Computer Modelling Group Ltd. (TSX: CMG) ("CMG" or the "Company") is very pleased to report our third quarter results for the three and nine months ended December 31, 2012.
THIRD QUARTER HIGHLIGHTS For the three months ended December 31, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 14,004 12,056 1,948 16% Perpetual software licenses 1,365 2,321 (956) -41% Total revenue 16,802 15,898 904 6% Operating profit 8,276 8,093 183 2% Net income 6,119 5,790 329 6% Earnings per share - basic 0.16 0.16 - 0% ---------------------------------------------------------------------------- For the nine months ended December 31, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 39,196 30,361 8,835 29% Perpetual software licenses 6,106 9,308 (3,202) -34% Total revenue 49,341 43,819 5,522 13% Operating profit 24,413 22,411 2,002 9% Net income 17,569 16,771 798 5% Earnings per share - basic 0.47 0.46 0.01 2% ----------------------------------------------------------------------------
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 February 11, 2013, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three and nine months ended December 31, 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) Fiscal 2012(2) Fiscal 2013(3) ($ thousands, unless otherwise stated) Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 ---------------------------------------------------------------------------- Annuity/ maintenance licenses 8,531 8,997 9,308 12,056 12,497 13,179 12,012 14,004 Perpetual licenses 3,911 5,391 1,596 2,321 3,416 2,070 2,671 1,365 ---------------------------------------------------------------------------- Software licenses 12,442 14,388 10,904 14,377 15,913 15,249 14,683 15,369 Professional services 1,936 1,551 1,078 1,521 1,302 1,216 1,390 1,433 ---------------------------------------------------------------------------- Total revenue 14,378 15,939 11,982 15,898 17,215 16,465 16,073 16,802 Operating profit 7,532 9,092 5,226 8,093 9,193 8,105 8,032 8,276 Operating profit % 52 57 44 51 53 49 50 49 EBITDA(4) 7,818 9,366 5,508 8,414 9,543 8,423 8,425 8,687 Profit before income and other taxes 7,413 9,240 6,096 8,184 9,104 8,577 7,703 8,556 Income and other taxes 2,605 2,577 1,778 2,394 2,484 2,487 2,342 2,437 Net income for the period 4,808 6,663 4,318 5,790 6,620 6,090 5,361 6,119 Cash dividends declared and paid 3,643 7,519 4,053 4,079 4,848 9,736 6,020 6,050 ---------------------------------------------------------------------------- Per share amounts - ($/share) Earnings per share - basic 0.13 0.18 0.12 0.16 0.18 0.16 0.14 0.16 Earnings per share - diluted 0.13 0.18 0.11 0.15 0.17 0.16 0.14 0.16 Cash dividends declared and paid 0.10 0.205 0.11 0.11 0.13 0.26 0.16 0.16 ---------------------------------------------------------------------------- (1) Q4 of fiscal 2011 includes $0.1 million 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, Q2 and Q3 of fiscal 2013 include $2.1 million, $0.2 million and $1.8 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 nine months ended December 31, 2012, as compared to the same period of prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 29% -- Increased operating profit by 9% -- Increased net income by 5% -- Increased spending on research and development by 19% -- Increased EBITDA by 10% -- Realized earnings per share of $0.47, representing a 2% increase Revenue For the three months ended December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 15,369 14,377 992 7% Professional services 1,433 1,521 (88) -6% ---------------------------------------------------------------------------- Total revenue 16,802 15,898 904 6% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 91% 90% Professional services - % of total revenue 9% 10% ---------------------------------------------------------------------------- For the nine months ended December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 45,302 39,669 5,633 14% Professional services 4,039 4,150 (111) -3% ---------------------------------------------------------------------------- Total revenue 49,341 43,819 5,522 13% ---------------------------------------------------------------------------- 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 6% for the three months ended December 31, 2012, compared to the same period of the previous fiscal year, due to an increase in software license sales driven by the growth in annuity/maintenance license sales.
