Constellation Software (TSX:CSU) reported third-quarter financial results on Monday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Constellation Software reported Q3 revenue of $3.5 billion, up 19%, with organic growth at 2%. Recurring revenue grew 4%, attributed to maintenance and recurring services, despite a decline in licenses and professional services.
The U.S. healthcare businesses saw a 10% decline, primarily due to acquisitions anticipated to shrink, influencing the overall performance. Excluding these, the healthcare segment would have been down 3%.
Cash from operations grew 5% to $717 million, while free cash flow available to shareholders decreased by 16% due to revaluation of obligations related to minority partners.
AI initiatives are actively being pursued across the company’s 1600 businesses, with a focus on best practice sharing, though the financial impact remains immaterial currently.
M&A activity continues robustly, supported by the company’s enhanced capability to handle larger transactions, although competition in the software acquisition space remains high.
Verticalization of businesses is mostly complete, with over half of revenue now coming from verticalized segments.
Management indicated no significant changes in client behavior regarding AI and stated that acquisition targets outside traditional VMS are considered with higher risk scenarios.
Full Transcript
OPERATOR
Good day and welcome to the Constellation Software 2026 Third Quarter Results Conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two.
Please note this event is being recorded. I would now like to turn the conference over to Mr. Mark Miller, President and COO. Please go ahead, sir.
Mark Miller (President and COO)
Well, good morning, everyone. Looking forward to chatting through our Q3 results with you and taking some questions. So I’ll keep some opening remarks short and then we’ll move into questions. Just as you could see from our release, revenue for the quarter was 3.5 billion, which was up 19%, organic growth was 2%. And I wanted to spend a little bit of time just sort of speaking to how we think about organic growth and what’s underneath that 2%, because in itself it doesn’t tell you the whole story.
The measure we actually care a lot about is watching maintenance and other recurring revenue. And that’s important because that’s where the customer base shows up and how our customers are continuing to use our systems over time. So something in my decades at Constellation, I spent a lot of time thinking about and watching and our maintenance and recurring revenue organic growth was 4% in the quarter. And the gap between the 2%, which was the overall organic growth and our recurring revenue organic growth was pretty much because licenses were down 17%, which is licenses are pretty immaterial to us these days.
And professional services were down 5%. And both of those numbers are fairly lumpy. So the actual 4% recurring revenue growth in the quarter was a reasonable outcome for us. Underneath the number, it’s important you understand a little bit about some of the businesses we have in there. And if you look to the MD&A, you can sort of see that if you took out our U.S. healthcare businesses, and in particular Altera, maintenance and recurring revenue growth would have been about 5%, which is pretty much a similar outcome to what we’ve had since 2016, which is a series that we published for you in the MD&A, and it generally varied between 5 and 7%.
So it’s pretty normal quarter for us and pretty much every year, but I think one in 2020 where it was 1%. So we thought it’d be useful to put that table in for you so you could actually see and understand that healthcare is an area where we have seen more shrinkage than we normally would. And there’s been a lot of consolidation in that space. In fact, our whole U.S. healthcare businesses were down by about 10% in the quarter against the 1% last quarter.
And in actuality, most of that step down was two new businesses we acquired that we knew when we acquired them were going to shrink. And actually the way we measure shrinkage in our business organic growth, is we take into account the businesses prior to our ownership of them. So we, we really weren’t even responsible for the shrinkage of those particular businesses. And we’re working really hard with all of our healthcare team to make sure that our businesses do provide great service to their customers and hopefully will organically grow at some point.
But it’s pretty important to understand that we did model that into the investment thesis. And all of our HACSE healthcare investments that I’ve mentioned today are expected to perform to IRR expectations that we underwrote. And including the two where we’ve seen that shrinkage in the quarter, excluding the two businesses that we recently acquired, the healthcare group would have been down about 3% overall. So not as bad. Now, I thought it’d be useful to talk a little bit about cash. Cash from operations was 717 million, which was really up 5%. Now we use a calculation called free cash flow available to shareholders and that was at 443 million, which was down 16%. But I think it’s important that I explain to you how that actually works. For those of you who do not follow the mechanics. We have an obligation to the minority partners in Topicus and we have to revalue it every quarter.
