Release Date: August 12, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AI adoption is improving development productivity across the portfolio, enabling faster product road map execution.
- Verticalization strategy aims to strengthen market positioning and build long-term reputation as a preferred acquirer.
- M&A activity remains robust with a strong pipeline, including larger deals and carve-outs, despite competitive pressure.
- Recent acquisitions like Derby Soft are performing well, with high growth and profitability justifying premium valuations.
- Management maintains disciplined capital allocation, focusing on IRR and operating cash flow rather than working capital gains.
Negative Points
- Organic growth in maintenance and recurring revenue decelerated to 4%, below the historical 5-6% range, due to one-offs and acquisition drags.
- Altera's organic growth is expected to remain negative for the next year or two, with a large customer loss impacting results.
- AI-driven revenue uplift has not yet materialized, with management noting it is still a ways out.
- Competition for acquisitions remains intense, with no improvement in win rates or pricing, especially at the high end.
- Larger acquisitions like Altera are harder to integrate and improve, with best practices taking longer to implement.
Q & A Highlights
Q: Can you provide more color on the organic growth deceleration in maintenance and recurring revenue, excluding Altera, which came in at 4% versus the historical 5%-6% range?
A: Jamal Baksh (CFO) explained that the deceleration was due to several one-off items. These included accounting-related impacts from large acquisitions like Altera and Dark Matter, which had strong Q2 2025 comps due to upfront revenue recognition on large contracts, creating difficult year-over-year comparisons. Additionally, Lumin's recent large acquisitions are currently dragging on growth as those businesses are being fixed, and a business in South America lost a large customer that was known about at the time of acquisition. Baksh noted that backing out these 3-4 items would normalize growth back to the historical 5% trend.
Q: Regarding the new verticalization strategy, what has changed in the market to lead you to evolve from the historical focus on not integrating acquisitions, and will these verticals span across different operating groups?
A: Mark Miller (President) clarified that this is not about integrating businesses functionally. The goal is to group businesses and prospects into coherent verticals, sometimes moving them between operating groups, to have a leader oversee a specific niche. This allows them to leverage AI tools across verticals and build a reputation as the "obvious permanent owner" of a niche, making them the first call for founders looking to sell. The constraint is having the right leaders, which takes time to develop.
Q: Are you seeing a growing number of businesses in the portfolio starting to see an uptick in organic growth driven by AI product enhancements?
A: Mark Miller (President) stated that while they are seeing significant productivity increases in their development process, with teams moving faster through backlogs, they have not yet seen a real pickup in organic growth from AI. He emphasized that building products faster is different from selling them, as customers need to have a budget and a need they are willing to pay for. He expects the impact on organic growth to be a ways out.
Q: The recent acquisitions like Derby Soft seem to have a higher multiple than typical. Is there a reason for this, and do you still expect the IRR to be in line with other acquisitions?
A: Bernard Anzarouth (Chief Investment Officer) confirmed it is a high multiple, but justified it by noting the business is very successful, growing nicely, and has good profitability. Jamal Baksh (CFO) added that they used leverage to help pay for it. Mark Miller (President) affirmed that the expected IRR remains in line with acquisitions of similar size, stating "merge rates aren't changing."
Q: On Altera, which has now passed its four-year anniversary, do you think the results have tracked your initial expectations, and what are the key learnings from this large acquisition?
A: Jamal Baksh (CFO) stated that the business is aligned with the original investment thesis and is actually operating ahead of the expected IRR. Bernard Anzarouth (CIO) shared that a key learning is that driving best practices is harder and slower in larger acquisitions. The focus is on breaking these larger businesses into smaller business units faster to improve them. Mark Miller (President) added that the complexity of larger businesses and their different cultures are the main challenges.
Q: Given the elevated M&A activity in the first half of the year, should we expect a similar pace in the back half?
A: Bernard Anzarouth (CIO) declined to offer a prediction, stating that while they have a very robust funnel, it is impossible to tell when or if these deals will close. He noted that last year's results were lower, highlighting the difficulty in predicting the timing of acquisitions.
Q: Can you speak to the profitability of the 2026 cohort of acquisitions and how it compares to other cohorts?
A: Jamal Baksh (CFO) noted that the 2026 cohort's margins improved from negative 16% in Q1 to positive 16% in Q2, with the negative start due to purchase accounting items like bonuses. The 2025 cohort is also trending up, from 16%-17% to 20%. He explained that while these newer cohorts are taking longer to reach the typical 30%+ margins of older cohorts, they are not inherently lower forever.
Q: Are carve-outs typically an area where Constellation can deploy larger amounts of capital, and what are the unique challenges they present?
A: Bernard Anzarouth (CIO) confirmed that carve-outs are a key area for deploying larger capital, citing their track record with Fortune 500 companies. Mark Miller (President) detailed the challenges, including financial statements not being fully separated, interwoven systems, and the need to manage the seller's concerns about their customers. Bernie added that they infuse a return-on-investment mindset into these businesses, which often lack it, and Mark noted that managing working capital is harder without a separate balance sheet.
Q: Are you still studying high-performing conglomerates, and how far do those learnings trickle down through the organization?
A: Mark Miller (President) said that while the senior team studies these models, the application varies by operating group. He referenced a study by Larry Cunningham that interviewed 70 leaders across the world, which found a common understanding and approach to business independent of language or geography. He was surprised by how deeply the core Constellation principles are embedded throughout the decentralized organization.
Q: Has the idea of looking outside vertical market software to deploy capital taken a backseat given the current level of capital deployment?
A: Mark Miller (President) stated that the focus is currently on software, as they have the ability to deploy more capital and are constantly learning. He noted that their teams are now able to handle larger acquisitions, which has opened up a new round of opportunities that weren't possible 15-20 years ago. The idea of looking outside software is discussed occasionally but is not the current focus.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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