]>> No, I was just wondering like are you seeing maybe changes in the behavior of the the targets, the sellers, um, you know, particularly given what's going on with AI that maybe being part of the constellation family is a better better place to be or is there anything else that's maybe trying this this elevated activity?

[00:12:29]>> No, no, I think we remain patient. We deploy capital very very carefully and uh I think we as I as I think I said to Stephanie earlier on I think we do have um a bit more talent who are able to um think about those larger transactions than we previously did that might give us a little bit of a better coverage and close rate on some of those but but it's still yeah is it the world has not changed uh from our uh our our viewpoint um it has not so we'll just continue to uh uh plug away at this problem and and uh keep keep working on it.

[00:13:08]>> I appreciate the color and look forward to seeing you guys on on Friday.

[00:13:12]>> Yeah, thank you. Looking forward to seeing you too.

[00:13:17]>> The next question comes from Graham Roads with Long River Investment Partners.

[00:13:25]>> Good morning everyone. Can you hear me?

[00:13:27]>> Yeah, hear you perfectly.

[00:13:30]Excellent. I'm calling all the way from Hong Kong, so I just wanted to to make sure. Um, and I'm I'm calling to ask uh first and foremost, as someone looking from the outside into your business, I'm trying to think about how to categorize the portfolio of companies that make up consolation software and the threat that AI might pose to them. And I'm thinking, you know, there's maybe like a lowrisk category where we have businesses built around um uh uh uh things like mission critical systems, systems of action. And then maybe there's a higher risk segment of the portfolio which is more like marketing or media generation or website construction and that kind of thing. And I was wondering if you you guys broadly agree with that class classification or categorization. And then maybe as well if you could comment at all on whether the higher risk category makes up a material part of your revenue and FCF, HUS and that kind of thing.

[00:14:21]Yeah, I mean it's pretty it's pretty broad the places we're in and you know when you're looking at how defensible a particular business is in any environment considering whether it was SAS or uh you know threats to because of mobile computing came out or and now because of AI it's I always say it's a beauty is in the eye of the beholder situation. You can kind of try to say well this business is more at risk because of this. Um there's a couple of things that you need to really understand about our businesses is sometimes they're they're even though they might be in um more let's say I consider sort of horizontalesque if you want to call it and you think more vulnerable places it depends on the addressable market size that of that particular niche and how defensible it is and how close they are to their customers. So uh and then on the other spectrum you have ones that are you know are generally have lots of departments involved and and they appear to be more sticky as well because of that. So it's very difficult to to do that in any sort of quantitative way. Uh it really depends on the leaders of that business.

[00:15:25]We're so decentralized with hundreds and hundreds of businesses around the world.

[00:15:29]Depends on the leaders of that business to just make sure that they care of the niche they're in. And uh we're generally not taking on very large uh horizontal companies in many of our nichy verticals because uh nichy place because that's sort of how we defend our market position by being small and intimate with you know dozens or hundreds of customers not trying to have tens of thousands of customers. So I don't know if that makes sense to you and where you're going to get attacked why AI is, you know, if if it is a problem is going to be maybe where you least expect it.

[00:16:03]You'd expect anytime there's a high churn, low attrition uh high attrition business, maybe more so, but that isn't a large percentage of our of our recurring revenues. Uh anyways, um yeah, it's it's just a difficult question to answer. You can cut it in so many different ways. uh we just uh will depend on our leaders to find the best uh solutions for our companies in each uh each of the situation they're in.

[00:16:30]>> Thanks. That's really helpful. Um a followup would be just in the last couple of months really since the start of the year with the launch of uh Polar Code and Open Claw and and Aentic uh AI.

[00:16:41]>> Yeah.

[00:16:41]>> Um I was wondering if that's changed your perspective at all on the competitive risk. Um, and if not, like what would it take for you guys to see this less as something that can enhance productivity and more as something which can can be a direct threat or even an indirect on like pricing and your ability to sell like other other modules and uh that kind of thing.

[00:17:02]>> Yeah. You know, a pricing like like I always say, you know, the way we lose customers is a they get um essentially go out of business which happens. You can't do much about that. they uh they're acquired by other customers, particularly larger customers. That's another way you lose them. You can't do much about that other than you hope you you the other customer that buys them is your customer. Um pricing is the third and pricing rarely we lose customers on pricing because the switching is painful for customers and it's working and they're using it and you know retraining all their users and uh you know adapting the interfaces to make work make make it harder. where you lose customers is when you can provide uh when the competitor can provide something much different than you can provide that the customer really needs and that's you know that's where I always worry the most just generically forgetting about AI. So that's kind of how how I sort of look at it. Now as far as these tools um you know we're all using them internally and I've been fortunate enough to travel around I think each week I've met with a different group of cost constellation different location and just see what they're what they're using and what they're doing and they're you know they're adapting to these tools using them internally to help them run their portfolios their businesses better. uh but they're also using them to try to develop more software to actually expand our presence inside of customers uh more so than defend our presence is is kind of the thinking but it's going to depend on our business. So I I I look at these tools as an opportunity to do more for customers uh not do what we currently do more efficiently although that will happen in some cases.