Its value moves with two things. Topicus’s recurring revenue and the polar shares Topicus holds in a company called Company Signity and a Seiko. When either goes up, the obligation goes up and we deduct that reevaluation arriving at free cash flow available to shareholders. The quarter charge was 117 million. A year ago it was 16 million. Hold that one line flat. And free cash flow was up about 3%. And of this quarter’s 117 million, roughly 77 million is simply the Signity and a Seiko share prices rising.
The rest is Topicus’s recurring revenue growing. So the charge went up because Topicus grew and because something we own became more valuable. It is non-cash in the period and I’m not going to tell you it is meaningless because there is a real obligation sitting behind it. But it is not a deterioration in the business. And I didn’t want anyone reading down who read the 16% down and concluding that’s what it was. One last thing is I would expect that we might get asked about AI today. On AI, there is an enormous amount of work going on across our businesses and nearly all the learning is happening inside of them rather than at head office. We have more than 1600 businesses across the world and dozens and dozens of vertical markets and many of them are running experiments right now in their products and how they support their customers and how they write software.
Some of those experiments are already paying for themselves and plenty of them are not. The part I would actually like to point out to you is the best practice sharing, and I’ve mentioned this before, that has been the engine of this company for three decades. Managers teaching each other what worked and more usually what didn’t. And I’ve never seen it run as hard as it is running on this. A company with one product or a handful of products runs some experiments at one time.
We have many, many, many running at once and the results travel. That is a real advantage, I would want you to understand, and it’s not one that you can buy. So I’m very, very proud of the team and how hard they’re working on AI. I would describe us as experimenting hard, running quickly and still early. The spend is not currently material to our results and I’m not going to give you a forecast. What I can tell you is that nobody here is waiting to be told what to do about it.
With that, we’ll take your questions.
OPERATOR
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are 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. And our first question for today will come from Doug Taylor with National Bank. Please go ahead.
Doug Taylor (Analyst at National Bank)
Yes, thank you. And good morning. Question for Mark. I think you articulated the Altera situation well last quarter, and I appreciate the added disclosure about the broader U.S. Healthcare unit, even excluding Altera. I know you said Altera was expected to be a managed sort of runoff for the next couple of years. Does that same timeline and discussion apply to the broader challenges with the U.S. healthcare unit?
Mark Miller (President and COO)
I mean, the U.S. healthcare unit is made up of probably like 50 different small businesses and each of them have their own pros and cons, et cetera. I broke out the group combined, which is sizable. But yeah, I wouldn’t be able to generalize the same way the dynamics that were happening at Altera across the entire U.S. Healthcare group. I think what we said in there though is we continue to invest and support our customers and it’s just a very difficult market because of the consolidation that happens because of Epic, et cetera.
Yeah, I personally wouldn’t extrapolate that at all. I really look to our business leaders to continue to think about how they could grow those businesses. Generally when we’re acquiring shrinking businesses, they shrink for a period of time because you want to stop doing some things and hope that at the point you stop doing the things that aren’t working out as well for you, that you can then use that as a basis to grow it. So we’re very careful to make sure we’re getting good returns on those investments.
And I perpetually have preached we want to grow those businesses when the time is right, but not at not irrationally generating low returns on the incremental capital we’re investing in those businesses. So we’ll make that a rational decision, if that makes any sense.
Doug Taylor (Analyst at National Bank)
Thank you for that. I’ll ask one more. Clearly a very strong year for capital deployment, which looks set to continue here in the near term given the sentiment towards software has had such a roller coaster ride this year, climbing out of it. I guess I’m curious if some of the behavior of some of the owners of software assets that you speak to regularly has continued to evolve. I know you don’t think of these things in terms of quarters, but it’s been quite a year.
So any comment there would be helpful.