Similarly, total revenue increased by 13% in the nine months ended December 31, 2012, compared to the same period of the previous fiscal year, as a result of the increase in software license sales led 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 December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 14,004 12,056 1,948 16% Perpetual licenses 1,365 2,321 (956) -41% ---------------------------------------------------------------------------- Total software license revenue 15,369 14,377 992 7% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 91% 84% Perpetual as a % of total software license revenue 9% 16% ---------------------------------------------------------------------------- For the nine months ended December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 39,196 30,361 8,835 29% Perpetual licenses 6,106 9,308 (3,202) -34% ---------------------------------------------------------------------------- Total software license revenue 45,302 39,669 5,633 14% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 87% 77% Perpetual as a % of total software license revenue 13% 23% ----------------------------------------------------------------------------
Total software license revenue grew by 7% in the three months ended December 31, 2012, compared to the same period of the previous fiscal year, due to the increase in annuity/maintenance license revenue offset by a decrease in perpetual sales. Similarly, total software license revenue grew by 14% for the nine months ended December 31, 2012, compared to the same period of the previous fiscal year, as a result of the increase in annuity/maintenance revenue stream offset by the decrease in perpetual license sales.
CMG's annuity/maintenance license revenue increased by 16% and 29% during the three and nine months ended December 31, 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 perpetual sales generated in the current and previous fiscal years. The majority of this increase was attributed to sales to our Canadian and the United States' markets. The increase in our annuity/maintenance revenue for the three months ended December 31, 2012 has been obscured by the variability 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. During the current quarter, we received approximately half of the amount received during the same period of the previous year. The amount received during the third quarter of the previous year represented an initial payment on a multi-year arrangement. If we were to exclude revenue received from this particular customer from the third quarter's recorded revenue in both the current and previous years, to provide a normalized comparison, we would note that the annuity/maintenance revenue actually grew by 34% for the three months ended December 31, 2012, compared to the same period of the previous fiscal year.
This arrangement did not have a significant impact on our year-to-date comparative information since similar payments have been received during the nine months ended December 31, 2012 and 2011.
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.
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 third 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 nine months ended December 31, 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 decreased by 41% for the three months ended December 31, 2012, compared to the same period of the previous fiscal year, due to fewer perpetual sales being realized in the United States and Eastern Hemisphere markets in the current quarter.
Perpetual license sales for the nine months ended December 31, 2012, decreased by 34% 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 nine 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.
We can observe from the table below that the exchange rates between the US and Canadian dollars during the three months ended December 31, 2012, had a slight negative effect on our reported perpetual license revenue whereas the inverse is true for the nine months ended December 31, 2012.
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 December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 8,785 8,711 74 1% Weighted average conversion rate 1.001 0.992 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 8,795 8,643 152 2% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 908 1,866 (958) -51% Weighted average conversion rate 0.994 1.019 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 903 1,902 (999) -53% ---------------------------------------------------------------------------- For the nine months ended December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 24,361 20,160 4,201 21% Weighted average conversion rate 1.001 0.993 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 24,393 20,020 4,373 22% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 4,159 9,144 (4,985) -55% Weighted average conversion rate 1.000 0.969 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 4,160 8,857 (4,697) -53% ---------------------------------------------------------------------------- REVENUE BY GEOGRAPHIC SEGMENT For the three months ended December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 5,490 4,007 1,483 37% United States 2,818 2,139 679 32% South America 2,435 3,481 (1,046) -30% Eastern Hemisphere(1) 3,261 2,429 832 34% ---------------------------------------------------------------------------- 14,004 12,056 1,948 16% ---------------------------------------------------------------------------- Perpetual revenue