Computer Modelling Group Ltd. ("CMG" or the "Company") (TSX:CMG) is very pleased to report our first quarter results for the three months ended June 30, 2012.
FIRST QUARTER HIGHLIGHTS For the three months ended June 30, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance software licenses 13,179 8,997 4,182 46% Perpetual software licenses 2,070 5,391 (3,321) -62% Total revenue 16,465 15,939 526 3% Operating profit 8,105 9,092 (987) -11% Net income 6,090 6,663 (573) -9% Earnings per share - basic 0.16 0.18 (0.02) -11% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG," the "Company," "we" or "our"), presented as at August 7, 2012, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three months ended June 30, 2012 and the audited consolidated financial statements and MD&A for the years ended March 31, 2012 and 2011 contained in the 2012 Annual Report for CMG. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com. The financial data contained herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars and rounded to the nearest thousand.
FORWARD-LOOKING INFORMATION
Certain information included in this MD&A is forward-looking. Forward-looking information includes statements that are not statements of historical fact and which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as investment objectives and strategy, the development plans and status of the Company's software development projects, the Company's intentions, results of operations, levels of activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), business prospects and opportunities, research and development timetable, and future growth and performance. When used in this MD&A, statements to the effect that the Company or its management "believes", "expects", "expected", "plans", "may", "will", "projects", "anticipates", "estimates", "would", "could", "should", "endeavours", "seeks", "predicts" or "intends" or similar statements, including "potential", "opportunity", "target" or other variations thereof that are not statements of historical fact should be construed as forward-looking information. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management of the Company. The Company believes that the expectations reflected in such forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking information should not be unduly relied upon.
With respect to forward-looking information contained in this MD&A, we have made assumptions regarding, among other things:
-- Future software license sales -- The continued financing by and participation of the Company's partners in the DRMS project and it being completed in a timely manner -- Ability to enter into additional software license agreements -- Ability to continue current research and new product development -- Ability to recruit and retain qualified staff
Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company's actual results, performance or achievements, or future events or developments, to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors which are described in the MD&A of CMG's 2012 Annual Report under the heading "Business Risks":
-- Economic conditions in the oil and gas industry -- Reliance on key clients -- Foreign exchange -- Economic and political risks in countries where the Company currently does or proposes to do business -- Increased competition -- Reliance on employees with specialized skills or knowledge -- Protection of proprietary rights
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
NON-IFRS FINANCIAL MEASURES
This MD&A includes certain measures which have not been prepared in accordance with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs." Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance.
"Direct employee costs" include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. "Other corporate costs" include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IFRS. People-related costs represent the Company's largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See "Expenses" heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.
"EBITDA" refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to consideration of how those activities are amortized, financed or taxed. See "EBITDA" heading for a reconciliation of EBITDA to net income.
CORPORATE PROFILE
CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced processes reservoir modelling software with a blue chip client base of international oil companies and technology centers in over 50 countries. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities. CMG has sales and technical support services based in Calgary, Houston, London, Caracas and Dubai. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".
QUARTERLY PERFORMANCE Fiscal 2011(1) ($ thousands, unless otherwise stated) Q2 Q3 Q4 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance licenses 7,855 7,999 8,531 Perpetual licenses 2,975 2,335 3,911 ---------------------------------------------------------------------------- Software licenses 10,830 10,333 12,442 Professional services 2,502 1,730 1,936 ---------------------------------------------------------------------------- Total revenue 13,332 12,063 14,378 Operating profit 6,695 5,516 7,532 Operating profit % 50 46 52 EBITDA(4) 6,944 5,789 7,818 Profit before income and other taxes 6,565 5,278 7,413 Income and other taxes 1,999 1,715 2,605 Net income for the period 4,565 3,563 4,808 Cash dividends declared and paid 3,430 3,623 3,643 ---------------------------------------------------------------------------- Per share amounts - ($/share) Earnings per share - basic 0.13 0.10 0.13 Earnings per share - diluted 0.13 0.10 0.13 Cash dividends declared and paid 0.095 0.10 0.10 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- QUARTERLY PERFORMANCE Fiscal Fiscal 2012(2) 2013(3) ($ thousands, unless otherwise stated) Q1 Q2 Q3 Q4 Q1 