Mr. Ryan Schneider reports
COMPUTER MODELLING GROUP ANNOUNCES THIRD QUARTER RESULTS
Computer Modelling Group Ltd. has released its financial results for the three and nine months ended Dec. 31, 2018.
QUARTERLY PERFORMANCE
($ thousands, unless otherwise stated)
Fiscal Fiscal
2017 2018 Fiscal 2019
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Annuity/maintenance licences $14,613 $16,516 $16,341 $16,158 $15,664 $14,715 $15,111 $17,240
Perpetual licences 3,036 1,078 290 743 2,053 326 1,172 611
Software licences 17,649 17,594 16,631 16,901 17,717 15,041 16,283 17,851
Professional services 1,409 1,392 1,350 1,418 1,677 1,664 1,658 1,222
Total revenue 19,058 18,986 17,981 18,319 19,394 16,705 17,941 19,073
Operating profit 7,630 6,978 6,615 6,908 7,529 5,374 7,024 8,406
Operating profit (%) 40 37 37 38 39 32 39 44
EBITDA 7,867 7,447 7,090 7,400 8,090 5,837 7,505 8,915
Profit before income and other taxes 7,685 6,930 6,253 7,151 8,547 5,980 7,104 9,406
Income and other taxes 2,480 1,973 1,647 2,054 2,401 1,722 2,048 2,559
Net income for the period 5,205 4,957 4,606 5,097 6,146 4,258 5,056 6,847
Cash dividends declared and paid 7,942 7,977 8,021 8,022 8,021 8,021 8,024 8,022
Funds flow from operations 6,085 6,205 5,788 6,225 7,285 5,242 5,777 7,550
Per-share amounts -- ($/share)
Earnings per share -- basic 0.07 0.06 0.06 0.06 0.08 0.05 0.06 0.09
Earnings per share -- diluted 0.07 0.06 0.06 0.06 0.08 0.05 0.06 0.09
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 0.08 0.08 0.07 0.08 0.09 0.07 0.07 0.09
Highlights
During the nine months ended Dec. 31, 2018, as compared with the same period of the previous fiscal year, Computer Modelling Group:
- Increased net income by 10 per cent and basic earnings per share by 11 per cent;
- Experienced a 4-per-cent decrease in annuity/maintenance licence revenue due to lower licensing in Canada, the negative impact of IFRS 15 (international financial reporting standards) adoption on U.S. revenue and the timing of revenue recognition on certain contracts, mainly in the Eastern hemisphere; when normalized for these items, annuity/maintenance licence revenue is comparable with the same period of the previous fiscal year;
- Achieved consistent perpetual licence sales;
- Experienced a 5-per-cent decrease in total operating expenses, mainly due lower stock-based compensation and 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 nine months ended Dec. 31, 2018, Computer Modelling Group:
- Achieved EBITDA (earnings before interest, taxes, depreciation and amortization) of 41 per cent of total revenue (EBITDA for the three months ended Dec. 31, 2018, was 47 per cent of total revenue, and although it was helped by a payment from a South American customer, it represents the highest quarterly EBITDA margin in the past two fiscal years);
- Realized basic earnings per share of 20 cents;
- Generated funds flow from operations of 23 cents per share;
- Declared and paid a regular dividend of 30 cents per share.
Revenue
Computer Modelling Group'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 -- 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 Dec. 31, 2018, increased by 4 per cent compared with the same period of the previous fiscal year due to an increase in software licence revenue, partially offset by a decrease in professional services revenue. Total revenue for the nine months ended Dec. 31, 2018, decreased by 3 per cent compared with the same period of the previous fiscal year, because lower software licence revenue was partially offset by higher professional services revenue.
Software licence revenue
Total software licence revenue for the three months ended Dec. 31, 2018, increased by 6 per cent compared with the same period of the previous fiscal year due to an increase in annuity/maintenance licence revenue.
Computer Modelling Group's annuity/maintenance licence revenue increased by 7 per cent during the three months ended Dec. 31, 2018, compared with the same period of the previous fiscal year due to receiving payment from a South American customer, as explained below.
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 third quarter of the current fiscal year and in the first and second quarters of the previous fiscal year. Normalized for these receipts, annuity/maintenance licence revenue for the three months ended Dec. 31, 2018, compared with the same period of the previous fiscal year, decreased by 2 per cent instead of increasing by 7 per cent.
This normalized decrease of 2 per cent for the three-month period was due to lower licensing in Canada and the negative impact of IFRS 15 adoption.
Computer Modelling Group's annuity/maintenance licence revenue for the nine months ended Dec. 31, 2018, decreased by 4 per cent compared with the same period of the previous fiscal year due to lower licensing in Canada, the negative impact of IFRS 15 adoption on U.S. revenue and the timing of revenue recognition on certain contracts, mainly in the Eastern hemisphere. When normalized for these items, annuity/maintenance licence revenue for the nine months ended Dec. 31, 2018, is comparable with the same period of the previous fiscal year. (Normalizing year-to-date revenue for South American receipts recognized into revenue on a cash basis does not change the year-over-year comparison as amounts received were similar in both periods.)