Canada 227 420 (193) -46% United States - 390 (390) -100% South America 26 - 26 - Eastern Hemisphere 1,112 1,511 (399) -26% ---------------------------------------------------------------------------- 1,365 2,321 (956) -41% ---------------------------------------------------------------------------- Total software license revenue Canada 5,717 4,427 1,290 29% United States 2,818 2,529 289 11% South America 2,461 3,481 (1,020) -29% Eastern Hemisphere 4,373 3,940 433 11% ---------------------------------------------------------------------------- 15,369 14,377 992 7% ---------------------------------------------------------------------------- For the nine months ended December 31, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 15,902 11,648 4,254 37% United States 7,759 6,191 1,568 25% South America 6,770 5,229 1,541 29% Eastern Hemisphere(1) 8,765 7,293 1,472 20% ---------------------------------------------------------------------------- 39,196 30,361 8,835 29% ---------------------------------------------------------------------------- Perpetual revenue Canada 1,541 452 1,089 241% United States 662 992 (330) -33% South America 509 1,291 (782) -61% Eastern Hemisphere 3,394 6,573 (3,179) -48% ---------------------------------------------------------------------------- 6,106 9,308 (3,202) -34% ---------------------------------------------------------------------------- Total software license revenue Canada 17,443 12,100 5,343 44% United States 8,421 7,183 1,238 17% South America 7,279 6,520 759 12% Eastern Hemisphere 12,159 13,866 (1,707) -12% ---------------------------------------------------------------------------- 45,302 39,669 5,633 14% ---------------------------------------------------------------------------- (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 December 31, 2012, compared to the same period of the previous fiscal year, due to lower annuity/maintenance revenue, and the Eastern Hemisphere, which experienced a 12% decrease in the nine months ended December 31, 2012, compared to the same period of the previous fiscal year, due to lower perpetual sales. The most significant growth came from our annuity/maintenance license sales, with increases experienced across all regions for the nine months ended December 31, 2012.
The Canadian market (representing 39% of year-to-date total software revenue) experienced strong increases in annuity/maintenance license sales during the three and nine months ended December 31, 2012, compared to the same periods of the previous fiscal year. These increases were supported by the sales to both new and existing clients. While perpetual sales decreased slightly in the current quarter, compared to the same period of the previous fiscal year, they experienced a healthy increase on a year-to-date basis. 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 year-over-year increases of 40%, 17%, 32% and 37% recorded during Q3 2012, Q4 2012, Q1 2013, and Q2 2013, respectively. This growth trend has continued into the third 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 license sales during the three and nine months ended December 31, 2012, compared to the same periods of the previous fiscal year. Fewer perpetual license sales were made during the three and nine months ended December 31, 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 quarterly year-over-year increases of 20%, 26%, 20% and 24% recorded during Q3 2012, Q4 2012, Q1 2013, and Q2 2013, respectively. This growth trend has continued into the third quarter of the current fiscal year with the recorded increase of 32%.
South America (representing 16% of year-to-date total software revenue) experienced a decrease in annuity/maintenance revenue during the three months ended December 31, 2012, compared to the same period of the previous fiscal year. This decrease occurred due to the variability of the payment recorded on the long-term contract for which revenue is recognized on a cash basis. The third quarter of the previous year included the initial payment for a multi-year arrangement which was higher than the payment received in the current quarter for the provision of services in prior quarters (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). If we were to adjust annuity/maintenance revenue recorded for the three months ended December 31, 2012 and 2011 for the described amounts, we would notice that the current quarter's revenue actually increased by 36%. Annuity/maintenance revenue for the nine months ended December 31, 2012 increased compared to the same period of the previous fiscal year due to sales to both new and existing clients. The increase in annuity/maintenance license sales was offset by a decrease in perpetual license sales during the nine months ended December 31, 2012.
Eastern Hemisphere (representing 27% of the year-to-date total software revenue) grew annuity/maintenance license sales during both the three and nine months ended December 31, 2012, compared to the same periods of the previous fiscal year. Perpetual license sales decreased in both the three and nine months ended December 31, 2012, compared to the same periods of the previous fiscal year. Year-to-date perpetual sales decreased 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 nine months ended December 31, 2011.
Movements in perpetual sales across 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.
QUARTERLY SOFTWARE LICENSE REVENUE ($THOUSANDS)
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