Computer Modelling Group Announces Third Quarter Results

About this update from Computer Modelling Group Ltd.

CALGARY, AB / ACCESSWIRE / February 9, 2023 / Computer Modelling Group Ltd. ("CMG" or the "Company") announces its financial results for the three and nine months ended December 31, 2022. Quarterly Performance Fiscal 2021 (2) Fiscal 2022 (3) Fiscal 2023 (4) ($ thousands, unless otherwise stated) Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Annuity/maintenance license revenue 13,790 12,286 13,239 13,575 14,306 13,529 14,825 15,533 Perpetual license revenue 1,184 125 846 1,497 2,351 386 780 518 Software license revenue 14,974 12,411 14,085 15,072 16,657 13,915 15,605 16,051 Professional services revenue 1,827 2,003 1,864 1,973 2,137 2,192 2,477 3,341 Total revenue 16,801 14,414 15,949 17,045 18,794 16,107 18,082 19,392 Operating profit 6,556 5,573 5,440 7,755 7,312 4,961 5,555 8,435 Operating profit (%) 39 39 34 45 39 31 31 43 Profit before income and other taxes 5,747 4,827 5,321 7,310 6,563 5,182 5,989 8,350 Income and other taxes 1,454 1,094 1,175 1,736 1,611 1,369 1,579 2,002 Net income for the period 4,293 3,733 4,146 5,574 4,952 3,813 4,410 6,348 EBITDA (1) 7,627 6,596 6,473 8,843 8,366 5,892 6,492 9,300 Cash dividends declared and paid 4,014 4,015 4,016 4,017 4,016 4,017 4,025 4,025 Funds flow from operations 6,267 4,811 4,904 7,022 7,105 4,558 4,974 8,169 Free cash flow (1) 5,755 4,478 4,494 6,227 6,584 4,255 4,505 7,545 Per share amounts - ($/share) Earnings per share (EPS) - basic and diluted 0.05 0.05 0.05 0.07 0.06 0.05 0.05 0.08 Cash dividends declared and paid 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 Funds flow from operations per share - basic 0.08 0.06 0.06 0.09 0.09 0.06 0.06 0.10 Free cash flow per share - basic (1) 0.07 0.06 0.06 0.08 0.08 0.05 0.06 0.09 (1) This is a non-IFRS financial measure. See the "Non-IFRS Financial Measures" section. (2) Q4 of fiscal 2021 includes $1.1 million in revenue that pertains to usage of CMG's products in prior quarters. (3) Q1, Q2 Q3 and Q4 of fiscal 2022 include $nil, $0.5 million, $nil and $0.8 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (4) Q1, Q2 and Q3 of fiscal 2023 include $0.2 million, $0.3 million, and $0.3 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. Commentary on Quarterly Performance For the Three Months Ended For the Nine Months Ended December 31, 2022 and compared to the same period of the previous fiscal year, when appropriate: Annuity/maintenance license revenue increased by 14%; Annuity/maintenance license revenue increased by 12%; Total revenue increased by 14%; Total revenue increased by 13%; Total operating expenses increased by 18%. Adjusted for the restructuring charges, operating expenses increased by 13%, primarily due to an increase in variable direct employee costs; Total operating expenses increased by 21%. Adjusted for the restructuring charges and CEWS/CERS benefits, operating expenses increased by 7%, primarily due to higher professional services and travel-related costs; Quarterly operating profit margin was 43%, decreasing from 45% in the comparative quarter of the prior year. Adjusted for the restructuring charges, operating profit margin was 43%, consistent with the adjusted operating profit margin of the comparative quarter; Year-to-date operating profit margin was 35%, decreasing from 40% in the comparative period. Adjusted for the restructuring charges and the CEWS/CERS benefits, operating profit margin was 43%, increasing from 40%, in the comparative quarter; Basic EPS of $0.08 was higher than the comparative quarter's EPS of $0.07; Basic EPS of $0.18 was higher than the comparative period's EPS of $0.17; Achieved free cash flow per share of $0.09; Achieved free cash flow per share of $0.20; Declared and paid a dividend of $0.05 per share. Declared and paid dividends of $0.15 per share. Revenue Three months ended December 31, 2022 2021 $ change % change ($ thousands) Software license revenue 16,051 15,072 979 6% Professional services revenue 3,341 1,973 1,368 69% Total revenue 19,392 17,045 2,347 14% Software license revenue as a % of total revenue 83% 88% Professional services revenue as a % of total revenue 17% 12% Nine months ended December 31, 2022 2021 $ change % change ($ thousands) Software license revenue 45,571 41,568 4,003 10% Professional services revenue 8,010 5,840 2,170 37% Total revenue 53,581 47,408 6,173 13% Software license revenue as a % of total revenue 85% 88% Professional services revenue as a % of total revenue 15% 12% CMG's revenue is comprised of software license sales, which provides the majority of the Company's revenue, and fees for professional services. Total revenue for the three and nine months ended December 31, 2022 increased by 14% and 13%, respectively, due to increases in both software license revenue and professional services revenue. Software License Revenue Three months ended December 31, 2022 2021 $ change % change ($ thousands) Annuity/maintenance license revenue 15,533 13,575 1,958 14% Perpetual license revenue 518 1,497 (979) -65% Total software license revenue 16,051 15,072 979 6% Annuity/maintenance as a % of total software license revenue 97% 90% Perpetual as a % of total software license revenue 3% 10% Nine months ended December 31, 2022 2021 $ change % change ($ thousands) Annuity/maintenance license revenue 43,887 39,100 4,787 12% Perpetual license revenue 1,684 2,468 (784) -32% Total software license revenue 45,571 41,568 4,003 10% Annuity/maintenance as a % of total software license revenue 96% 94% Perpetual as a % of total software license revenue 4% 6% Total software license revenue for the three and nine months ended December 31, 2022 increased by 6% and 10%, respectively, compared to the same periods of the previous fiscal year, due to the increases in annuity/maintenance license revenue, partially offset by the decreases in perpetual license revenue. Annuity/maintenance license revenue increased by 14% and 12% during the three and nine months ended December 31, 2022, respectively, due to increases in all regions except Canada, supported by license fee increases, increased license usage by existing customers and the addition of new customers. In particular, we are seeing an increase in revenue from the customers involved in carbon capture and storage projects, and estimate that about 15% and 13% of total software revenue for the three and nine months ended December 31, 2022, respectively, is attributable to the energy transition segment. Perpetual license revenue during the three and nine months ended December 31, 2022 decreased by 65% and 32%, respectively, compared to the same periods of the previous fiscal year. Sales of perpetual licenses 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 perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year. In our experience, the majority of perpetual sales are generated in South America and the Eastern Hemisphere, as North American customers usually prefer annuity licenses to perpetual purchases. Software Revenue by Geographic Region Three months ended December 31, 2022 2021 $ change % change ($ thousands) Annuity/maintenance license revenue Canada 3,268 3,303 (35) -1% United States 4,061 3,429 632 18% South America 2,247 1,884 363 19% Eastern Hemisphere (1) 5,957 4,959 998 20% 15,533 13,575 1,958 14% Perpetual license revenue Canada - - - 0% United States - 180 (180) -100% South America - - - 0% Eastern Hemisphere 518 1,317 (799) -61% 518 1,497 (979) -65% Total software license revenue Canada 3,268 3,303 (35) -1% United States 4,061 3,609 452 13% South America 2,247 1,884 363 19% Eastern Hemisphere 6,475 6,276 199 3% 16,051 15,072 979 6% Nine months ended December 31, 2022 2021 $ change % change ($ thousands) Annuity/maintenance license revenue Canada 9,399 9,425 (26) 0% United States 11,115 9,502 1,613 17% South America 5,840 5,195 645 12% Eastern Hemisphere (1) 17,533 14,978 2,555 17% 43,887 39,100 4,787 12% Perpetual license revenue Canada - - - 0% United States 157 401 (244) -61% South America - - - 0% Eastern Hemisphere 1,527 2,067 (540) -26% 1,684 2,468 (784) -32% Total software license revenue Canada 9,399 9,425 (26) 0% United States 11,272 9,903 1,369 14% South America 5,840 5,195 645 12% Eastern Hemisphere 19,060 17,045 2,015 12% 45,571 41,568 4,003 10% (1) Includes Europe, Africa, Asia and Australia. During the three and nine months ended December 31, 2022, compared to the same periods of the previous fiscal year, total software license revenue increased in all regions except Canada. The Canadian region's (representing 22% of year-to-date total software license revenue) annuity/maintenance revenue remained consistent during the three and nine months ended December 31, 2022, compared to the same periods of the previous fiscal year, due to the region continuing to be negatively affected by consolidation activity that started affecting its annuity/maintenance revenue in the first quarter of the current fiscal year. The United States (representing 25% of year-to-date total software license revenue) experienced increases of 18% and 17% in annuity/maintenance license revenue during the three and nine months ended December 31, 2022, respectively, due to new customers, including those within the carbon capture and storage industry, and increased licensing by existing customers. South America (representing 13% of year-to-date total software license revenue) experienced increases of 19% and 12% in annuity/maintenance license revenue during the three and nine months ended December 31, 2022, respectively, due to increased licensing by new and existing customers as well as due to a multi-year lease that commenced in the second quarter of the previous fiscal year. The Eastern Hemisphere (representing 40% of year-to-date total software license revenue) experienced increases of 20% and 17% in annuity/maintenance license revenue during the three and nine months ended December 31, 2022, respectively, due to increased license fees as well as increased licensing by existing customers, and the addition of new customers, including new customers in the carbon capture and storage industry in Europe. Perpetual revenue decreased by 61% and 26%, respectively during the three and nine months ended December 31, 2022, relative to the same period of the previous fiscal year. Deferred Revenue ($ thousands) Fiscal 2023 Fiscal 2022 Fiscal 2021 $ change % change Deferred revenue at: Q1 (June 30) 24,409 23,451 958 4% Q2 (September 30) 24,164 21,242 2,922 14% Q3 (December 31) 26,717 23,056 3,661 16% Q4 (March 31) 30,454 30,461 (7) 0% CMG's deferred revenue consists