FOR: COMPUTER MODELLING GROUP LTD.
TSX SYMBOL: CMG
Date issue: May 19, 2017
Time in: 7:00 AM e
Attention:
CALGARY, ALBERTA–(Marketwired – May 19, 2017) – Computer Modelling Group Ltd.
(“CMG” or the “Company”) (TSX:CMG) is very pleased to report our financial
results for the fiscal year ended March 31, 2017.
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 May 18, 2017,
should be read in conjunction with the audited consolidated financial
statements and related notes of the Company for the years ended March 31, 2017
and 2016. 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.
Corporate Profile
CMG is a computer software technology company serving the oil and gas industry.
The Company is a leading supplier of advanced process reservoir modelling
software with a blue chip customer base of international oil companies and
technology centers in approximately 60 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, Dubai, Bogota and Kuala Lumpur.
CMG’s Common Shares are listed on the Toronto Stock Exchange (“TSX”) and trade
under the symbol “CMG”.
Vision, Business and Strategy
CMG’s vision is to be the leading developer and supplier of dynamic reservoir
modelling systems in the world. Early in its life CMG made the strategic
decision to focus its research and development efforts on providing solutions
for the simulation of difficult hydrocarbon recovery techniques, a decision
that created the foundation for CMG’s dominant market presence today in the
simulation of advanced hydrocarbon recovery processes. CMG has demonstrated
this commitment by continuously investing in research and development and
working closely with its customers to develop simulation tools relevant to the
challenges and opportunities they face today. This includes CoFlow, the newest
generation of reservoir and production system simulation software. Our target
is to develop a dynamic system that does more than optimize reservoir recovery;
it will model the entire hydrocarbon reservoir system, including production
systems.
Since its inception almost 40 years ago, CMG has remained focused on assisting
its customers in unlocking the value of their hydrocarbon reservoirs. With
petroleum production using conventional methods on the decline, the petroleum
industry must use more difficult and costly advanced process extraction
methods, while being faced with more governmental and regulatory requirements
over environmental concerns. CMG’s success can, in turn, be correlated with the
oil industry becoming more reliant on the use of simulation technology due to
the maturity of conventional petroleum reservoirs and the complexities of both
current and emerging production processes. In addition, as producers continue
to look for ways to operate efficiently in a low oil price environment, we
believe they will continue to seek reservoir simulation solutions to enhance
production from their existing and new assets. CMG will continue to provide the
most advanced reservoir simulation tools to assist companies with their
reservoir planning, management and optimization.
CMG’s success can specifically be attributed to a number of factors: advanced
physics, ongoing enhancements to the Company’s already robust product line,
improved computational speed, parallel computing ability, ease of use features
of the pre- and post-processor applications, cost effectiveness of the CMG
solution for customers, and the knowledge base of CMG’s personnel to support
and advance its software.
CMG currently licenses reservoir simulation software to more than 600 oil and
gas companies, consulting firms and research institutions in approximately 60
countries. In combination with its principal business of licensing its
software, CMG also provides professional services consisting of highly
specialized consulting, support, training, and funded research activities for
its customers. While the generation of professional services revenue
specifically tied to the provision of consulting services is not regarded as a
core part of CMG’s business, offering this type of service is important to CMG
operationally. CMG performs a limited amount of specialized consulting
services, which are typically of a highly complex and/or experimental nature.
These studies provide hands-on practical knowledge, allowing CMG staff to test
the boundaries of our software, and provide us the opportunity to increase
software license sales to both new and existing customers. In addition,
providing consulting services is important from the customer service
perspective as it enables our customers to become more proficient users of
CMG’s software. The funded research revenue is derived from the customers who
partner with CMG to assist in the development, testing and refinement of new
simulation technologies.
In addition to consulting, we allocate significant resources to training, which
is an instrumental part of our company’s success, as it enables our customers
to become more efficient and effective users of our software. Our training is
continuous in nature and it helps us in developing and maintaining long-term
relationships with our customers.
CMG remains committed to advancing its technological superiority over its
competition. CMG firmly believes that, to be the dominant supplier of dynamic
reservoir modelling systems in the world, it must be responsive to customers’
needs today and accurately predict their needs in the future.
CMG invests a significant amount of resources each year toward maintaining its
technological superiority. During fiscal 2017, CMG maintained a consistent
level of spending on research and development compared to the previous fiscal
year (representing 22% of total revenue). The continued investment by CMG in
its current product suite offering helps to ensure that its existing proven
technology continues to be industry-leading. These significant levels of
investment, in combination with developing CoFlow, are targeted strategies to
achieve our vision to be the leading developer and supplier of dynamic
reservoir modelling systems in the world.
