Mr. Ryan Schneider reports
COMPUTER MODELLING GROUP ANNOUNCES SECOND QUARTER RESULTS
Computer Modelling Group Ltd. has released its financial results for the three and six months ended Sept. 30, 2018.
QUARTERLY PERFORMANCE
(in thousands, unless otherwise stated)
Fiscal 2017 Fiscal 2018 Fiscal 2019
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Annuity/maintenance licences $18,378 $14,613 $16,516 $16,341 $16,158 $15,664 $14,715 $15,111
Perpetual licences 835 3,036 1,078 290 743 2,053 326 1,172
Software licences 19,213 17,649 17,594 16,631 16,901 17,717 15,041 16,283
Professional services 1,082 1,409 1,392 1,350 1,418 1,677 1,664 1,658
Total revenue 20,295 19,058 18,986 17,981 18,319 19,394 16,705 17,941
Operating profit 9,811 7,630 6,978 6,615 6,908 7,529 5,374 7,024
Operating profit (%) 48 40 37 37 38 39 32 39
EBITDA 10,081 7,867 7,447 7,090 7,400 8,090 5,837 7,505
Profit before income and other taxes 10,176 7,685 6,930 6,253 7,151 8,547 5,980 7,104
Income and other taxes 2,917 2,480 1,973 1,647 2,054 2,401 1,722 2,048
Net income for the period 7,259 5,205 4,957 4,606 5,097 6,146 4,258 5,056
Cash dividends declared and paid 7,930 7,942 7,977 8,021 8,022 8,021 8,021 8,024
Funds flow from operations 8,084 6,085 6,205 5,788 6,225 7,285 5,242 5,777
Per share amounts -- ($/share)
Earnings per share -- basic 0.09 0.07 0.06 0.06 0.06 0.08 0.05 0.06
Earnings per share -- diluted 0.09 0.07 0.06 0.06 0.06 0.08 0.05 0.06
Cash dividends declared and paid 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Funds flow from operations per share -- basic 0.10 0.08 0.08 0.07 0.08 0.09 0.07 0.07
Highlights
During the six months ended Sept. 30, 2018, as compared with the same period of the previous fiscal year, Computer Modelling:
- Experienced a 9-per-cent decrease in annuity/maintenance licence revenue as a result of timing differences of revenue recognition on certain contracts and a change in accounting policy; if normalized for these items, annuity/maintenance licence revenue grew by a low single-digit percentage;
- Increased perpetual licence revenue by 10 per cent, supported by strong perpetual sales in the second quarter;
- Experienced a 5-per-cent decrease in total operating expenses, mainly due to the fact that the comparative period included $600,000 of non-recurring charges related to the move to the new headquarters.
During the six months ended Sept. 30, 2018, Computer Modelling:
- Realized basic earnings per share of 12 cents;
- Declared and paid a regular dividend of 20 cents per share.
Revenue
Computer Modelling's revenue comprises software licence sales, which provide the majority of the company's revenue, and fees for professional services.
On April 1, 2018, the company adopted IFRS 15 (international financial reporting standards) -- Revenue from Contracts with Customers -- using the cumulative effect method, by recognizing the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of equity at April 1, 2018. The company recorded an increase to retained earnings of $700,000 ($500,000 net of tax), on April 1, 2018, due to earlier recognition of revenue on certain term-based software licences. Under the cumulative effect method, comparative information is not restated and continues to be reported under the previous standard, IAS 18 -- Revenue. For more information, refer to note 3 of the company's condensed consolidated interim financial statements.
Total revenue for the three months ended Sept. 30, 2018, remained flat compared with the same period of the previous fiscal year, due to a decrease in software licence revenue offset by an increase in professional services revenue. Total revenue for the six months ended Sept. 30, 2018, decreased by 6 per cent compared with the same period of the previous fiscal year, as a decrease in software licence revenue was partially offset by an increase in professional services revenue.
The adoption of IFRS 15 and the resultant early revenue recognition through opening equity had a negative impact of $200,000 and $400,000 on software licence revenue for the three and six months ended Sept. 30, 2018, respectively. The remainder of the decrease was due to the timing of revenue recognition on certain contracts.