primarily of amounts for prepaid licenses. Our annuity/maintenance revenue is deferred and recognized ratably over the license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time. The above table illustrates the normal trend in the deferred revenue balance from the beginning of the calendar year (which corresponds with Q4 of our fiscal year), when most renewals occur, to the end of the calendar year (which corresponds with Q3 of our fiscal year). Our 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. The deferred revenue balance at the end of Q3 of fiscal 2023 was 16% higher than Q3 of fiscal 2022 with only minor impact of timing differences on the balance. Expenses Three months ended December 31, 2022 2021 $ change % change ($ thousands) Sales, marketing and professional services 4,111 3,810 301 8% Research and development 4,160 3,926 234 6% General and administrative 2,686 1,554 1,132 73% Total operating expenses 10,957 9,290 1,667 18% Direct employee costs (1) 8,304 7,054 1,250 18% Other corporate costs (1) 2,653 2,236 417 19% 10,957 9,290 1,667 18% Nine months ended December 31, 2022 2021 $ change % change ($ thousands) Sales, marketing and professional services 11,574 11,062 512 5% Research and development 13,484 12,599 885 7% General and administrative 9,572 4,979 4,593 92% Total operating expenses 34,630 28,640 5,990 21% Direct employee costs (1) 26,748 22,703 4,045 18% Other corporate costs (1) 7,882 5,937 1,945 33% 34,630 28,640 5,990 21% (1) This is a non-IFRS financial measure. See the "Non-IFRS Financial Measures" section. Adjusted total operating expenses, adjusted direct employee costs and adjusted other corporate costs are non-IFRS financial measures. They do not have a standard meaning prescribed by IFRS and, accordingly, may not be comparable to measures used by other companies. They are calculated by excluding CEWS subsidies, CERS subsidies and restructuring charges, as applicable, from the related non-adjusted measures. Management believes that analyzing the Company's expenses exclusive of these items illustrates underlying trends in our costs and provides better comparability between periods. The following tables provide a reconciliation of total operating expenses to adjusted total operating expenses, direct employee costs to adjusted direct employee costs and other corporate costs to adjusted other corporate costs: Three months ended December 31 2022 2021 ($ thousands) Total operating expenses 10,957 9,290 CEWS - 259 CERS - 140 Adjusted total operating expenses 10,957 9,689 Direct employee costs 8,304 7,054 CEWS - 259 Adjusted direct employee costs 8,304 7,313 Other corporate costs 2,653 2,236 CERS - 140 Adjusted other corporate costs 2,653 2,376 Nine months ended December 31 2022 2021 ($ thousands) Total operating expenses 34,630 28,640 CEWS - 583 CERS - 183 Restructuring charge (3,943) (851) Adjusted total operating expenses 30,687 28,555 Direct employee costs 26,748 22,703 CEWS - 583 Restructuring charge (3,771) (851) Adjusted direct employee costs 22,977 22,435 Other corporate costs 7,882 5,937 CERS - 183 Restructuring charge (172) - Adjusted other corporate costs 7,710 6,120 In May 2022, Ryan Schneider stepped down as the Company's President and CEO and Pramod Jain was appointed CEO. This change resulted in restructuring costs of $1.6 million in the first quarter of the current fiscal year. During the second quarter of the current fiscal year, the Company restructured primarily its Calgary office, resulting in additional restructuring costs of $2.3 million in the second quarter and bringing the total restructuring charges for the fiscal year to $3.9 million. The restructuring that occurred in the second quarter was mainly aimed at streamlining operations to align resources with the Company's priorities. This prioritization will allow the Company to strengthen other business operations that are necessary for the Company to be responsive, resilient and able to adapt more quickly to changing business priorities. The restructuring decreased our headcount and at December 31, 2022, CMG's full-time equivalent staff complement was 164 employees and consultants (December 31, 2021 - 178 employees). In the three months ended December 31, 2022, adjusted direct employee costs increased by 14% due to increased variable compensation expense as well as a result of increased stock-based compensation expense due to the increase in share price during the current quarter. In the nine months ended December 31, 2022, adjusted direct employee costs increased by 2% due to the increase in direct employee costs experienced during the current quarter. Adjusted other corporate costs increased by 12% and 26% for the three and nine months ended December 31, 2022, respectively, compared to the same periods of the previous fiscal year, primarily due to higher professional services costs and travel-related costs. Quarterly Summary Fiscal 2023 continues to be positive, with the strengthening fundamentals across the oil and gas sector, and new opportunities created by demand for energy transition projects. During the three and nine months ended December 31, 2022, CMG's annuity/maintenance revenue increased by 14% and 12%, respectively, compared to the same periods of the previous fiscal year, continuing the trend of comparative quarterly