One week after the shocking resignation of Constellation Software Inc. CSU-T founder and president Mark Leonard for health reasons, his successor sought Wednesday to assure investors nothing will change on his watch.
“I really think it’s business as usual, just continue to push ahead with our existing strategy,” said Mark Miller, who was promoted to replace Mr. Leonard last Thursday, during a conference call with analysts and investors. “We’ll just continue to focus on the same things we always have here at Constellation in a completely decentralized fashion.”
That means the Toronto company will continue to deploy capital on acquisitions and Mr. Miller will focus on larger deal opportunities, staff compensation and sharing best practices among Constellation’s six operating groups, he said. Mr. Miller added there were “no plans to change any of the management team, at all.”
Mr. Miller also noted that he and chairman John Billowits bought Constellation shares following the management change; insider trading reports show they spent $1-million and $730,000 on stock, respectively. It was Mr. Miller’s first Constellation stock buy in six years, and the biggest outlay on the shares by the chairman since 2018.
“We really just felt it was sending a signal to people that we were very comfortable with the company and its long-term future,” Mr. Miller said.
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Mr. Miller was previously Constellation’s chief operating officer and executive chairman of its Volaris Group subsidiary. He has been with Constellation for 30 years, since it bought his software company. It was the first of hundreds of acquisitions by Constellation as it went on to gain a reputation as one of the world’s most effective capital allocators in technology.
BMO Capital Markets analyst Thanos Moschopoulos said in an interview Mr. Miller’s message was that he would stay the course “and continue executing against what has been a very successful strategy.” Asked if that would satisfy investors, Mr. Moschopoulos replied: “Ultimately the best way to assuage the market is to continue putting up strong results as they have continued to throughout their history.”
National Bank Financial Markets analyst Richard Tse said in an e-mail that Mr. Miller’s remarks were “pretty much as expected,” including no material changes in the company’s approach to capital deployment or running operations.
Still, analysts probed for any possible changes under the new boss during the 30-minute call, including whether Mr. Miller would engage with shareholders more than the publicity-averse Mr. Leonard. Two analysts told Mr. Miller they hoped he would engage with the street more often; “I don’t think we’ve decided on that,” he replied.
Constellation has typically focused on buying companies that provide “mission critical” software to specific subsectors, and never selling them. For example, Mr. Miller’s company sold software used by transit companies to schedule buses, trains and drivers. Typical Constellation targets have historically generated less than US$10-million in revenues but also produced solid cash flows and operating profits, had high recurring revenues and faced little competition. More recently Constellation has bought larger units from big companies, and floated two subsidiaries publicly, Topicus.com TOI-X and Lumine Group Inc. LMN-X
Constellation’s core acquisition model has spawned many copycats since it went public in 2006. The company, renowned for paying relatively little for acquisitions, averaged 30-per-cent-plus annual returns until this year, making it Canada’s second most valuable technology company behind Shopify Inc. SHOP-T Constellation’s stock price hit a high of $5,300 in May.
Mr. Miller’s call marked not only a rare public foray for Constellation leadership but an even rarer second such event in two weeks. Prior to Mr. Leonard’s departure, shareholders had been spooked by concerns that Constellation companies could be vulnerable as generative artificial intelligence upends the global technology sector. The stock is now 27 per cent off its peak.
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Much of the fears stem from the threat of lean startups that have quickly launched businesses using generative AI that could challenge incumbent software vendors at a fraction of the cost. There are also concerns facing incumbent enterprise software vendors that many of their customers could create their own tools using generative AI that could displace what they now buy.
Three days before his departure, Mr. Leonard hosted a question-and-answer session on AI and its potential impact on Constellation’s business. During the call he did not provide much clarity and at times was dismissive of the potential disruption the tools could pose to its underlying business. Mr. Miller similarly dismissed concerns about the AI threat Wednesday, saying Constellation’s business operators haven’t expressed “any concern about that.”
Mr. Moscohopoulos called the recent selloff “overdone” in a note, arguing Constellation would likely be a net beneficiary of AI. He added its “well-established playbook, bench strength and decentralized structure should allow it to sustain strong growth and exceptional returns on capital.”