Constellation Software TSE: CSU used its second-quarter conference call to outline its approach to artificial intelligence, vertical-market organization and acquisitions, while executives addressed recent organic-growth pressure tied to several acquired businesses and comparison effects.
President Mark Miller said the company is seeing AI affect both customer demand and internal software development. Customers are asking its software products to do more, while operating businesses are using AI tools to move more quickly through customer-driven product roadmaps and develop products faster, he said.
However, Miller said Constellation will not centralize AI decision-making at head office or provide AI-specific revenue targets, timelines or reporting metrics. Instead, business-unit managers will determine how to deploy AI within their own vertical markets and fund initiatives through their own profit-and-loss statements.
“Our software is primarily mission-critical,” Miller said. “It is embedded in how a customer runs their businesses every day. AI is something we add to make that software more valuable.”
AI adoption focused on development productivity
In response to a question from BMO Capital Markets analyst Thanos Moschopoulos, Miller said Constellation has begun to see development teams improve productivity as they receive training on AI tools. The company has not yet seen a meaningful increase in organic growth directly attributable to AI product enhancements, however.
Miller said product development can move quickly, but selling new products requires customers to have budgets and a business need they are willing to pay to address. He characterized AI-driven organic-growth benefits as still “a ways out.”
Chief Financial Officer Jamal Baksh said the company has established general-ledger accounts to track token costs and other AI-related spending. He said AI costs are not currently having a material impact on the company’s profit and loss statement, although third-party maintenance expense has increased slightly.
Miller added that Constellation has not committed itself to a single AI platform and intends to let its businesses adapt their tool choices as costs and technologies evolve. The company is not currently focused on reducing headcount through AI, he said, given its decentralized structure and the relatively small development teams within many individual businesses.
Verticalization without integration
Miller also described an effort to group businesses and acquisition prospects into more coherent verticals. The goal is to become “the obvious permanent owner of a niche,” he said, building a reputation that makes Constellation the first call for founders considering a sale.
He emphasized that the initiative does not represent an effort to operationally integrate acquired companies. Rather, Constellation may move certain businesses across operating groups so that related companies are “in the same orbit” under leaders focused on particular verticals.
The approach could enable businesses serving similar markets to learn from each other and potentially share useful AI applications, Miller said. He cited the company’s experience with vertically focused leaders and the creation of Lumine as evidence that the model can work. The principal constraint, he said, is developing the right leaders for each vertical.
Constellation also expects some mergers-and-acquisitions and business-development resources to become more closely aligned with verticals as those groups expand. Miller said larger vertical groups have historically shown success in deploying capital.
Organic-growth headwinds described as temporary or fixable
Baksh addressed questions about maintenance and recurring-revenue organic growth, which analysts noted had been below Constellation’s historical 5% to 6% range in constant currency.
He said several factors affected the quarter:
- Altera faced a difficult comparison against the second quarter of 2025, when it recorded a couple of new-name sales and recognized a portion of revenue upfront under IFRS accounting rules.
- Dark Matter also faced a strong prior-year comparison, while the business remains a turnaround with negative organic growth.
- Lumine’s recently acquired businesses generated 1% organic growth in the quarter as the company works to improve them.
- A South American business lost a large customer whose departure was known when Constellation acquired the company; Baksh said that customer accounted for roughly a 30-basis-point drag on Constellation’s results.
Baksh said the Altera and Dark Matter effects were largely accounting-related and should revert in the following quarter. Excluding the cited factors, he said organic growth would normalize closer to the company’s historical rate. Based on businesses currently owned, he said management does not expect another major customer loss or similar anomaly in coming quarters.
Regarding Altera, Baksh said the business is expected to be a “slow shrinker” for the next year or couple of years, but there was “nothing terrible going on” beyond the difficult comparison. Miller said the asset has performed in line with the original investment thesis and ahead of its expected internal rate of return, based on discussions with the Harris operating group’s CEO.
Acquisition opportunities remain competitive
Chief Investment Officer Bernie Anzarouth said Constellation continues to find opportunities across owner-managed companies, private-equity-owned assets and corporate carve-outs. Recent acquisition activity involving businesses such as DerbySoft, TouchBistro and Imagine reflected deal-specific circumstances rather than a broad change in valuations for larger assets, he said.
Anzarouth said competition for vertical software assets remains robust, although the company is seeing “some weaknesses at the high end in pricing.” He said Constellation’s win rates have not materially improved and that established competitors and “copycats” remain active in the market.
On DerbySoft, Anzarouth acknowledged that the transaction carried a high multiple, describing the business as successful, growing and profitable. Baksh noted that leverage was used in the transaction, while Miller said the company’s hurdle rates for expected returns have not changed.
Executives also discussed the challenges of larger acquisitions and carve-outs, including more complex product lines, different corporate cultures, intertwined financial statements and the need to separate businesses from parent-company systems. Miller said Constellation has learned that applying best practices can take longer in larger acquisitions and that breaking them into smaller business units can accelerate improvements.
Despite growing capabilities for larger deals, Miller said Constellation remains focused on vertical-market software rather than expanding into other sectors. “There’s so much more for us to do in the software world,” he said.
About Constellation Software (TSE:CSU)
Constellation Software is an international provider of market-leading software and services to a number of industries. Our mission is to acquire, manage and build market-leading software businesses that develop specialized, mission-critical software solutions to address the specific needs of our particular industries. Our company was founded in 1995 to assemble a portfolio of vertical market software companies that have the potential to be leaders in their particular market. Since then, we have grown rapidly through a combination of acquisitions and organic growth, and established a strong constellation of companies with a large, diverse customer base.
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