Software licence revenue
Total software licence revenue for the three and six months ended Sept. 30, 2018, decreased by 2 per cent and 8 per cent, compared with the same periods of the previous fiscal year, due to decreases in annuity/maintenance licence revenue.
Computer Modelling's annuity/maintenance licence revenue decreased by 8 per cent and 9 per cent during the three and six months ended Sept. 30, 2018, compared with the same periods of the previous fiscal year, due to a decrease in Canada, as well as decreases in South America and the Eastern hemisphere, which were caused mainly by the timing of revenue recognition on certain contracts. These decreases were partially offset by an increase in the United States.
The company's annuity/maintenance licence revenue can be significantly impacted by the variability of the amounts recorded from a long-standing customer and its affiliates for which revenue recognition criteria are fulfilled only at the time of the receipt of funds. Due to the economic conditions in the country where this customer and its affiliates are located, revenue from them will continue to be recognized on a cash basis. The timing of such payments may skew the comparison of annuity/maintenance licence revenue between periods. The company received payments from these customers in the first and second quarters of the previous fiscal year, but none in the current year. Normalized for these receipts, annuity/maintenance licence revenue for the three and six months ended Sept. 30, 2018, decreased by 2 per cent and 4 per cent, respectively, instead of decreasing by 8 per cent and 9 per cent, compared with the same periods of the previous fiscal year.
These normalized decreases of 2 per cent and 4 per cent were due to the timing of revenue recognition on certain contracts in the Eastern hemisphere, as well as the negative impact of IFRS 15 adoption. Over all, when normalized for the receipts recognized into revenue on a cash basis, the timing differences on certain contracts and the impact of IFRS 15 adoption, annuity/maintenance licence revenue for the three and six months ended Sept. 30, 2018, grew by a low-single-digit percentage. In addition, the movement in the Canadian dollar/U.S. dollar exchange rate had a negative impact of approximately 2 per cent and 3 per cent on annuity/maintenance licence revenue for the three and six months ended Sept. 30, 2018, respectively.
Perpetual licence revenue increased in the three and six months ended Sept. 30, 2018, compared with the same periods of the previous fiscal year, as there were more perpetual sales realized in the Eastern hemisphere and Canada. Software licensing under perpetual sales 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 the company expects to achieve a certain level of aggregate perpetual sales on an annual basis, it expects to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year.
Software revenue by geographic segment
During the three months ended Sept. 30, 2018, as compared with the same period of the previous fiscal year, Canada and South America experienced a decrease in total software licence revenue, which was partially offset by increases in the Eastern hemisphere and the United States.
During the six months ended Sept. 30, 2018, as compared with the same period of the previous fiscal year, three regions experienced a decrease in total software licence revenue, and revenue in the United States increased.
The Canadian market (representing 25 per cent of year-to-date software licence revenue) experienced 15-per-cent and 11-per-cent decreases in annuity/maintenance licence revenue during the three and six months ended Sept. 30, 2018, respectively, compared with the same periods of the previous fiscal year, due to a reduction in licensing by some customers. Perpetual revenue increased in the current period, as there were no perpetual sales recognized in the comparative period.
The U.S. market (representing 30 per cent of year-to-date software licence revenue) experienced 4-per-cent and 1-per-cent increases in annuity/maintenance licence revenue during the three and six months ended Sept. 30, 2018, compared with the same periods of the previous fiscal year, despite the negative impact of IFRS 15 adoption. These increases are mainly a result of increased licensing by new and existing customers involved in unconventional shale and tight hydrocarbon recovery processes. Perpetual sales during the three and six months ended Sept. 30, 2018, were consistent with the comparative periods.
