Constellation Software Inc. is one of Canada’s largest technology companies.Timon Schneider/SOPA Images/Reuters
Constellation Software Inc. CSU-T, the country’s largest technology company, is seeking to allay investor fears that AI will erode the value of traditional software products, saying it can weather the disruption caused by artificial intelligence. The company also announced that it will acquire a minority stake in technology companies, in addition to its traditional practice of outright acquisitions.
Constellation’s many subsidiaries have deep relationships with customers, allowing the conglomerate to continue developing products that meet customer needs, company President Mark Miller said on Monday’s earnings call. “There’s a real buzz in the market right now about AI disrupting the software business,” he said. “We are in a good position while being very disciplined in how we approach it.”
Constellation stock was up 0.39% on the Toronto Stock Exchange as of Monday’s close.
The Toronto-based company has acquired hundreds of small and medium-sized companies around the world that make “mission-critical” software for niche sectors such as golf courses and public transportation.
US travel software company adopts poison pill to block further investment by Constellation
Founded in 1995, Constellation has long been considered a stable and reliable investment. However, the company’s stock price has fallen about 38% in the past 12 months. Performance beyond 2023 will reflect how well the market is coming to grips with the impact of AI. Constellation initially benefited from this advancement because investors believed that developers could create software faster and more efficiently using new technology.
However, the market is now concerned that AI will completely change the traditional Software-as-a-Service business model. If companies can increase productivity through AI, they could potentially buy fewer software licenses for their employees. Using AI to create software quickly lowers the barrier to entry for nimble startups to displace incumbents and empowers customers to be more independent and build their own tools.
As a result, software companies are in ruins. For example, the stock prices of Thomson Reuters, International Business Machines, Adobe, and Salesforce have fallen 14% to 25% so far this year.
At an earnings call, Miller refuted pessimistic reports about Constellation. “Building products and features faster is not what differentiates us,” he said. “What matters is what our business has cultivated over the years: deep vertical knowledge, a true understanding of our customers’ workflows and processes, the data within our solutions, and the trusted relationships our customers have built.”
Constellation Software continues to operate. perhaps?
Constellation and its subsidiaries are also implementing AI and sharing best practices. Miller said that even if those gains don’t impact the bottom line, “the productivity gains are real and still growing.” “There’s not a lot of new revenue coming from that,” he continued, adding that the company isn’t seeing any revenue decline from AI either.
Constellation is currently piloting a new tool to help rank potential acquisition targets by scoring how they are influenced by AI. “The jury is still out on whether it will prove its worth over time,” Miller said.
He acknowledged that some companies within Constellation’s broad portfolio are better able to handle disruption than others. “As a good conglomerate, we want to make sure we put capital into the winners. If you’re losing, we’ll take the capital and invest it elsewhere,” he said.
Despite the disruption caused by AI, analysts still view Constellation favorably. “We view the depth of the decline to be excessive,” CIBC analyst Stephanie Price wrote in a note earlier this year. The decline in the stock price indicates that the market is signaling a significant contraction in Constellation’s growth prospects. “We believe this level of decline is unlikely given Constellation’s diverse software offerings and continued M&A activity,” she wrote.
Miller has been Constellation’s chief operating officer since 2001 and became president last September after founder Mark Leonard stepped down for health reasons. Leonard took a unique approach to Constellation. He believed strongly in decentralization and steadfastly avoided media attention. Last year, in a rare public conference call, he introduced several Constellation AI experts, identifying them only by first name to avoid being contacted by competitors.
Mr. Miller could take a more open approach by attending the earnings call. Constellation reported an 18% increase in fourth-quarter revenue to US$3.2 billion compared to the same period in 2024. Full-year revenue increased 15% to US$11.6 billion.
However, organic growth slowed from 3% to 2%. “Amid the turmoil in software valuations, any acceleration would have helped reassure investors,” Desjardins analyst Jérôme Dubreuil said in a note Monday.
Constellation typically buys companies outright, but will now selectively take minority stakes in larger companies, Miller said. The first example is Constellation’s deal with U.S. travel technology company Saber Corporation, he said.
Constellation holds a 12.7% stake and has entered into a governance agreement under which one of its management members will be appointed to Sabre’s board of directors. (Earlier this month, Saber adopted a shareholder rights plan that prevents third parties from acquiring more than 15% of its stock.)
Analysts on Monday’s conference call questioned this approach, with some expressing concern that Constellation would not have significant influence through its minority shareholders.
“This is another way to deploy capital, and we’re going to do it rationally,” Miller said. “I won’t let you get distracted by something like that.”