Mark Miller (President and COO)
Yeah, Bernie, I’ll let you say we’ve
Bernie
been very busy, as you can see, for the first three quarters of the year and that activity is still ongoing. I don’t know that there’s a massive trend for everyone throwing in the towel in a software business. I think they’re just selling as they feel like selling in the public markets. You see the big fear that happened at the beginning of the year. Prices have bounced back since then. So I just feel that there’s more activity for us in general.
I think our people in the M&A world and the BD world are stepping up and they’re doing an excellent job against competition. We still have a very healthy amount of competition. I understand from just what I read in the press that large platforms are selling less, harder to unload these days, but private equity and those platforms that exist today are still adding tuck-ins and still competing with us. So still healthy amount of competition in the software world.
Mark Miller (President and COO)
And there’s many businesses that don’t transact either. Right. Like. Like during 2008, it was a tough time out there for people. People very nervous about what the future held. Right. As through COVID. And good businesses don’t want to sell unless there’s another reason. Because they feel they know their customers just as our businesses do. They listen to them and they continue to see their business in doing okay. So I don’t think any of that’s changed.
You know, it really hasn’t changed. And M&A generally is lumpy for us and it always will be. And so we’ve. We’ve got a great year so far and hopefully it’ll continue. Yeah.
OPERATOR
Thank you. The next question will come from Thanos Montopoulos with BMO Capital Markets. Please go ahead.
Thanos Montopoulos (Analyst at BMO Capital Markets)
Hi. Good morning. Daniel’s appointed Chief AI Officer. And that’s interesting. As it’s central head office role, and as you alluded to, you have a decentralized organization. Can you provide more color on how he’ll be approaching that role? Will his focus primarily be about propagating those best practices?
Mark Miller (President and COO)
It’ll be mostly about best practice sharing, for sure. Don’s a really smart guy and he’s respected by all of our leaders across Constellation. And any way he can help transmit best practices from an AI perspective is well worth his time doing that. And I’m super happy he’s taken on that role. It’s a classic head office role where you’re really not in control of anything, but you share information as much as you can to help people do what they do better.
So I’m really happy he took that on.
Thanos Montopoulos (Analyst at BMO Capital Markets)
Great. And can you lead us on your verticalization strategy and where things stand as far as the implementation of that?
Mark Miller (President and COO)
Yeah, we’re mostly through it. So, you know, there’s a few loose ends we’re kind of working through, but we’re mostly through it. And yeah, it’s been a big effort for the team here, on top of, you know, also spending a lot of energy on AI this year as well. So I’m very happy with that. They’ve done a great job. Our operating It’d be substantially more than. Let’s just say more than half would. Right. So just to give you a rough idea. So. Yeah. And of course, when you’re doing verticalization, there’s a bit of beauty-is-in-the-eye-of-the-beholder situation as to how crisp that is. So there’s still some flexibility around, but there’s just a better focus.
It’s kind of putting businesses sort of in the same orbit is my expression to use being Constellation so that they still can do what they need to do and. Yeah, so that’s sort of the situation there.
OPERATOR
The next question will come from Jerome Dubray with Desjardins. Please go ahead.
Jerome Dubray (Analyst at Desjardins)
Hey, good morning everyone. Thanks for taking the question. Maybe first question goes in line. The MD&A talking about an increase in expenses on professional services, fees paid to advisers in relation to certain larger, more complex transactions. Are these deals done now and is this something new that is being explored by the team or just larger deals kind of in the line of the things that were done in the past?
Jamal Baksh (Chief Financial Officer)
Yeah, I mean the expenses I’m talking about, like for tax analysis or legal analysis, different countries, etc. It wasn’t—yeah, it’s not that we’re paying advisors to bring us deals, etc. It’s just more third-party advice as we’re doing diligence.
Jerome Dubray (Analyst at Desjardins)
Thank you. And the second one is on free cash, I guess lumpiness. Mark, you talked about the RGA valuation. That is well noted. The other one that we noticed is on working cap, just something that’s typically lumpy. Is there something new there or we should be expecting some sort of reversals in the coming quarters?
