Computer Modelling Group Ltd. (TSX:CMG) ("CMG" or the "Company") is very pleased to report our second quarter results for the three and six months ended September 30, 2012.
SECOND QUARTER HIGHLIGHTS For the three months ended September 30, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 12,012 9,308 2,704 29% Perpetual software licenses 2,671 1,596 1,075 67% Total revenue 16,073 11,982 4,091 34% Operating profit 8,032 5,226 2,806 54% Net income 5,361 4,318 1,043 24% Earnings per share - basic 0.14 0.12 0.02 17% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 25,192 18,305 6,887 38% Perpetual software licenses 4,741 6,987 (2,246) -32% Total revenue 32,539 27,921 4,618 17% Operating profit 16,137 14,318 1,819 13% Net income 11,451 10,981 470 4% Earnings per share - basic 0.31 0.30 0.01 3% ----------------------------------------------------------------------------
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 November 7, 2012, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three and six months ended September 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 Fiscal Fiscal 2011(1) 2012(2) 2013(3) ($ thousands, unless otherwise stated) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ---------------------------------------------------------------------------- Annuity/maintenance licenses 7,999 8,531 8,997 9,308 12,056 12,497 13,179 12,012 Perpetual licenses 2,335 3,911 5,391 1,596 2,321 3,416 2,070 2,671 ---------------------------------------------------------------------------- Software licenses 10,333 12,442 14,388 10,904 14,377 15,913 15,249 14,683 Professional services 1,730 1,936 1,551 1,078 1,521 1,302 1,216 1,390 ---------------------------------------------------------------------------- Total revenue 12,063 14,378 15,939 11,982 15,898 17,215 16,465 16,073 Operating profit 5,516 7,532 9,092 5,226 8,093 9,193 8,105 8,032 Operating profit % 46 52 57 44 51 53 49 50 EBITDA(4) 5,789 7,818 9,366 5,508 8,414 9,543 8,423 8,425 Profit before income and other taxes 5,278 7,413 9,240 6,096 8,184 9,104 8,577 7,703 Income and other taxes 1,715 2,605 2,577 1,778 2,394 2,484 2,487 2,342 Net income for the period 3,563 4,808 6,663 4,318 5,790 6,620 6,090 5,361 Cash dividends declared and paid 3,623 3,643 7,519 4,053 4,079 4,848 9,736 6,020 ---------------------------------------------------------------------------- Per share amounts - ($/share) Earnings per share - basic 0.10 0.13 0.18 0.12 0.16 0.18 0.16 0.14 Earnings per share - diluted 0.10 0.13 0.18 0.11 0.15 0.17 0.16 0.14 Cash dividends declared and paid 0.10 0.10 0.205 0.11 0.11 0.13 0.26 0.16 ---------------------------------------------------------------------------- (1) Q3 and Q4 of fiscal 2011 include $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 and Q2 of fiscal 2013 include $2.1 million and $0.2 million, respectively, 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".
Highlights
During the six months ended September 30, 2012, as compared to the same period of prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 38% -- Increased operating profit by 13% -- Increased spending on research and development by 21% -- Increased EBITDA by 13% -- Realized earnings per share of $0.31, representing a 3% increase Revenue For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 14,683 10,904 3,779 35% Professional services 1,390 1,078 312 29% ---------------------------------------------------------------------------- Total revenue 16,073 11,982 4,091 34% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 91% 91% Professional services - % of total revenue 9% 9% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 29,933 25,292 4,641 18% Professional services 2,606 2,629 (23) -1% ---------------------------------------------------------------------------- Total revenue 32,539 27,921 4,618 17% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 92% 91% Professional services - % of total revenue 8% 9% ----------------------------------------------------------------------------
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 34% for the three months ended September 30, 2012, compared to the same period of the previous fiscal year, due to an increase in software license sales driven by the growth in both annuity/maintenance and perpetual license sales, and a slight increase in fees for professional services earned during the quarter.
Total revenue increased by 17% in the six months ended September 30, 2012, compared to the same period of the previous fiscal year, as a result of the increase in software license sales driven by the increase in annuity/maintenance revenue.
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 September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 12,012 9,308 2,704 29% Perpetual licenses 2,671 1,596 1,075 67% ---------------------------------------------------------------------------- Total software license revenue 14,683 10,904 3,779 35% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 82% 85% Perpetual as a % of total software license revenue 18% 15% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 25,192 18,305 6,887 38% Perpetual licenses 4,741 6,987 (2,246) -32% ---------------------------------------------------------------------------- Total software license revenue 29,933 25,292 4,641 18% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 84% 72% Perpetual as a % of total software license revenue 16% 28% ----------------------------------------------------------------------------
Total software license revenue grew by 35% in the three months ended September 30, 2012, compared to the same period of the previous fiscal year, due to the increases in both annuity/maintenance and perpetual license revenue related to increased sales to new and existing customers. Total software license revenue grew by 18% for the six months ended September 30, 2012, compared to the same period of the previous fiscal year, as a result of an increase in the annuity/maintenance revenue stream offset by a decrease in perpetual license sales.
CMG's annuity/maintenance license revenue increased by 29% and 38% during the three and six months ended September 30, 2012, respectively, compared to the same periods of last year. These increases were 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 current and previous fiscal year. Part of the increase in the six months ended September 30, 2012, compared to the same period of the previous fiscal year, is due to the inclusion of a payment received in the first quarter of the current fiscal year 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. During the current quarter, no payments have been received or recorded for this arrangement. If we were to exclude revenue received from this particular customer from the year-to-date recorded revenue to provide a normalized comparison, we would note that the annuity/maintenance revenue grew by 26% for the six months ended September 30, 2012, compared to the same period of the previous fiscal year.
