Computer Modelling Group Announces Year End Results – Part 1

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

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($ 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".

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Quarterly Performance

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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.

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