Jamal Baksh (Chief Financial Officer)
Yeah, I mean that number, like you said, it is a lot to do with timing. I mean we do a ton of analysis around AR, WIP, aging, etc., and there’s no concerns there. I always point out one thing with that line item. Like if we buy a business with a ton of positive working capital, we might pay more for that business and you’d have the increased price go through cash flow from investing and then we could collect that cash the next day and you’d get cash flow from ops.
You could buy that same business that had negative working capital—let’s just say we bought it two days after the collections—you’d pay less for it, but then you wouldn’t get that pop in working capital. It’s not purely an organic number. It is influenced by the timing of the type of businesses we’re buying and when we buy them in their cycle of cash flow.
Mark Miller (President and COO)
Yeah, we’re careful, including the roll-up calculations too for that business. Right. You’re right on.
Jerome Dubray (Analyst at Desjardins)
That’s helpful. Thank you.
OPERATOR
The next question will come from Stephanie Price with CIBC. Please go ahead.
Stephanie Price (Analyst at CIBC)
Good morning. Thanks. Just wanted to circle back on a few topics we’ve covered already. Just on U.S. healthcare, I’ll walk through your thoughts a little bit more on the opportunities in that vertical and how you think about the investment opportunity in U.S. healthcare despite organic declines here.
Mark Miller (President and COO)
Well, the way our leaders look at investments is on an opportunistic basis. So they’re designing products that they believe might attract more growth inside of their business unit. So I think Jamal put it correctly: it’s a number of businesses in healthcare, and you have to look at each one of them individually as to what the opportunity is and if it makes sense to invest our shareholders’ capital in building something new for those particular businesses.
So it’s a difficult question to ask generally—it’s nice to kind of group U.S. healthcare together and say—but it really is a bunch of businesses. Altera is a large disproportionate business, so it kind of sways the whole group a little bit.
Stephanie Price (Analyst at CIBC)
Yeah. Okay. And then just on M&A, obviously nice to see the deployment year to date. Just curious, amid efficiency gains, how should we think about the timeline to bring these businesses onto the CSU model? Has there been any change there? Or how are you thinking about improving margins once you acquire these businesses?
Mark Miller (President and COO)
I would maintain the same timeline. Of course, once we bring these businesses in, we’re infusing them with all of our AI best practices as well. And really, time will tell if that will accelerate in terms of changing the timeline towards higher margins in the shorter term. And so we’re not ready to say that yet.
Jamal Baksh (Chief Financial Officer)
I mean, I think I pointed out Q1 that we had, what was it, negative 16% margins with that cohort of the Q1 acquisitions. That cohort is now at 27%. And the same thing—like the Q2 cohort went from 12% to 21%. So they are improving. It’s just that we’re making so many acquisitions that it’s still a drag on our overall. But no, they are being improved. It’s not a different pattern.
Stephanie Price (Analyst at CIBC)
Okay, thanks for the color.
OPERATOR
The next question will come from Kevin McVeigh with UBS. Please go ahead.
Mark Miller (President and COO)
Morning, Kevin.
Kevin McVeigh (Analyst at UBS)
Hey, good morning. Hey, congratulations on the results. Just to follow up on that, it’s great to see the accelerated pace of M&A. Is that just valuation opportunistic? Just any thoughts? Because it’s great to see the incremental capital deployed. But what’s giving you that confidence, I guess, or is it just opportunistic transactions?
Mark Miller (President and COO)
Still opportunistic transactions where we’ve got a lot of M&A people out there globally, and so we hope to be the first ones there when a business is for sale and hopefully beat the competition. And so there still is very robust competition out there and we’ll see what the next few quarters look like. But right now I’m very pleased with the way things are going.
Bernie
Yeah, I always add to that is I really think we built better muscle to do larger transactions as well. We wouldn’t have had that capacity like a decade ago, Kevin. So it’s kind of nice. We have a good team who are able to make these fairly large, complicated transactions happen. So at least we can be in the game and on the field, and we might win one of those that we maybe wouldn’t have had the capacity to do previously. And all the knowledge we built up over the history of our M&A, we use all of that knowledge to help us make new acquisitions.