In addition, the movement in the Canadian dollar/U.S. dollar exchange rate had a negative impact of approximately 1 per cent and 3 per cent on annuity/maintenance licence revenue for the three and nine months ended Dec. 31, 2018, respectively.
Perpetual licence revenue decreased in the three months ended Dec. 31, 2018, compared with the same period of the previous fiscal year, due to lower perpetual sales in South America and the Eastern hemisphere, partially offset by higher sales in the United States. Perpetual licence revenue remained flat for the nine months ended Dec. 31, 2018, compared with the same period of the previous fiscal year, as higher sales in Canada and the United States were offset by lower sales in South America and the Eastern hemisphere. 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, the company expects to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year.
Software revenue by geographic segment
During the three months ended Dec. 31, 2018, as compared with the same period of the previous fiscal year, all regions except for Canada experienced increases in total software licence revenue.
During the nine months ended Dec. 31, 2018, as compared with the same period of the previous fiscal year, the United States experienced an increase in total software licence revenue and the other three regions experienced decreases.
The Canadian market (representing 24 per cent of year-to-date software licence revenue) experienced 14-per-cent and 12-per-cent decreases in annuity/maintenance licence revenue during the three and nine months ended Dec. 31, 2018, respectively, compared with the same periods of the previous fiscal year, due to a reduction in licensing by some customers. Perpetual revenue increased during the nine months ended Dec. 31, 2018, as there were no perpetual sales recognized in the comparative period.
The U.S. market (representing 29 per cent of year-to-date software licence revenue) experienced a 2-per-cent decrease in annuity/maintenance licence revenue during the three months ended Dec. 31, 2018, and remained flat during the nine months ended Dec. 31, 2018, compared with the same periods of the previous fiscal year. Revenue in the United States was negatively impacted by IFRS 15 adoption, which offset increases from licensing by new and existing customers involved in unconventional shale and tight hydrocarbon recovery processes. Perpetual sales during the three and nine months ended Dec. 31, 2018, were higher than in the comparative periods.
South America (representing 14 per cent of year-to-date software licence revenue) experienced an increase of 60 per cent in annuity/maintenance licence revenue during the three months ended Dec. 31, 2018, and a decrease of 1 per cent during the nine months ended Dec. 31, 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 third quarter of the current fiscal year and in the first and second quarters of the previous fiscal year. To provide a normalized comparison, if the company excludes revenue from these customers from the three-month periods of both years, the company notes that South American annuity/maintenance licence revenue decreased by 9 per cent instead of increasing by 60 per cent. If the company excludes revenue from these customers from the nine-month periods of both years, South American annuity/maintenance licence revenue increased by 4 per cent instead of decreasing by 1 per cent. No significant perpetual sales were realized in South America during the three and nine months ended Dec. 31, 2018.
The Eastern hemisphere (representing 33 per cent of year-to-date software licence revenue) experienced an 11-per-cent increase and a 2-per-cent decrease in annuity/maintenance licence revenue during the three and nine months ended Dec. 31, 2018, compared with the same periods of the previous fiscal year. Both variances were mainly due to the timing of revenue recognition on certain contracts. The Eastern hemisphere's perpetual licence revenue for the three and nine months ended Dec. 31, 2018, was lower than the same periods of the previous fiscal year.
Deferred revenue
Computer Modelling Group'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 third quarter of fiscal 2019 decreased by 23 per cent compared with the third quarter of fiscal 2018. Half of the decrease is due to the timing of contract execution. The deferred revenue balance at Dec. 31, 2017, included a number of contracts that were not included in the deferred revenue balance at Dec. 31, 2018, because those contracts were finalized and invoiced subsequent to Dec. 31, 2018, whereas in the previous fiscal year those contracts were finalized and invoiced prior to Dec. 31, 2017. Further, a portion of the decrease is due to the fact that some customers switched to shorter-term licensing as it gives them the flexibility they need in uncertain economic times.
Expenses
Direct employee costs decreased during the three and nine months ended Dec. 31, 2018, compared with the same period of the previous fiscal year due to lower stock-based compensation expense and (for the year-to-date period only) due to lower headcount. Other corporate costs for the three and nine months ended Dec. 31, 2018, decreased by 6 per cent and 11 per cent, respectively, compared with the same periods of the previous fiscal year, due to lower office operating costs and (for the year-to-date period only) because the comparative period included $600,000 of non-recurring charges related to the move to the new headquarters.