South America (representing 11 per cent of year-to-date software licence revenue) experienced a decrease of 28 per cent in annuity/maintenance licence revenue during the three and six months ended Sept. 30, 2018, compared with the same periods of the previous fiscal year. The company's revenue in South America can be significantly impacted by the variability of the amounts recorded from a customer and its affiliates for which revenue is recognized only when cash is received. The company received payments from these customers in the first and second quarters of the previous fiscal year, but none were received in the current year. To provide a normalized comparison, if the company removes the revenue from this particular customer from the three and six months ended Sept. 30, 2017, the company notes that the South American annuity/maintenance licence revenue increased by 13 per cent and 12 per cent for the three and six months ended Sept. 30, 2018, respectively, instead of decreasing by 28 per cent. No perpetual sales were realized in South America during the three and six months ended Sept. 30, 2018.
The Eastern hemisphere (representing 34 per cent of year-to-date software licence revenue) experienced 1-per-cent and 8-per-cent decreases in annuity/maintenance licence revenue during the three and six months ended Sept. 30, 2018, compared with the same periods of the previous fiscal year, mainly due to differences in the timing of revenue recognition on certain contracts, particularly during the first quarter of the current fiscal year. The Eastern hemisphere's perpetual licence revenue for the three and six months ended Sept. 30, 2018, was significantly higher than the same periods of the previous fiscal year, as a result of several perpetual sales realized during the second quarter of the current fiscal year.
Deferred revenue
Computer Modelling's deferred revenue consists primarily of amounts for presold licences. With the exception of certain term-based software licences that are recognized at the start of the licence period, the company's annuity/maintenance revenue is deferred and recognized ratably over the licence period, which is generally one year or less. Amounts are deferred for licences that have been provided and revenue recognition reflects the passage of time.
A table on the company's website illustrates the normal trend in the deferred revenue balance from the beginning of the calendar year (which corresponds with the fourth quarter of the company's fiscal year), when most renewals occur, to the end of the calendar year (which corresponds with the third quarter of the company's fiscal year). The company's fourth quarter corresponds with the beginning of the fiscal year for most oil and gas companies, representing a time when they enter a new budget year and sign/renew their contracts.
Deferred revenue as at the second quarter of fiscal 2019 decreased by 2 per cent compared with the second quarter of fiscal 2018, primarily due to one significant multiyear contract that commenced during the fourth quarter of fiscal 2017 and included a large upfront payment for future software use and lower payments during the remainder of the contract period.
Expenses
Computer Modelling's total operating expenses decreased by 4 per cent and 5 per cent for the three and six months ended Sept. 30, 2018, respectively, compared with the same periods of the previous fiscal year. The decrease for the three-month period was due to lower direct employee costs and the decrease for the six-month period was due to decreases in both direct employees costs and other corporate costs.
Direct employee costs
As a technology company, Computer Modelling's largest area of expenditure is its people. Approximately 74 per cent of total operating expenses for the six months ended Sept. 30, 2018, related to direct employee costs. Staffing levels in the current fiscal year were slightly lower compared with the previous fiscal year. At Sept. 30, 2018, Computer Modelling's full-time equivalent staff complement was 191 employees and consultants, down from 196 full-time equivalent employees and consultants at Sept. 30, 2017. Direct employee costs decreased during the three months ended Sept. 30, 2018, compared with the same period of the previous fiscal year, due to a decrease in stock-based compensation expense. Direct employee costs decreased during the six months ended Sept. 30, 2018, compared with the same period of the previous fiscal year, mainly due to a lower head count.
Other corporate costs
Other corporate costs for the three months ended Sept. 30, 2018, remained consistent with the same period of the previous fiscal year. Other corporate costs for the six months ended Sept. 30, 2018, decreased by 13 per cent compared with the same period of the previous fiscal year, mainly because the comparative period included $600,000 of non-recurring charges related to the move to the new headquarters.
Outlook
During the current quarter the company's total revenue was comparable with the same quarter of the previous year as a result of strong perpetual licence sales and an increase in consulting activities, which offset a decrease in annuity and maintenance revenue. Current quarter's operating profit and net income increased by 6 per cent and 10 per cent, respectively, compared with the same quarter of the previous year, mainly as a result of reduced expenses.