And it seems to be working out really well for us, so. True. Yeah, the best practice sharing in acquisitions is crazy.
Kevin McVeigh (Analyst at UBS)
That’s great. And then just real quick, are you seeing any client behavioral patterns? I mean, you know, the AI debate’s been out there for a while. It seems like the business is steady as it’s ever been. But are you seeing anything underneath in terms of clients looking to leverage maybe certain best practices from your folks or, you know, certain capabilities more than ever, more than others as they, you know, not only respond to obviously, you know, AI efficiencies, but as they work through that in their own business models?
Mark Miller (President and COO)
I wish I could say there’s some big trend to see, but there’d be individual clients who are trying to maybe do a little bit more with AI that you hear about, but across the board we’re not seeing that. Right. So I think our stronger businesses can get stronger. Our weaker businesses that have high churn rates—and that’s a small percentage of recurring revenues—I think they always had such a lower long term, like a lower LTV to keep the customers around.
So I wonder about some of those businesses. But overall, I wish I could say there’s any general trends we’re seeing.
Kevin McVeigh (Analyst at UBS)
That alone is helpful. Thank you.
OPERATOR
The next question will come from David Kwan with TD Cowen. Please, go ahead.
David Kwan (Analyst at TD Cowen)
Good morning, David. Hey, Mark, Jamal, Bernie. So for acquisition targets that are kind of more outside of the traditional VMS businesses that you’ve targeted, especially maybe areas where you don’t have much current exposure, can you maybe talk about how your approach is in terms of building out the investment cases for these types of opportunities? Like, do you take a different and maybe more conservative approach to the forecast, or maybe you’re using a higher hurdle rate to account for that greater risk with these types of businesses because your playbook probably doesn’t line up great versus more traditional targets.
Jamal Baksh (Chief Financial Officer)
Well, as you know, we do build four scenario models and anytime we go outside of our little patch of VMS, we build more dispersion in the models. So your wipeout is going to be a lot worse, your winner is going to be a bit better. And we use that with the probability-weighted model to figure out what price to pay. And we believe that the models or the scenarios capture the upside and the downside. And where we’re less comfortable, we make the lower cases just a bit worse.
Hope that helps.
Mark Miller (President and COO)
Yeah, I think, like, one of the things we’re looking at with more horizontal businesses: you got to really think about the size of the addressable market. If the addressable market is outrageously large, you got to really think about that, right? Like, are you going to be able to cover it, profit, what have you. But we go through all that in our modeling exercise and debate that stuff as far as what it could be, right. But it’s not like we’re buying businesses that compete with, you know, Microsoft and Oracle. Maybe Oracle. But we try to find niche businesses even in horizontals, even in geographies. Anything that has a moat—and a few moats—is what we’re looking for. So in that sense we believe that those businesses are relatively well protected. So we’re not going into the wilderness buying anything that moves.
The behavior looking at stuff hasn’t really changed in the past few quarters. No.
David Kwan (Analyst at TD Cowen)
So the behavior looking at stuff hasn’t really changed in the past few quarters?
Mark Miller (President and COO)
Doing what we always do, doing what we always have.
David Kwan (Analyst at TD Cowen)
No, it’s helpful. There was actually kind of—I assumed it was a tuck-in—but a smaller maybe managed services business I think you guys acquired in Brazil. So like I said, a little bit more outside of your traditional hunting grounds. I was kind of curious how you would approach a business like that.
Jamal Baksh (Chief Financial Officer)
Same approach, higher dispersion. That’s really the way it works.
Mark Miller (President and COO)
Calculated. Yeah. Just think it through.
David Kwan (Analyst at TD Cowen)
Okay. And then just one other question on M&A. Are you seeing the valuations start to come down for the private companies or are they kind of staying fairly resilient? You know, is there any impact from—you know, I know the 10-year yields come down recently, but still quite above where it was at the start of the year. So are you seeing any impact from higher rates?