Outlook
The company's quarterly results were positively affected by a payment received from a South American customer for which revenue is recognized only when cash is received, resulting in a 7-per-cent increase in quarterly annuity and maintenance revenue. The increase in total quarterly revenue, combined with a reduction in operating expenses, resulted in a 22-per-cent increase in quarterly operating profit and a 50-per-cent increase in quarterly earnings per share.
While its year-to-date total revenue decreased by 3 per cent, compared with the same period of the previous fiscal year, the company's total operating expenses also decreased by 5 per cent, having a positive effect of 1 per cent on the operating profit. The company's year-to-date net income increased by 10 per cent and earnings per share by 11 per cent.
Quarterly annuity and maintenance revenue decreased by 2 per cent (after normalizing for the payment from the South American customer) due to declines in Canada as well as a negative impact of the change in accounting policy, which mainly affected the U.S. region.
Year-to-date annuity and maintenance revenue decreased by 4 per cent. While Canada is the main reason for the decrease, year-to-date results were also negatively affected by the change in accounting policy, which offset some of the growth achieved in the U.S. region, as well as the timing differences of revenue recognition on certain contracts in the first two quarters of the year, mainly in the Eastern hemisphere. If normalized for these items, the company's worldwide year-to-date annuity and maintenance revenue is comparable with fiscal 2018.
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 the economic uncertainty in the region for the past number of years. The instability of the market appears to have lessened, and the company is focusing on demonstrating to its 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 the exploration and development of Canada's unconventional hydrocarbon resources.
- The U.S. region continued 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, offsetting the growth in revenue by unconventional customers.
- South American quarterly annuity and maintenance revenue was positively affected by the payment received from a customer for which revenue is recognized only when cash is received. On a year-to-date basis, annuity and maintenance revenue was relatively flat.
- Eastern hemisphere annuity and maintenance revenue increased in the quarter, while experiencing single-digit decline on a year-to-date basis. Year-to-date Eastern hemisphere annuity and maintenance revenue was 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 on a year-to-date basis. The Eastern hemisphere was also negatively affected by the movement in foreign exchange.
The company continues to be optimistic about the U.S. market, where it continues working with both existing and new customers on modelling workflows for unconventional assets. In all regions, the company demonstrates 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 Group'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 head count and head office costs.
The company continues its efforts in marketing and trial modelling of CoFlow, its newest product that will provide a unified solution for integrated asset modelling by combining reservoir, production networks and geomechanics in one environment. Shell continues to target additional deployments and use the software on its selected assets. The CoFlow team is working on feature development, supporting prospective customers and model conversions related to potential opportunities, and continuing performance improvement. The company is pleased to announce that it has closed its first commercial contract for CoFlow for use on an onshore asset, in early February.
As these efforts progress, the company has implemented organizational changes to further integrate the CoFlow development team into Computer Modelling Group's established research and development department. Effective Feb. 12, 2019, Dr. Long Nghiem, newly appointed as chief technology officer and remaining as vice-president, research and development, will oversee CoFlow's continuing development, with an emphasis on realizing commercial opportunities. Rob Eastick, formerly vice-president, CoFlow, will take on the role of co-ordinator, production network technologies.
Computer Modelling Group's commercial product suite has been under Dr. Nghiem's leadership since 1997. His vision and technical knowledge have contributed significantly to the company's success to date. Mr. Eastick saw CoFlow through a critical period as it evolved from a jointly financed R&D arrangement with Shell and Petrobras (until Dec. 31, 2016) to a product suitable for deployment on the complex assets of Computer Modelling Group customers. Mr. Eastick will continue to direct development of a suite of technologies that are fundamental to CoFlow's utility. Taking this organizational step more efficiently and effectively uses the resources and skills of the company's leadership and team members and allows for application of the company's proven model to CoFlow for delivering technology and value to the company's customers.
The company ended the third quarter of 2019 with a strong balance sheet, no debt and $45.6-million in cash. Subsequent to quarter-end, Computer Modelling Group'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. Computer Modelling, 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 Nine months
ended Dec. 31 ended Dec. 31
2018 2017 2018 2017
Revenue $19,073 $18,319 $53,719 $55,286
Operating expenses
Sales, marketing and professional services 4,109 4,771 13,474 14,467
Research and development 4,976 5,028 14,613 15,200
General and administrative 1,582 1,612 4,828 5,118
10,667 11,411 32,915 34,785
Operating profit 8,406 6,908 20,804 20,501
Finance income 1,000 243 1,686 648
Finance (costs) - - - (815)
Profit before income and other taxes 9,406 7,151 22,490 20,334
Income and other taxes 2,559 2,054 6,329 5,674
Net and total comprehensive income 6,847 5,097 16,161 14,660
Earnings per share
Basic 0.09 0.06 0.20 0.18
Diluted 0.09 0.06 0.20 0.18
We seek Safe Harbor.
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