Overall Performance
Key Performance Drivers and Capability to Deliver Results
One of the challenges the petroleum industry faces in trying to overcome
barriers to production growth is the continuing need for breakthrough
technologies. The facts facing the petroleum industry today are that brand new
fields are increasingly difficult to find, especially on a large scale, and
that there is a large number of mature fields and unconventional prospects
where known petroleum reserves exist; the question is how to economically
extract the petroleum reserves in place while utilizing environmentally
conscious processes. These challenges have been made even more formidable given
that the current economic environment and global political climate have led to
increased uncertainty regarding capital markets and commodity prices.
The petroleum industry utilizes reservoir simulation to provide both vital
information and a visual interpretation on how reservoirs will behave under
various recovery techniques. With this visualization and reservoir simulation
modelling, reservoir professionals receive assistance in predicting the physics
and chemistry of fluid flows, drilling locations, well operating conditions,
risks, and best case economics of oil and gas property investment.
Understanding the science of how a petroleum reservoir will react to difficult
hydrocarbon recovery processes through simulation prior to spending the capital
on drilling wells and injecting expensive chemicals and steam, for instance, is
far less costly and risky than trying the various techniques on real wells.
In a low oil price environment, producers have shifted their focus to
lower-cost assets, improving production margins and low-cost enhanced oil
recovery (EOR), instead of drilling new wells. Reservoir simulation is a
cost-effective and high-value tool to reduce risks, improve recovery processes,
increase margins and incremental recovery.
CMG’s existing product suite of software is the market leader in the simulation
of difficult hydrocarbon recovery techniques. To maintain this dominant market
position, CMG actively participates in research consortia that experiment with
new petroleum extraction processes and technologies. CMG then incorporates the
simulation of new recovery methods into its product suite and focuses on
overcoming existing technological barriers to advance speed and ease of use,
amongst other benefits, in its software.
During fiscal 2017, CMG’s research and development team made significant
performance improvements in our simulators by introducing hybrid parallel
computing, which allows our customers to run larger problems faster on a
network of computers. We also successfully beta-tested cloud computing with
more than one top-tier public cloud provider, which is becoming increasingly
important as customers gravitate towards the flexibility, economics, capacity,
in-place upgradeability and the many other benefits of the cloud. During the
year we also introduced additional features in GEM, the generalized
Equation-of-State compositional reservoir simulator, to allow it to perform
simulations of reservoirs using chemical EOR techniques. These types of
advanced features allow CMG to maintain our leadership position in simulation
of advanced recovery methods, particularly as we see continued use of various
types of EOR techniques globally.
The development of CoFlow, the newest generation of reservoir and production
system simulation software, is a significant project for CMG. From its
inception to December 31, 2016, CoFlow was a joint project with partners Shell
International Exploration and Production B.V. and Petroleo Brasileiro S.A.
(“Petrobras”). Effective January 1, 2017, Petrobras’ financial participation in
the joint development project has ended. In response to Petrobras’ end of its
financial participation, CMG reduced the headcount of the CoFlow development
team by eight employees and contractors in January 2017. Under the new
five-year agreement between CMG and Shell Global Solutions International B.V.
(“Shell”), CMG is responsible for the research and development costs of CoFlow,
while Shell will provide a fixed fee contribution for the continuing
development of the software. CMG, through its participation in this project,
will have full commercialization rights to the developed technology, while
Shell and Petrobras will have unlimited perpetual CoFlow licenses. To date, the
project has represented over 475 man-years of development. The CoFlow team
consists of 54 full-time equivalent persons made up of 40 CMG employees and an
additional 14 partner staff members working remotely from their offices in the
Netherlands and the United States.
In February 2017, we released the most recent version of CoFlow, R11, to Shell
and Petrobras to be used on their selected target assets. R11 made material
progress in improving the runtime performance in identified areas, and there
will be continued work in this area in future releases. Currently, CMG is in
the process of identifying additional customers for trial modelling work using
CoFlow.
CMG is in a very strong financial position with $44.0 million in working
capital, no bank debt and a long history of generating earnings and cash from
operating activities. In addition to its financial resources, CMG’s real
strength lies in the outstanding quality and dedication of its employees in all
areas of the Company.
Our focus will remain on licensing software to both existing and new customers
and, with diversification of our geographic profile, we plan to strengthen our
position in the global marketplace. Approximately 90% of our software license
revenue is derived from our annuity and maintenance contracts, which generally
represent a recurring source of revenue. We continue to be profitable despite
the ongoing economic challenges in the oil and gas industry. During fiscal
2017, we have suspended employee recruitment and reduced headcount and
discretionary spending to control costs. As a result of ongoing adverse
economic conditions in Venezuela and in the oil and gas industry in general, we
decided to close our office in Caracas in May 2016. Our customers in the region
continue to be supported from other locations, mainly the office in Bogota.