Mark Miller (President and COO)
Not really. I mean, there’s some movement, but really generally there’s so much competition that’s out there, whether it’s a transaction that’s leveraged or not. Maybe that will be spelling out a slightly lower price, but not really that much because people still do have capital out there and they have to put it out. So prices really haven’t been dropping that much. And some people don’t want to sell their businesses at this valuation. Right. Yeah.
David Kwan (Analyst at TD Cowen)
That’s great. Thank you.
OPERATOR
The next question will come from Paul Treiber with RBC Capital Markets. Please go ahead.
Paul Treiber (Analyst at RBC Capital Markets)
Thanks for taking the question. Good morning. Just a question on the IRGA, particularly in regards to the fair value of SECO insignity. I think that agreement expires in 2031. At that point—yes—there’s the liability, the fair value. Is that set purely by the market price? If you disagree with the market value at that time, do you have an exit or is that entirely your liability?
Jamal Baksh (Chief Financial Officer)
Yeah, the agreement there. She’s spending hours finalizing a revised agreement on this. Is it that Jode A will get their proportion of the Signony and SECO shares. So it’s actually not a cash obligation. They will just get them and they’re valued for accounting purposes at the market rates. So it is what it is. And it’s not that we will pay them that dollar amount. They will just get the shares.
Mark Miller (President and COO)
Yeah, I mean, it’s usually pretty smooth because most people have been around for a while and we run Constellation Software in such a decentralized way, you end up inheriting more portfolios to oversee. So I think that’s generally how it works because we’re sort of a large tree of capital allocators around the world. If you want, and you hope you have a lot of successors sitting there that will bump up into that role. And they do a very similar job to what they’ve historically done.
Just have an over a larger, we would say, capital base to oversee and to make sure they’re sharing best practice, what have you. In Ramon’s case, pick up a little bit of more shareholder and investor relations that he wouldn’t really have been involved in at all as in his role at Topicus. So it works really well at Constellation Software because of the way we’re structured. There’s no like single points of failure.
OPERATOR
Again, if you have a question, please press star then one. Our next question will come from Teddy Farley with Jefferies. Please go ahead.
Teddy Farley (Analyst at Jefferies)
Hi, this is Teddy on for Samad Samana. Thank you for taking our questions and congrats on another strong quarter. Just a few quick ones for me with some of our industry channel checks, particularly among vertical software companies. On the smaller end, we’ve started to hear more cases of AI disintermediation. So within your portfolio companies, are you seeing any evidence of this yet?
Mark Miller (President and COO)
Really? Not to any large degree. I mean there’s some things happening but it’s not material. I think I said before, I think. Yeah.
Teddy Farley (Analyst at Jefferies)
So this is smaller but on license revenue, I know you noted it’s lumpy quarter to quarter, but was there anything in the 3Q25 comp period that’s worth calling out?
Mark Miller (President and COO)
Yeah, because it’s so immaterial. I did not do a deep dive on that. So yeah, I couldn’t even tell you. Trying to get most people moved over to subscription if you can, in some form or another recurring.
Teddy Farley (Analyst at Jefferies)
Awesome. And then last one for me, is there anything you would highlight on specific sectors you’re seeing either more or less transaction volume on and it could be over the full year. Just because I know there’s some amount of noise. Quarter to quarter.
Mark Miller (President and COO)
It’s all over the place. Right, Bernie?
Bernie
It’s very generalized. We go into all areas, all verticals and it’s opportunistic. So no trend in any one sector that I could see.
Teddy Farley (Analyst at Jefferies)
Awesome, thank you. And I’ll pass it along.
OPERATOR
And this will conclude our question and answer session. I would like to turn the conference back over to Mr. Mark Miller for any closing remarks. Please go ahead.
Mark Miller (President and COO)
Well, thank you everyone for attending and of course I have to thank our whole team at Constellation Software for working so hard and continue to push ahead. So thank you very much. Over and out from Toronto.
OPERATOR
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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