The current quarter and year-to-date annuity and maintenance revenue continued to be negatively affected mainly by the timing differences of revenue recognition on certain contracts in South America and the Eastern hemisphere and the change in accounting policy affecting the United States, contributing to a decrease in annuity and maintenance revenue of 8 per cent and 9 per cent, respectively. If normalized for those items, annuity and maintenance revenue experienced low-single-digit growth on a worldwide basis. On a regional basis:
- Canadian annuity and maintenance revenue continued to be under pressure both during the quarter and on a year-to-date basis as a result of economic uncertainty that has affected the region over the past number of years. While the instability of the market appears to have lessened, the company is going to focus on demonstrating to customers the value of its simulation tools for optimizing their production particularly during challenging times. In addition, the company will continue working with customers entering exploration and development of Canada's unconventional hydrocarbon resources.
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The U.S. region continues to benefit from strong activity by unconventional customers, and while the company achieved growth both in the current quarter and year to date, the results in the region were negatively affected by a change in revenue recognition accounting policy and the movement in the Canadian dollar/U.S. dollar exchange rate. The company is positively encouraged by the activity in the region and will continue to strengthen its presence by promoting its unconventional modelling workflows.
- South America grew by 13 per cent during the quarter (12 per cent year to date) after normalizing for payments from a customer for which revenue is recognized only when cash is received, thus skewing the comparison between the periods.
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Eastern hemisphere annuity and maintenance revenue for the current quarter was comparable with the same period of the previous year, while declining on a year-to-date basis. Both periods -- and the first quarter of the current fiscal year in particular -- have been negatively affected by revenue recognition on contracts for usage of the company's products in prior quarters. Normalizing for these items, annuity and maintenance revenue grew by a low-single-digit percentage in both periods. The Eastern hemisphere was also negatively affected by the movement in foreign exchange.
The company continues to be optimistic about the additions it has made to its customer base throughout fiscal 2018 and into the first half of fiscal 2019, which contributed to low-single-digit growth in year-to-date annuity/maintenance licence revenue after normalizing for the items described above. In particular, the company is optimistic about the U.S. market, where it continues to work with both existing and new customers on modelling workflows for unconventional assets. In all regions, the company continues to demonstrate to customers the importance of reservoir simulation as a value creation tool for their enterprises, especially in times of economic and regulatory uncertainty.
Computer Modelling's year-to-date total operating expenses decreased by 5 per cent, due mainly to the fact that the comparative period included $600,000 of non-recurring charges related to the move to the new headquarters. The remaining decrease was due to lower employee and head office costs.
The company continues its efforts in marketing and trial modelling of CoFlow, its newest product that will provide a one-vendor solution for integrated asset modelling by combining reservoir, production networks and geomechanics in one environment. The company continues identifying potential customers and performing trial modelling for them while Shell is deploying and using the software on its selected assets. The CoFlow team continues to work on feature development and performance improvement.
The company ended the second quarter of 2019 with a strong balance sheet, no debt and $52.3-million in cash. Subsequent to quarter-end, Computer Modelling's board of directors declared a quarterly dividend of 10 cents per share.
About Computer Modelling Group Ltd.
Computer Modelling Group is a computer software technology and consulting company serving the oil and gas industry. The company, recognized by oil and gas companies worldwide as a leading developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, London, Dubai, Bogota and Kuala Lumpur.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(thousands of dollars except per-share amounts)
Three months Six months
ended Sept. 30 ended Sept. 30
2018 2017 2018 2017
Revenue $17,941 $17,981 $34,646 $36,967
Operating expenses
Sales, marketing and professional services 4,378 4,779 9,365 9,696
Research and development 4,862 4,865 9,637 10,172
General and administrative 1,677 1,722 3,246 3,506
10,917 11,366 22,248 23,374
Operating profit 7,024 6,615 12,398 13,593
Finance income 312 218 686 420
Finance (costs) (232) (580) - (830)
Profit before income and other taxes 7,104 6,253 13,084 13,183
Income and other taxes 2,048 1,647 3,770 3,620
Net and total comprehensive income 5,056 4,606 9,314 9,563
Earnings per share
Basic 0.06 0.06 0.12 0.12
Diluted 0.06 0.06 0.12 0.12
We seek Safe Harbor.
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