During the fiscal year ended March 31, 2017, our EBITDA represented 46% of
total revenue, which demonstrates our continuous ability to effectively manage
corporate costs.
We continue to return value to our shareholders in the form of regular
quarterly dividend payments. During the year ended March 31, 2017, we paid
dividends of $0.40 per share, which is consistent with the prior fiscal year.
We are confident that our sustainable business model driven by superior
technology, commitment to research and development initiatives, and
customer-oriented approach will continue contributing to CMG’s future success.
Annual Performance
/T/
($ thousands, unless otherwise
stated) March 31, 2017 March 31, 2016 March 31, 2015
—————————————————————————-
—————————————————————————-
Annuity/maintenance licenses 65,263 67,805 63,431
Perpetual licenses 4,971 7,169 13,405
—————————————————————————-
Software licenses 70,234 74,974 76,836
Professional services 4,863 5,824 8,025
—————————————————————————-
Total revenue 75,097 80,798 84,861
Operating profit 33,321 36,036 41,516
Operating profit (%) 44% 45% 49%
EBITDA(1) 34,414 37,418 43,099
Net income for the year 24,269 25,302 32,648
Cash dividends declared and
paid 31,697 31,514 31,462
Total assets 106,725 101,413 106,456
Total shares outstanding 79,482 78,819 78,487
Trading price per share at
March 31 10.35 10.14 12.72
Market capitalization at March
31 822,634 799,220 998,353
—————————————————————————-
Per share amounts – ($/share)
Earnings per share – basic 0.31 0.32 0.42
Earnings per share – diluted 0.31 0.32 0.41
Cash dividends declared and
paid 0.40 0.40 0.40
—————————————————————————-
—————————————————————————-
(1) EBITDA is defined as net income before adjusting for depreciation
expense, finance income, finance costs, and income and other taxes. See
“Non-IFRS Financial Measures”.
/T/
Quarterly Performance
/T/
Fiscal 2016(1)
($ thousands, unless otherwise
stated) Q1 Q2 Q3 Q4
—————————————————————————-
—————————————————————————-
Annuity/maintenance licenses 16,738 16,790 17,297 16,980
Perpetual licenses 2,563 1,095 2,729 782
—————————————————————————-
Software licenses 19,301 17,885 20,026 17,762
Professional services 2,139 1,240 1,191 1,254
—————————————————————————-
Total revenue 21,440 19,125 21,217 19,016
Operating profit 10,494 8,160 10,342 7,040
Operating profit (%) 49 43 49 37
EBITDA 10,824 8,519 10,686 7,389
Profit before income and other taxes 9,742 9,365 10,974 5,550
Income and other taxes 2,941 2,599 3,121 1,668
Net income for the period 6,801 6,766 7,853 3,882
Cash dividends declared and paid 7,876 7,891 7,871 7,876
—————————————————————————-
Per share amounts – ($/share)
Earnings per share – basic 0.09 0.09 0.10 0.05
Earnings per share – diluted 0.09 0.08 0.10 0.05
Cash dividends declared and paid 0.10 0.10 0.10 0.10
—————————————————————————-
—————————————————————————-
Fiscal 2017(2)
($ thousands, unless otherwise
stated) Q1 Q2 Q3 Q4
—————————————————————————-
—————————————————————————-
Annuity/maintenance licenses 16,893 15,379 18,378 14,613
Perpetual licenses 579 521 835 3,036
—————————————————————————-
Software licenses 17,472 15,900 19,213 17,649
Professional services 1,345 1,027 1,082 1,409
—————————————————————————-
Total revenue 18,817 16,927 20,295 19,058
Operating profit 8,975 6,905 9,811 7,630
Operating profit (%) 48 41 48 40
EBITDA 9,277 7,189 10,081 7,867
Profit before income and other taxes 9,212 7,119 10,176 7,685
Income and other taxes 2,398 2,128 2,917 2,480
Net income for the period 6,814 4,991 7,259 5,205
Cash dividends declared and paid 7,896 7,929 7,930 7,942
—————————————————————————-
Per share amounts – ($/share)
Earnings per share – basic 0.09 0.06 0.09 0.07
Earnings per share – diluted 0.09 0.06 0.09 0.07
Cash dividends declared and paid 0.10 0.10 0.10 0.10
—————————————————————————-
—————————————————————————-
(1) Q1, Q2, Q3 and Q4 of fiscal 2016 include $1.0 million, $0.3 million,
$0.7 million, and $0.9 million, respectively, in revenue that pertains
to usage of CMG’s products in prior quarters.
(2) Q1, Q2, Q3 and Q4 of fiscal 2017 include $1.8 million, $0.3 million,
$3.7 million, and $0.7 million, respectively, in revenue that pertains
to usage of CMG’s products in prior quarters.
/T/
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