Despite some variability introduced by the arrangement described above, it should be noted that our annuity/maintenance license sales, representing our recurring revenue stream, have continued to experience consecutive quarterly increases over the past several fiscal years, and this trend continued in the second quarter of fiscal 2013.
We can observe from the table below that the exchange rates between the US and Canadian dollars during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported annuity/maintenance revenue.
Software license revenue under perpetual sales increased by 67% for the three months ended September 30, 2012, compared to the same period of the previous fiscal year, driven by increased sales of perpetual licenses in the North America and Eastern Hemisphere. Perpetual license sales for the six months ended September 30, 2012, decreased by 32% 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 dollar perpetual contract in the Eastern Hemisphere which contributed significantly to the revenue growth in the first six months of the previous fiscal year.
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 previous quarters contributed to the increase in our recurring maintenance revenue in the current quarter.
Similar to the annuity/maintenance revenue stream, we can observe from the table below that the exchange rates between the US and Canadian dollars during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported perpetual license 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 September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 6,938 5,902 1,036 18% Weighted average conversion rate 1.005 0.990 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 6,972 5,841 1,131 19% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 1,905 1,656 249 15% Weighted average conversion rate 1.007 0.964 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 1,918 1,596 322 20% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 15,576 11,448 4,128 36% Weighted average conversion rate 1.001 0.994 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 15,598 11,377 4,221 37% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 3,251 7,277 (4,026) -55% Weighted average conversion rate 1.002 0.956 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 3,257 6,955 (3,698) -53% ---------------------------------------------------------------------------- REVENUE BY GEOGRAPHIC SEGMENT For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 5,473 3,998 1,475 37% United States 2,549 2,061 488 24% South America 1,172 926 246 27% Eastern Hemisphere(1) 2,818 2,323 495 21% ---------------------------------------------------------------------------- 12,012 9,308 2,704 29% ---------------------------------------------------------------------------- Perpetual revenue Canada 753 - 753 - United States 258 141 117 83% South America - 615 (615) -100% Eastern Hemisphere 1,660 840 820 98% ---------------------------------------------------------------------------- 2,671 1,596 1,075 67% ---------------------------------------------------------------------------- Total software license revenue Canada 6,226 3,998 2,228 56% United States 2,807 2,202 605 27% South America 1,172 1,541 (369) -24% Eastern Hemisphere 4,478 3,163 1,315 42% ---------------------------------------------------------------------------- 14,683 10,904 3,779 35% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 10,413 7,732 2,681 35% United States 4,942 4,052 890 22% South America 4,334 1,748 2,586 148% Eastern Hemisphere(1) 5,503 4,773 730 15% ---------------------------------------------------------------------------- 25,192 18,305 6,887 38% ---------------------------------------------------------------------------- Perpetual revenue Canada 1,314 32 1,282 4006% United States 662 603 59 10% South America 483 1,291 (808) -63% Eastern Hemisphere 2,282 5,061 (2,779) -55% ---------------------------------------------------------------------------- 4,741 6,987 (2,246) -32% ---------------------------------------------------------------------------- Total software license revenue Canada 11,727 7,764 3,963 51% United States 5,604 4,655 949 20% South America 4,817 3,039 1,778 59% Eastern Hemisphere 7,785 9,834 (2,049) -21% ---------------------------------------------------------------------------- 29,933 25,292 4,641 18% ---------------------------------------------------------------------------- (1) Includes Europe, Africa, Asia and Australia.
On a geographic basis, total software license sales increased across all regions with the exception of the South American market which experienced an overall decrease during the three months ended September 30, 2012, compared to the same period of the previous fiscal year, and Eastern Hemisphere, which experienced a $2.0 million decrease in the six months ended September 30, 2012, compared to the same period of the previous fiscal year. Total revenues in both of these regions, were impacted by lower perpetual sales. The most significant growth came from our annuity/maintenance license sales, with increases experienced across all regions.
The Canadian market (representing 39% of year-to-date total software revenue) experienced healthy increases in both annuity/maintenance and perpetual license sales during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. 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 quarterly increases of 51%, 40%, 17% and 32% recorded during Q2 2012, Q3 2012, Q4 2012, and Q1 2013, respectively. This growth trend has continued into the second quarter of the current fiscal year with the recorded increase of 37%.
The US market (representing 19% of year-to-date total software revenue) also grew annuity/maintenance and perpetual license sales during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. 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%, 20%, 26% and 20% recorded during Q2 2012, Q3 2012, Q4 2012, and Q1 2013, respectively. This growth trend has continued into the second quarter of the current fiscal year with the recorded increase of 24%.
South America (representing 16% of year-to-date total software revenue) experienced growth in annuity/maintenance revenue during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. Annuity/maintenance revenue grew in the first six months of the current fiscal year mainly due to the inclusion of the significant amount on the long-term contract for which revenue is recognized on a cash basis. If we were to adjust year-to-date annuity/maintenance revenue in the current fiscal year for the described amount, we would notice that South America grew annuity/maintenance revenue by just over 30% as a result of the sales to both new and existing clients. The increase in annuity/maintenance license sales was offset by the decreases in perpetual license sales during both the three and six months ended September 30, 2012.
Eastern Hemisphere (representing 26% of the year-to-date total software revenue) grew annuity/maintenance license sales during both three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. While perpetual license sales increased in the current quarter, they decreased on a year-to-date basis, as a result of the large perpetual sale made during the first quarter of the previous fiscal year which contributed significantly to revenue growth during the six months ended September 30, 2011.
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