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Yesterday Constellation Software (CSI)'s fiscal 2025 Dropped.
Here is an update:
# Business Model
* CSI operates as a decentralized serial acquirer of Vertical Market Software (VMS) businesses.
* They operate with deeply negative working capital because customers typically pay for software licenses and subscriptions annually in advance. This gives CSI a continuous stream of zero-cost capital to reinvest.
* Capital allocation is pushed down the chain to avoid bureaucracy. Managers target 20-30% IRRs, usually buying hundreds of small, sub-$10M companies to bypass the intense PE bidding wars.
# Q4 / Fiscal 2025 Results:
* Total consolidated revenue for 2025 hit $11,623 million, up 15% from 2024.
* Total Organic growth came in at 4% (3% when adjusted for foreign exchange).
* Nearly 75% of their revenue is highly recurring maintenance and subscription fees, which provides massive downside protection.
* Crucially, organic growth in maintenance / recurring (most important segment) this recurring segment was 6%, proving customers aren't churning away due to AI.
* Organic growth in this segment may actually accelerate if CSI can successfully implement AI initiatives in their VMS companies.
IFRS accounting makes CSI's GAAP net income very noisy, specifically due to two major ongong non operating distortions. They are:
1. The Topicus Penalty: Took a $440 million non-cash hit because Topicus (a subsidiary) performed so well that the put options held by minority shareholders had to be revalued higher. This happens on an ongoing basis (not new).
2. Asseco: CSI increased its stake in Asseco Poland S.A. to 24.84%. This crossed the "significant influence" threshold, forcing an accounting switch from fair-value to the book value method, which generated a non-cash income bump of $260 million.
These are really immaterial to the business operations though - to assess that we have to follow the cash (Free Cash Flow Attributable to Shareholders - FCFA2S)
* FCFA2S grew 14.3% to $1,683 million in 2025.
* Their Reinvestment Rate dropped slightly to 89.9% (they deployed $1,513M vs $1,683M FCFA2S).
* Return on Invested Capital (ROIC) based on FCFA2S was 21.98%, slightly down from 23.70% in 2024.
* Return on Incremental Invested Capital (ROIIC) based on FCFA2S dropped to 14.59%. This suggests the 2024 acquisition cohort is yielding a lower initial cash rate, or internal hurdle rates are slipping as they pursue larger deals.
The real risk isn't AI - it's the law of large numbers.
* To keep growing at historical rates, they now need to deploy $1.5 billion to $1.8 billion annually.
* Buying 200 small companies a year no longer moves the needle. To compensate, they are pursuing larger public market deals (like Asseco and Sabre Corporation), exposing them to higher purchase multiples and competitive auctions.
# Valuation:
* Using a 5-year DCF model with a 10% discount rate and an FCFA2S exit multiple, shares look undervalued.
* Even projecting a conservative 12% growth rate and assuming multiple compression (dropping from 27x to 22x), fair value sits around $2,331 USD / $3,170 CAD.
CSI remains an apex capital allocator, but going forward, their valuation will depend entirely on management’s ability to resist overpaying for growth as they scale. AI is not eating their lunch.
Read more here - no paywall! --> [https://thepursuitofcompounding.substack.com/p/constellation-software-inc-fiscal](https://thepursuitofcompounding.substack.com/p/constellation-software-inc-fiscal)