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Annuity/maintenance licenses 8,997 9,308 12,056 12,497 13,179 Perpetual licenses 5,391 1,596 2,321 3,416 2,070 -------------------------------------------------------------------------- Software licenses 14,388 10,904 14,377 15,913 15,249 Professional services 1,551 1,078 1,521 1,302 1,216 -------------------------------------------------------------------------- Total revenue 15,939 11,982 15,898 17,215 16,465 Operating profit 9,092 5,226 8,093 9,193 8,105 Operating profit % 57 44 51 53 49 EBITDA(4) 9,366 5,508 8,414 9,543 8,423 Profit before income and other taxes 9,240 6,096 8,184 9,104 8,577 Income and other taxes 2,577 1,778 2,394 2,484 2,487 Net income for the period 6,663 4,318 5,790 6,620 6,090 Cash dividends declared and paid 7,519 4,053 4,079 4,848 9,736 -------------------------------------------------------------------------- Per share amounts - ($/share) Earnings per share - basic 0.18 0.12 0.16 0.18 0.16 Earnings per share - diluted 0.18 0.11 0.15 0.17 0.16 Cash dividends declared and paid 0.205 0.11 0.11 0.13 0.26 -------------------------------------------------------------------------- -------------------------------------------------------------------------- (1) Q2, Q3 and Q4 of fiscal 2011 include $0.2 million, $0.3 million and $0.1 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (2) Q1, Q2, Q3 and Q4 of fiscal 2012 include $0.3 million, $0.04 million, $2.6 million and $2.7 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (3) Q1 of fiscal 2013 includes $2.1 million in revenue that pertains to usage of CMG's products in prior quarters. (4) EBITDA is defined as net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. See "Non-IFRS Financial Measures". Note: all quarterly data contained in the above table has been prepared in accordance with IFRS. Highlights During the three months ended June 30, 2012, as compared to the same period of prior fiscal year, CMG: -- Increased annuity/maintenance revenue by 46% -- Increased spending on research and development by 16% -- Paid out a dividend per share of $0.26, representing a 27% increase -- Realized earnings per share of $0.16
Revenue
For the three months ended June 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Software licenses 15,249 14,388 861 6% Professional services 1,216 1,551 (335) -22% ---------------------------------------------------------------------------- Total revenue 16,465 15,939 526 3% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Software license revenue - % of total revenue 93% 90% Professional services - % of total revenue 7% 10% ----------------------------------------------------------------------------
CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and fees for professional services. Total revenue increased by 3% in the current quarter, compared to the first quarter of the previous fiscal year, due to an increase in software license sales driven by the growth in annuity/maintenance license sales. This increase was partially offset by a decrease in fees for professional services earned during the quarter.
SOFTWARE LICENSE REVENUE
Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company's software products which is generally for a term of one year or less and perpetual software license sales, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Annuity/maintenance license fees have historically had a high renewal rate and, accordingly, provide a reliable revenue stream while perpetual license sales are more variable and unpredictable in nature as the purchase decision and its timing fluctuate with the customers' needs and budgets. The majority of CMG's customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG's software.
For the three months ended June 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance licenses 13,179 8,997 4,182 46% Perpetual licenses 2,070 5,391 (3,321) -62% ---------------------------------------------------------------------------- Total software license revenue 15,249 14,388 861 6% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 86% 63% Perpetual as a % of total software license revenue 14% 37% ----------------------------------------------------------------------------
Total software license revenue grew by 6% in the current quarter, compared to the first quarter of the previous fiscal year, due to the increase in annuity/maintenance license revenue related to increased sales to new and existing customers. This increase was substantially offset by a decrease in perpetual sales.
CMG's annuity/maintenance license revenue increased by 46% during the three months ended June 30, 2012, compared to the same period of last year. This increase was driven by sales to new and existing clients as well as an increase in maintenance revenue tied to our strong perpetual sales generated in the previous two fiscal years. Part of the increase is due to the inclusion of a payment received from one of our large customers for whom revenue recognition criteria are fulfilled only at the time of the receipt of funds. The payment was received for the licenses and services provided for two quarters of the previous fiscal year (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the "Quarterly Software License Revenue" graph). Given our long-standing relationship with this client, and the multi-year nature of the contract, we expect to continue to receive payments under this arrangement, however, the amount and timing are uncertain and will continue to be recorded on a cash basis which may introduce some variability in our reported quarterly annuity/maintenance revenue results. If we were to exclude revenue received from this particular customer from the current quarter's recorded revenue to provide a normalized comparison, we would note that the annuity/maintenance revenue increased by 24% in the current quarter.
