Hey Simon - unfortunately what’s missing here is that OCF growth of 10% implies that CSU can still deploy capital at legacy ROICs. The business’ organic growth is in the low single digits, and the vast majority of topline growth (and therefore incremental flow through) comes from newly acquired assets. We are currently in likely the most competitive era for CSU to participate in acquisitive processes - highest number/variety of bidders (PE, CSU copycats, independent startups targeting LSD $m niches given the cratering cost curve for software development), highest perceived multiples by sellers (AI whitewashing + hot tech market has made people think their businesses are worth more than they are), and macro factors (tariff and rate environment likely makes it harder at the margin for CSU to push through their 20%+ price increases to customers in years 1/2). When you do some math on the amount of capital that needs to be deployed to achieve your OCF growth cases, you’ll likely start to be a bit more concerned
I feel the cratering cost curve (leading to more competitors in the vertical) and worries about the decline of seat-based revenue model would lead to lower perceived multiples by sellers. Hence a good thing for CSU. Do share your thoughts.
10% OCF does not seem low to me at all. 10% growth basically means that CSU continues to deploy 60% of prior year FCF (in-line with LTM 3Q25) at 20% ROIC and a 1.5x M&A rev multiple. That in turn means that deployed capital per year goes from $1.4bn in 2025, to nearly $2.5bn by the end of the decade. This figure is about 40% higher than the highest ever capital deployment year in the history of CSU. Law of large numbers is a real thing, and these assumptions assume that CSU margins stay constant too (I could argue that CSU implementing structurally higher cost AI will actually dilute margins).
they have scaled acquisitions over the years and both the number of deals and average size has increased. their opportunity size has grown substantially so we will see.
They have scaled and ROICs have come down dramatically, as Mark Leonard said himself would happen. This year has been a very disappointing capital deployment year, so like you said, we will see if it's a canary in the coal mine or not
can you elaborate what you mean by “performance”? they only normally talk publicly at the agm in may (no quarterly earnings calls) but they did have a brief call a couple months ago specifically to talk about mark miller taking the helm and previously about ai as an ad hoc based on a large investors requests for comments.
constellation is notoriously mum about details but they do share some of their thoughts on trends and insights at the agm which will be coming in May (if i recall correctly its typically in may). They do not have much to say broadly as they defer to the unique verticals and business units layers beneath that operate in a decentralized manner. strategy hasn’t changed much but they have continued to experiment with sharing of best practices between business units and things like their venture capital idea and trying to expand into other business models to acquire outside vms but not many have seen to be as good of candidates so far
Hey Simon - unfortunately what’s missing here is that OCF growth of 10% implies that CSU can still deploy capital at legacy ROICs. The business’ organic growth is in the low single digits, and the vast majority of topline growth (and therefore incremental flow through) comes from newly acquired assets. We are currently in likely the most competitive era for CSU to participate in acquisitive processes - highest number/variety of bidders (PE, CSU copycats, independent startups targeting LSD $m niches given the cratering cost curve for software development), highest perceived multiples by sellers (AI whitewashing + hot tech market has made people think their businesses are worth more than they are), and macro factors (tariff and rate environment likely makes it harder at the margin for CSU to push through their 20%+ price increases to customers in years 1/2). When you do some math on the amount of capital that needs to be deployed to achieve your OCF growth cases, you’ll likely start to be a bit more concerned
60% of FCF deployed at 20% means 12% return already.
Now add organic growth and we are at ~16%
Now if they retain 40% of cashflow as they only deploy 60% of that's another 2.5% left to shareholder.
We're in the 18% total return range with no multiple change...
I feel the cratering cost curve (leading to more competitors in the vertical) and worries about the decline of seat-based revenue model would lead to lower perceived multiples by sellers. Hence a good thing for CSU. Do share your thoughts.
10% is low
10% OCF does not seem low to me at all. 10% growth basically means that CSU continues to deploy 60% of prior year FCF (in-line with LTM 3Q25) at 20% ROIC and a 1.5x M&A rev multiple. That in turn means that deployed capital per year goes from $1.4bn in 2025, to nearly $2.5bn by the end of the decade. This figure is about 40% higher than the highest ever capital deployment year in the history of CSU. Law of large numbers is a real thing, and these assumptions assume that CSU margins stay constant too (I could argue that CSU implementing structurally higher cost AI will actually dilute margins).
they have scaled acquisitions over the years and both the number of deals and average size has increased. their opportunity size has grown substantially so we will see.
They have scaled and ROICs have come down dramatically, as Mark Leonard said himself would happen. This year has been a very disappointing capital deployment year, so like you said, we will see if it's a canary in the coal mine or not
Thank you! Where was it mentioned that Mark Leonard was expected to make a full recovery?
look at the other comments, thanks!
Have you found any recent comments from the company talking about their current and future view of performance
can you elaborate what you mean by “performance”? they only normally talk publicly at the agm in may (no quarterly earnings calls) but they did have a brief call a couple months ago specifically to talk about mark miller taking the helm and previously about ai as an ad hoc based on a large investors requests for comments.
Performance”was
“Performance “ was a catch all word from me to query CS public statements about on going strategy, opportunities ,focus , market conditions and so on.
Returns will come from their existing portfolio
And well bought new additions.
Thats what I would love to get a sense of.
constellation is notoriously mum about details but they do share some of their thoughts on trends and insights at the agm which will be coming in May (if i recall correctly its typically in may). They do not have much to say broadly as they defer to the unique verticals and business units layers beneath that operate in a decentralized manner. strategy hasn’t changed much but they have continued to experiment with sharing of best practices between business units and things like their venture capital idea and trying to expand into other business models to acquire outside vms but not many have seen to be as good of candidates so far
uh oh! times are changing!
Well written and i fully agree with your arguments.
Seems like CSU is thrown in on the all SaaS will be dead pile, undeservingly so
thank you! 🙏
Hi Simon, where did you get the info that Mark L is about to make a full recovery? Thanks for the great article!
https://www.bnnbloomberg.ca/video/shows/market-call/2026/01/16/andrey-omelchaks-past-picks-topicuscom-boyd-group-constellation-software/