[00:18:39]Okay, that's really helpful. And final question for me is just on pens, um, which you guys introduced last quarter, and I was wondering when you're thinking about making an investment, a minority investment, do you have a different hurdle rate for that than you would for your your standard uh, wholly owned M&A?

[00:18:56]And then related to that, you know, for a very long time, we've used free cash flow available to shareholders as, I guess, the yard stick of our company's progress. And I wonder if these minority investments grow grow over time um would you suggest that we we start thinking about something else to um anchor valuations on or or the company's progress? Thank you.

[00:19:18]>> Yeah. So in terms of pens you're the hurdle rate is the same. However the the um the modeling in terms of you know the waiting of worst case versus winner case are going to be be much more um dispersed. and so will probably result in a lower price but but the hurdle rate is the same um in terms of going forward and the free cash flow available the shareholder metric that is something we've been discussing and and internally the way and and many investors know this the way I we bonus ourselves internally is is something called like it's an economic net income it was very close to what we used to have as adjusted net income and for these types of pens investments we would actually look at our prata share of their ultimate cash flow which you know doesn't show up in our current statements. So it's something we're thinking through right now to try to maybe give you investors the same metric that we're using internally. Um and again I haven't finalized it is going to be a discussion on how we what we present but it is yeah I I understand your point that the free cash flow available shareholder metric is sort of it doesn't pick up anything um relating to these these PEM investments for the most part.

[00:20:29]>> Thanks guys that's been very helpful. I appreciate it a lot.

[00:20:32]Thank you.

[00:20:35]>> Thank you. Once again, if you have a question, please press star then one.

[00:20:41]The next question comes from Paul Triber with RBC Capital Markets.

[00:20:48]>> Yeah, thanks and good morning. Just Mark, opened question, but just overall, you know, how would you characterize the the quarter? You know, if you could call out what you think was better than expected or what maybe improved versus last couple quarters. And then conversely, you know, what you think uh you know, needs some improvement.

[00:21:06]>> M&A obviously was was was positive because, you know, I'd rather be getting capital out now rather than the end of the year. Uh it's sort of like any business, you'd rather rather get get more capital out sooner. um the you know from a performance issue uh you know we didn't uh didn't uh weren't uh we were expecting the you know the uh adjustments to ITAB because of the uh you know the acquisitions we made so I don't think that was unexpected and I think we that's why we we actually explained exactly how that happened um I continue to pressure our businesses on organic growth generally Paul I really would like to see them doing a better job on organic growth uh across the And I think this is an opportunity to push them harder on that uh with the uh advent of some tools to allow you to do things a little bit faster and a little bit better. So um but that's a generic concern that isn't just in the quarter.

[00:22:00]So maybe I've uh I've missed missed not not answered your question. So other than that, yeah Bernie Jamal, anything to add to uh Paul's question?

[00:22:12]>> I say it's a pretty big standard quarter. Um so it was expected like you know organic growth in line with you know historical norms.

[00:22:19]>> Um all of these initiatives I mean we're saying that we're doing a lot but yeah but it wasn't an expectation that we're going to translate that into revenue growth right away. It's going to take time right and then you have to sell it into your customer etc. So, so that that was always expected to take take some time.

[00:22:35]>> And and just to reiterate what you said about uh M&A, happy that um the first quarter and uh and the bit um seem to be going quite well. Uh hopefully we can continue throughout the year.

[00:22:48]>> Yeah, >> that's that's helpful. The um you second question, Martin, you've been in the president role for six months, probably just over six months.

[00:22:57]you know any um you know leadership style changes that you're bringing to the role and then in particular you know how how has been interacting and managing you know the broader operating group leaders versus your your prior role at at Boleris >> they've been great Paul like just terrific uh you know we had uh we had a board meeting yesterday out near the airport and uh you know it just the you know all the operating group all the operating group leaders are you know after the meeting are sitting together working on things and talking about how we can improve. So I I'm I'm just super happy with the the team across uh across constellation. Um and uh I think uh the collaboration is uh at an all-time high between the operating group leaders and everybody's very engaged and uh working closely together. I'd have to say um sharing best practices at a high velocity around anything we're learning uh about for example AI and uh because there's just so many ways to combat that problem. So I'm I'm super happy Paul with things are at >> all right thanks for taking the questions.

[00:24:06]>> Thank you.

[00:24:08]This concludes our question and answer session. I would like to turn the conference back over to Mark Miller for any closing remarks.

[00:24:16]>> Yeah, just wanted to thank everybody for for dialing in and we're really looking forward to seeing everybody at the AGM and of course thanking all of our team across the world for uh helping us deliver Q1. So uh uh over uh we'll uh we'll see everybody on Friday that makes it to the AGM and uh thank you Bernie Jamal as well. Over and out.

[00:24:35]>> Thank you.

[00:24:36]>> Yes.

[00:24:38]>> Thank you. The conference has now concluded. Thank you for attending today's presentation.