Constellation Software: 1Q25 Business Recap

1Q25 Summary.

1Q25 revenues grew +13% y/y to $2.7bn for the quarter. This is a slowdown from last quarter’s growth of +17% y/y. In total, LTM revenue now stands at $10.4bn. The slowdown in revenue growth is primarily attributable to a smaller than usual deployment of capital on acquisitions. While capital deployment for this quarter was low at $127mn, YTD they have deployed $427mn, making up for the soft 1Q.

Overall organic growth was +2% y/y (fxn), same as last quarter. The “Maintenance & Other Recurring” revenue segment grew +4% y/y, a 100bps deceleration from last quarter and 200bps from a year ago. If you recall, this segment is of particular importance because it is the best barometer of the health of Constellation’s businesses and represents 75% of total revenues.

They noted the higher organic growth rates of the last 1-2 years were driven by inflation, so the slowdown isn’t exactly surprising. However, they have been talking about stoking organic growth for sometime now and haven’t had much, if any, success (one reason for the Topicus transaction was an expectation they would learn how to grow more organically). Though, while more organic growth would be nice, it wasn’t the base case. In our Extensive Research Report we ran our reverse DCF with organic growth of 0 and 2%.

License revenues fell -8% y/y, a less steep drop than last quarter’s -19% y/y. As mentioned in our last CSU business update, license revenue “is expected to shrink as legacy VMS offerings move to a SaaS model. Shrinkage here should be thought of as helping the Maintenance & Other Recurring revenue line item.” In some sense, the less worse results in License revenue partially explains the slowing organic growth in the Maintenance & Other Recurring revenue segment. In total, license revenue now represents ~3.5% of total revenues compared to 5% from the prior quarter.

FCFA2S was up +14% y/y to $510mn compared to $446mn last year. However, adjusting out the IRGA liability increase (see the original report for our rationale), FCFA2S increases $94mn y/y to $604mn for a +16% y/y growth rate.

In 1Q, they acquired 9.99% of Asseco Poland S.A., a multinational enterprise software company, for $174m. Once regulators give the okay, CSU intends to purchase a further ~15% of the company. At the AGM they talked about how they are okay taking minority positions in businesses and do not need a controlling stake. This could open the door for more passive investment partnerships as companies learn they are a good long-term partner. They also noted that they would view such an investment with the same time horizon as all of their other investments (they would have no plans of ever selling).

As always, the big question with Constellation Software is for how long can they deploy their ever growing free cash flow in investments that meet their hurdle rates. At the AGM they gave some more color around capital allocation: “We won’t pay out big dividends and we won’t buy back shares, certainly not at high prices. And so we’ll look elsewhere. Our style drift is going to increase over time. And it’s something we accept and we’re exploring all the time”.

Readers might remember that they briefly looked at oil assets in 2021 but missed the opportunity to make an acquisition before prices rebounded. Today they are moving more into software adjacent verticals like hybrid hardware/software businesses and data companies. On one hand this is a positve development as the wider universe means a longer capital deployment runway. On the other hand, it is indicative of the limits of investing in their core VMS market with ever growing amounts of capital.

In terms of valuation, CSU is trading at a FCF multiple of 44x, and a price to sales multiple of ~7x. This compared to a 39x FCF multiple when we published our orginal report in September 2022.

Below are some notable comments from the 2025 AGM.

CSU AGM Notables.

Investment Criteria: “We’re not looking for rocket ships that are going to the moon. We’re looking for steady businesses, average businesses that bump along that we do the best that we can for our customers and the employees stick around for a long, long time and they just produce cash.”

Long Term Organic Growth Expectations: “So I don’t think I ever said expect 2% to 3% organic growth. I think that’s a misquote. And I would hope that we at least keep pace with the GNP. And I think inflation would impact that, too, significantly.”