Despite some variability introduced by the described arrangement, it should be noted that our annuity/maintenance license sales, representing a recurring revenue stream, have continued to experience consecutive quarterly increases over the past several fiscal years, and this trend has continued in the first quarter of fiscal 2013.
We can observe from the table below that the exchange rates between the US and Canadian dollars during the current quarter compared to the first quarter of the previous fiscal year, had no measurable impact on our reported annuity/maintenance revenue.
Software license revenue under perpetual sales decreased by 62% or $3.3 million for the three months ended June 30, 2012, compared to the same period of the previous fiscal year. In the first quarter of the previous fiscal year, we reported an amount associated with a multi-million perpetual contract in the Eastern Hemisphere which contributed significantly to the revenue growth in the first quarter of the previous year. Even though perpetual sales increased in the Canadian market in the current quarter, we have generated fewer perpetual license sales across all other regions. Software licensing under perpetual sales is a significant part of CMG's business, but may fluctuate significantly between periods due to the uncertainty associated with the timing and the location where sales are generated. For this reason, even though we expect to achieve a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year. It should be further pointed out, that strong perpetual sales in the previous quarters contributed to the increase in our recurring maintenance revenue in the current quarter.
We can observe from the table below that the exchange rates between the US and Canadian dollars during the current quarter compared to the first quarter of the previous fiscal year, had virtually no impact on our reported perpetual revenue.
The following table summarizes the US dollar denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars:
For the three months ended June 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 8,638 5,546 3,092 56% Weighted average conversion rate 0.999 0.998 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 8,626 5,536 3,090 56% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 1,346 5,621 (4,275) -76% Weighted average conversion rate 0.995 0.953 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 1,339 5,359 (4,020) -75% ----------------------------------------------------------------------------
REVENUE BY GEOGRAPHIC SEGMENT
For the three months ended June 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 4,939 3,734 1,205 32% United States 2,392 1,991 401 20% South America 3,162 822 2,340 285% Eastern Hemisphere(1) 2,686 2,450 236 10% ---------------------------------------------------------------------------- 13,179 8,997 4,182 46% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Perpetual revenue Canada 561 32 529 1653% United States 404 462 (58) -13% South America 483 676 (193) -29% Eastern Hemisphere 622 4,221 (3,599) -85% ---------------------------------------------------------------------------- 2,070 5,391 (3,321) -62% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total software license revenue Canada 5,500 3,766 1,734 46% United States 2,796 2,453 343 14% South America 3,645 1,498 2,147 143% Eastern Hemisphere 3,308 6,671 (3,363) -50% ---------------------------------------------------------------------------- 15,249 14,388 861 6% ---------------------------------------------------------------------------- (1) Includes Europe, Africa, Asia and Australia.
On a geographic basis, total software license sales increased across all regions with the exception of the Eastern Hemisphere which experienced a decline of 50%.
The Canadian market (representing 36% of the current quarter's total software revenue) experienced healthy increases in both annuity/maintenance and perpetual license sales with the recorded increases of $1.2 million and $0.5 million, respectively. These increases were supported by the sales to both new and existing clients. The Canadian market continues to be the leader in generating total software license revenue and, particularly, in generating the recurring annuity/maintenance revenue as evidenced by the consecutive quarterly increases of 49%, 51%, 40% and 17% recorded in the first, second, third and fourth quarters of the previous fiscal year, creating a trend which has continued into the first quarter of the current fiscal year.
The US market (representing 18% of the current quarter's total software revenue) grew the annuity/maintenance revenue stream by $0.4 million in the current quarter compared to the first quarter of the previous fiscal year, offset by a slight decrease in perpetual sales. Similar to the Canadian market, we have continued to see successive increases in the annuity/maintenance license sales in the US as evidenced by the increases of 19%, 19%, 20% and 26% recorded during the first, second, third and fourth quarters of the previous fiscal year. This growth trend has continued into the first quarter of the current fiscal year.
South America (representing 24% of the current quarter's total software revenue) experienced strong growth in annuity/maintenance revenue mainly due to the inclusion of the significant amount on the long-term contract for which revenue is recognized on a cash basis. The current quarter includes the revenue amount associated with licenses and services provided in two quarters of the previous fiscal year. If we were to adjust current quarter's revenue for the described amount, we would notice that South America grew annuity/maintenance revenue by more than 30% as a result of the sales to both new and existing clients. The increase in annuity/maintenance license sales was offset by a decrease of 29% in perpetual license sales.
