Constellation Software beat first-quarter revenue estimates as acquisitions and steady organic growth continued to support results, while analysts argued investor fears around artificial intelligence disruption may be overdone.
BNN Bloomberg spoke with Kevin McVeigh, managing director at UBS Securities, about Constellation Software’s acquisition strategy, software sector valuation pressures and why he believes the company remains well positioned for long-term growth.
Key Takeaways
- Constellation Software reported 20 per cent revenue growth in the first quarter, marking its strongest revenue beat since the fourth quarter of 2023.
- Organic revenue growth remained at six per cent for a second consecutive quarter, exceeding the company’s historical growth trend despite concerns about AI disruption.
- The company committed to roughly US$800 million in acquisitions following nearly US$700 million in deal activity during the quarter, signalling continued confidence in its M&A pipeline.
- Analysts said Constellation Software could benefit from valuation dislocations in public markets as AI concerns pressure software stocks more broadly.
- UBS argued the company’s strong free cash flow generation, disciplined acquisition strategy and lack of stock-based compensation make the stock appear attractive after its recent decline.
Read the full transcript below:
ROGER: We’ll see if Constellation Software shares rebound today after the company posted a 20 per cent revenue increase compared with the same quarter last year. The increase was mainly due to growth from acquisitions. Here to break down the latest earnings is Kevin McVeigh, managing director at UBS Securities. Kevin, thanks very much for joining us.
KEVIN: Thank you for having us, Roger. It’s a pleasure to be here.
ROGER: What numbers stand out the most for you in this report?
KEVIN: I think exactly what you alluded to — the revenue beat, as well as the increase in revenue growth. Total revenue grew 20 per cent year-over-year. As important, organic growth was six per cent, and that’s the second consecutive quarter of six per cent revenue growth, which is an acceleration from the five per cent the company has historically enjoyed.
Roger, that’s really important given all the concern around AI and the potential disruption across software names. What we continue to see is continued execution across Constellation.
I’d also highlight that it’s the strongest revenue beat they’ve had since the fourth quarter of 2023. As the market continues to be concerned about Constellation and software more broadly, we continue to focus on the stocks that continue to execute, and we think Constellation is well positioned to weather this uncertainty in the near and longer term.
GREG: Kevin, the amount of acquisitions in this last quarter was certainly robust. What are they guiding to going forward and in the pipeline for next quarter? Similar kind of cadence, or more or less?
KEVIN: More. I think it’s a terrific question and an important point. They’ve committed to upwards of US$800 million in the next quarter. That’s up from US$700 million in the quarter they just reported, but bear in mind that’s up from roughly US$100 million the quarter before.
I think it’s a really important point because what it implies to us is increased confidence in the outlook for what their clients need.
Constellation has been a terrific capital allocator over time. When you think about that average revenue growth of roughly 21 to 25 per cent, the majority of that has been inorganic at about 20 per cent, and then the organic contribution around five per cent. They’ve been a very efficient capital allocator.
What’s really important about Constellation relative to acquisition and other concerns across the industry is the core organic growth is five per cent — about three per cent volume and two per cent price. That’s a very big contrast to other software companies.
They’ve got the free cash flow to continue to acquire at pace, and we think they’re uniquely positioned in a post-generative AI world given the value they add to their clients.
ROGER: With software taking a beating over the last little while, is this them seeing some good opportunities? And do they have reason to be confident they can grow these?
KEVIN: Roger, terrific question. We think so.
What you’ve seen them do is have a really efficient capital allocation strategy that fits into one of three buckets. They either buy small niche companies at roughly US$15 million to US$25 million on average, and that applies about one-times revenue.
In the past, they’ve also taken sizable equity positions in public companies, typically around a 50 per cent position, in companies like Lumine and Topicus.
More recently, they’ve engaged in a permanent minority structure where they take 12 to 15 per cent equity positions, the most recent one being Sabre. It’s been a terrific strategy for them.
What we’ve seen them do is commit a little bit more to the public markets, and I think a lot of that is driven by the fact there may be more valuation opportunity in public markets given some of the dislocation that’s occurred as a result of AI concerns than in private markets.
Private markets obviously don’t have as much pressure from the day-to-day volatility of the market. They’ve been prolific capital allocators and we fully expect that to continue.
One of the bull cases on the stock before AI was the perpetual concern over whether they could continue to acquire at pace. What you see them do is be very innovative and continue to take advantage of dislocation in capital markets.
GREG: Kevin, that’s great. Is there a period two or three years out where that ability to keep acquiring starts to dim because of AI, or does it get enhanced?
And second, are we at a level now — down 30 per cent — where, looking at the chart and the price-to-growth ratio, it looks like a very compelling risk-reward in your opinion?
KEVIN: Great question.
One of the things we focus on with Constellation — and what you see the market doing — is broadly revaluing the sector. We think we’re at the point where the market is starting to differentiate some of the true winners.
If you look at Constellation, one of the things we’ve always focused on is free cash flow relative to capital allocated to acquisitions. When you look at that number, you’ve actually seen that spread widen.
To us, that’s a very bullish indicator because it implies they can continue to acquire at pace. To the earlier point, we think there’s a real opportunity for them to be even more efficient from a multiple perspective given the halo effect of the concern that’s been perpetuating across the market.
On valuation, we fully agree with that. One of the things we’ve also seen across the market is investors resetting valuations from an implied free cash flow perspective.
If you look at Constellation today, the stock is implying about 6.5 per cent longer-term growth. That compares with what they’ve historically delivered, which is roughly 15 to 20 per cent longer-term growth.
The level of fear and disruption in the stock is really at levels we haven’t seen.
One other subtle but important point with Constellation is they don’t have stock-based compensation. If you look at most software companies, about 1,500 basis points of EBITDA add-backs are stock-based compensation.
If you factor that in, the valuation looks that much more compelling because it’s a very clean EBITDA and very clean free cash flow story that should be able to take advantage of some of the opportunities the market is presenting right now.
ROGER: All right, Kevin, we’ve got to wrap it up there. Thanks very much for joining us.
KEVIN: Thank you. Appreciate it.
ROGER: Kevin McVeigh, managing director at UBS Securities.
---
This BNN Bloomberg summary and transcript of the May 13, 2026 interview with Kevin McVeigh are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