The Value in Small-Mid Size Businesses: “I fundamentally feel that it’s a place where we add enormous value. And if we can bang out somewhere between 500 and 800 million dollars a year of small acquisitions, that would be enormously a good thing to keep on doing. And then it would just be a question of sort of what we pull in, in terms of large acquisitions that will make the difference between deploying all of our capital or just a portion.”

Baby Boomers Retiring Providing a Growth Lever in the Future: “I’ve always expected the market to increase into the next decade just because of the baby boomers retiring and not finding successors and trying to sell their businesses. But I haven’t seen so far we haven’t seen an increase in the number of transactions. But we still continue to maintain our focus on the small and medium sized businesses and the large ones come in from time to time.”

On acquiring businesses today vs businesses 5 years ago: “do see more horizontal businesses, and I think we do execute on more horizontal businesses.”

On competition: “The competition has been increasing. It has been increasing for the last several years both from copycats, from strategics and strictly private equity firms with their roll ups. But I don’t see Q1 as being any different from any other quarter as it’s just a question of timing for some of these acquisitions.”

On International Competition: “I think what we have been seeing in North America, we see in Europe as well. There are copycats coming up and people try to see what we do. And they might have different styles, focus on different segments of the market. But when I started off in 2006 competition was less than it is today.”

Why Topicus Deployed $700mn YTD: “We had two larger transactions we’ve been working on for a longer period of time and they then worked out.”

Payment Opportunities: “I would say the biggest thing we’ve been doing outside of core VMS is on the payment side of things. So I would say we’re one of the larger payment processors in Constellation. And we believe because of the nature of a lot of the business we own, there’s a lot of payments opportunities in the businesses. So our hospitality businesses, our fitness businesses that type of stuff. And so, we’re definitely focused on payments. And we’ve done a couple of acquisitions in the space. We’re looking at other ones.”

Why No Competition for Lumine: “We haven’t seen yet too many or any real significant communications and media vertical market software consolidators. And I think it’s partially because of how specialized the space is. The barriers to entry from a domain knowledge perspective are pretty high. And so therefore, we really don’t yet see any specialized copycats that seem to be more opportunistic across many verticals and geographies.”

How can one best judge the quality of the acquisitions you’re making?: “If we’re acquiring over 100 companies a year, you’re not going to be able to drill down into how we’re doing with them. So the best you can do is sort of aggregate analysis. So look at the incremental recurring revenues each year and the incremental capital deployed and try and run those sorts of macro level calculations. I think it comes down to trust. And we do sort of provide you with a sense of what our hurdle rates are and how we’re doing against them. And if you believe us that does give you some insight, but it’s not like having a set of audited numbers on each one of our acquisitions.”

Low Hurdle Rate experiment (won’t do this again): “We experimented with dropping the hurdle rate for both large and medium sized transactions. We discovered when we did it for medium sized transactions, it didn’t result in significantly more capital being deployed, but it did result in lower returns. So that’s a useful experiment, but not one to anticipate redoing in the short term. The larger ones, it’s obviously made us more competitive and allowed us to deploy significant chunks of capital. And as you point out, the cost of deploying those large chunks is lower than the cost of deploying small amounts of capital on small acquisitions.”

Current deals may have slightly lower perceived quality, but they are cash-generative and operationally resilient: “Even some that are poor quality… maybe they’ll grow 1% or 2% or even say it’s zero. They’ll still spit out the cash that we’re looking for.”

Paying a Premium: “The higher the quality of the company, the more you’re willing to invest in organic growth. And also a good management team, you’re willing to invest in acquired growth.”

For more on Constellation Softare, check out our CSU research report here and our last CSU update here.

Speedwell Research Reports.

Become a Speedwell Research Member to receive all of our in-depth research reports, shorter exploratory reports, updates, and Plus members also receive Excels.

Become a Speedwell Member

(Many members have gotten their memberships expensed. If you need us to talk with your compliance department to become an approved vendor, please reach out at info@speedwellresearch.com).

*At the time of this writing, one or more contributors to this report has a position in CSU. Furthermore, accounts one or more contributors advise on may also have a position in CSU. This may change without notice.