Eastern Hemisphere (representing 22% of the current quarter's total software revenue) grew annuity/maintenance license sales by $0.2 million, which was offset by a decrease of $3.6 million in perpetual sales. A large perpetual sale made during the first quarter of the previous fiscal year, contributed significantly to the revenue growth in the comparative period.
The movements in perpetual sales across the regions are indicative of the unpredictable nature of the timing and location of perpetual license sales. Overall, our recurring annuity/maintenance revenue base continues to be strong and growing across all regions. We will continue to focus our efforts on increasing our license sales to both existing and new clients and, supported by our product suite offering and our customer-oriented approach, we will endeavor to continue expanding our market share globally.
As footnoted in the Quarterly Performance table, in the normal course of business CMG may complete the negotiation of certain annuity/maintenance contracts and/or fulfill revenue recognition requirements within a current quarter that includes usage of CMG's products in prior quarters. This situation particularly affects contracts negotiated with countries that face increased economic and political risks leading to revenue recognition criteria being satisfied only at the time of the receipt of cash. The dollar magnitude of such contracts may be significant to the quarterly comparatives of our annuity/maintenance revenue stream and, to provide a normalized comparison, we specifically identify the revenue component where revenue recognition is satisfied in the current period for products provided in previous quarters.
To view the Quarterly Software License Revenue, please visit the following link: http://media3.marketwire.com/docs/808cmg1.pdf.
DEFERRED REVENUE
2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Deferred revenue at: March 31 21,693 16,755 4,938 29% June 30 18,779 15,326 3,453 23% ----------------------------------------------------------------------------
CMG's deferred revenue consists primarily of amounts for pre-sold licenses. Our annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time.
The increase in deferred revenue year-over-year as at June 30 and March 31 is reflective of the growth in annuity/maintenance license sales. The variation within the year is due to the timing of renewals of annuity and maintenance contracts that are skewed to the beginning of the calendar year which explains the decrease in the deferred revenue balance at the end of the first quarter (June 30) compared to fiscal year-end (March 31). Deferred revenue at June 30, 2012 increased compared to the same period of prior fiscal year due to both renewal of the existing and signing of the new annuity and maintenance contracts in the quarter.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $1.2 million for the three months ended June 30, 2012, representing a decrease of $0.3 million from the amount recorded for the same period of the previous fiscal year. The first quarter of the previous fiscal year included $0.3 million in a grant received from the CMG Reservoir Simulation Foundation ("Foundation CMG") for the DRMS project which was fulfilled during that same quarter. Refer to the discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties." The completion of this funding is the main contributor to the decrease in professional services revenue in the current quarter compared to the first quarter of the previous fiscal year.
Professional services revenue consists of specialized consulting, training, and contract research activities. CMG performs consulting and contract research activities on an ongoing basis, but such activities are not considered to be a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner, combined with servicing our customers' needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within client companies.
Expenses
For the three months ended June 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Sales, marketing and professional services 3,962 3,125 837 27% Research and development 2,897 2,495 402 16% General and administrative 1,501 1,227 274 22% ---------------------------------------------------------------------------- Total operating expenses 8,360 6,847 1,513 22% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Direct employee costs(i) 6,595 5,563 1,032 19% Other corporate costs 1,765 1,284 481 37% ---------------------------------------------------------------------------- 8,360 6,847 1,513 22% ---------------------------------------------------------------------------- (i)Includes salaries, bonuses, stock-based compensation, benefits and commissions.
CMG's total operating expenses increased by 22% for the three months ended June 30, 2012, compared to the same period of the previous fiscal year due to increases in both direct employee and other corporate costs.
DIRECT EMPLOYEE COSTS
As a technology company, CMG's largest area of expenditure is for its people. Approximately 79% of the total operating expenses in the three months ended June 30, 2012 related to staff costs, compared to 81% recorded in the comparative period of last year. Staffing levels for the first three months of the current fiscal year grew in comparison to the same period of previous fiscal year to support our continued growth. At June 30, 2012, CMG's staff complement was 164 employees, up from 144 employees as at June 30, 2011. Direct employee costs increased during the current quarter compared to the first quarter of the previous fiscal year due to staff additions, increased levels of compensation, commissions and related benefits.
OTHER CORPORATE COSTS
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