Constellation Conference Call – An Opportunity to Get into the Mind of CSU’s New Boss

Mark Miller, who was recently appointed as the new President of Constellation Software after Mark Leonard, the legendary executive of CSU and arguably one of the best wealth creators in the Canadian market over the last 15 years, announced his resignation from the position due to health reasons.

Mark Miller started as a co-founder of a business back in the 1980s that was eventually acquired by CSU in 1995. He has been with the company for more than 30 years, with deep experience in capital deployment and acquisitions. He gradually moved into new verticals over the years, created an operating group called Volaris, and later became the Chief Operating Officer of CSU before the transition. His background is more operational, but for investors looking for someone who understands the nuts and bolts of CSU’s culture, he should be the ideal candidate.

This conference call provided an opportunity for analysts and shareholders to hear directly from CSU’s new leader—particularly to gain his insights on capital allocation, the impact of artificial intelligence (AI) on CSU’s business model, and the company’s long-term strategy. This blog summarizes the conference call across a few key topics:

• Resource allocation: What will the new CEO prioritize?

Mark Miller indicated that his number one priority as the new leader is to focus on capital deployment. He will especially spend time studying larger capital deployment opportunities—specifically, how to execute larger deals better.

He also emphasized developing a detailed succession plan for the management team throughout the organization. Overall, the long-term strategic goal is to maintain business as usual while continuing to improve capital allocation and strengthen operating businesses.

• Does Artificial Intelligence (AI) change the way CSU operates?

One question was whether AI will affect CSU’s budget for research and development (R&D) spending. Mark Miller’s answer: it depends on the business, but he encourages leaders to integrate AI to improve products and services for customers. Internally, CSU has a group focused on developing AI and working closely with customers. From an operational perspective, the new boss will ensure CSU’s operating businesses share best practices among units related to AI.

Investors also asked whether AI would change CSU’s criteria for future leadership—for example, seeking candidates with more technological backgrounds rather than capital deployment. His response: it would not change CSU’s current practices. The company continues to target buy-and-hold-forever businesses and prefers leadership with skillsets that develop people internally, focus on capital deployment, and think long-term—rather than purely technical expertise.

Regarding decentralization, Miller indicated that CSU may continue to make business units smaller by breaking them up. The company has already done a significant amount of this and expects to do more in the future. Management sees it as another tool in the decentralized model, with the goal of fostering entrepreneurship, staying nimble and close to customers, and developing better products.

• Is there a change in shareholder engagement?

CSU is one of the rare companies that does not hold quarterly conference calls, instead communicating with shareholders at an annual meeting once a year. They used to write insightful shareholder letters but stopped a few years ago. Despite a busier-than-usual conference call schedule recently, investors should not expect more regular updates or greater engagement going forward.

There was a large insider purchase recently, which raised the question of whether a potential share buyback is coming. Mark Miller explained that insider purchases signal management’s confidence in the company’s long-term future. However, CSU still prefers to allocate capital to acquisitions, which historically have offered much higher returns for shareholders than buybacks.

• View on capital allocation, M&A, and hurdle rate

On capital allocation, investors asked if there are any changes to the company’s strategy. Management indicated that AI has not impacted either the pace of M&A or the valuation of acquisition targets in the private market. The company has also not seen increasing competition at the unit level. Miller noted that CSU’s operating units tend to be fast followers, quick to respond to changes in market size or competitive dynamics.

He also emphasized that he will spend more time studying large M&A deals. While the company is pursuing opportunities, they are not being disclosed yet.

Lastly, when asked what happens if there are not enough targets that meet the company’s hurdle rate, Miller stressed that CSU will not lower the hurdle simply because of a weak deal pipeline. Depending on the situation, management will do what is best for shareholders—whether that means paying a special dividend (as done in the past) or pursuing other investment opportunities. Again, CSU is not a fan of buybacks.

Conclusion

Overall, the key message from CSU’s new boss is that business will continue as usual. Nothing significant has changed in how the company operates or allocates capital. Management has sent a positive signal to investors regarding the company’s outlook through large insider purchases. Mark Miller is a long-time executive, and for investors seeking someone who understands CSU’s culture and playbook, we feel he is the ideal person.

Unlock the Power of Informed Investing with 5i Research!

DIY investing doesn't have to mean going it alone. At 5i Research, we're your trusted partner in navigating the stock market. Our platform offers comprehensive stock and market research, empowering you to make smart investment decisions. 

• Investor Q&A: Have burning questions? Get answers from our team of experts and fellow investors in our dedicated Q&A section.
• Research Reports: With over 60 meticulously researched Canadian stocks, our reports offer in-depth analysis, giving you the confidence to invest wisely. 
• Model Portfolios, Alerts, Forums, Portfolio Tracking, and Much More...

Take Care,

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.