increases that started in the third quarter of the previous fiscal year, supported by improved industry conditions. Geographically, all regions saw increases in annuity/maintenance revenue, except Canada which remained flat, due to the addition of new customers, including carbon capture and storage companies, increased license fees and increased licensing by some existing customers. Perpetual license revenue decreased by 65% and 32% during the three and nine months ended December 31, 2022, compared to the same periods of the prior fiscal year, primarily due to lower perpetual license sales in the Eastern Hemisphere. During nine months ended December 31, 2022, CMG's expenses were impacted by restructuring charges of $3.9 million, which resulted in reduced full-time equivalent staff compared to the same period of the previous fiscal year. The Company made these changes to concentrate the focus of our research and development activities into the areas with the potential to deliver the greatest value to our customers and have the greatest commercial impact on the business. This allows the Company to reinvest to strengthen other business operations that are necessary to support our growth strategy without materially altering the current cost structure. When adjusted for the restructuring charges, as well as CEWS and CERS subsidies in the comparative periods of the previous year, total operating expenses increased by 13% and 7% in the three and nine months ended December 31, 2022, respectively, due to increases in professional services and travel costs as COVID-19 related travel restrictions eased. Adjusted operating profit margins were 43% and 43% during the three and nine months ended December 31, 2022, respectively, compared to 43% and 40% during the same periods in the previous fiscal year which is reflective of CMG's continuous cost management. Basic earnings per share were $0.08 and $0.18 for the three and nine months ended December 31, 2022, compared to $0.07 and $0.17 recorded in the same periods of the previous fiscal year. CMG maintains a strong financial position and closed the period with $59.9 million of cash and no debt. Despite the restructuring charges and the increase in professional fees year-to-date, CMG generated $0.09 and $0.20 per share of free cash flow for the three and nine months ended December 31, 2022, respectively, representing a slight increase compared to the same periods of fiscal 2022. Additional IFRS Measure Funds flow from operations is an additional IFRS measure that the Company presents in its consolidated statements of cash flows. Funds flow from operations is calculated as cash flows provided by operating activities adjusted for changes in non-cash working capital. Management believes that this measure provides useful supplemental information about operating performance and liquidity, as it represents cash generated during the period, regardless of the timing of collection of receivables and payment of payables, which may reduce comparability between periods. Non-IFRS Financial Measures Certain financial measures in this MD&A - namely, adjusted total operating expenses, direct employee costs, adjusted direct employee costs, other corporate costs, adjusted other corporate costs, adjusted operating profit, adjusted net income, EBITDA, adjusted EBITDA and free cash flow - do not have a standard meaning prescribed by IFRS and, accordingly, may not be comparable to measures used by other companies. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance. Certain additional disclosures for these non-IFRS financial measures have been incorporated by reference and can be found on page 2 in the Company's MD&A for the three and nine months ended December 31, 2022, available on SEDAR at www.sedar.com and on the Company's website under the Investors section at www.cmgl.ca/investors . Reconciliations of the non-IFRS financial measures to the most directly comparable IFRS financial measure are presented below: Free Cash Flow Reconciliation to Funds Flow from Operations Fiscal 2021 Fiscal 2022 Fiscal 2023 ($ thousands, unless otherwise stated) Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Funds flow from operations 6,267 4,811 4,904 7,022 7,105 4,558 4,974 8,169 Capital expenditures (41) (27) (133) (481) (62) - (130) (211) Repayment of lease liabilities (471) (306) (277) (314) (459) (303) (339) (413) Free cash flow 5,755 4,478 4,494 6,227 6,584 4,255 4,505 7,545 Weighted average shares - basic (thousands) 80,286 80,286 80,307 80,335 80,335 80,335 80,412 80,511 Free cash flow per share - basic 0.07 0.06 0.06 0.08 0.08 0.05 0.06 0.09 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. Corporate Profile CMG is a computer software technology company serving the energy industry. The Company is a leading supplier of advanced process reservoir modelling software, with a diverse customer base of international oil companies and technology centers in approximately 60 countries.CMG's existing technology has differentiating capabilities built into its software products that can also be directly applied to the energy transition needs of its customers. 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". Condensed Consolidated Statements of Financial Position UNAUDITED (thousands of Canadian $) December 31, 2022 March 31, 2022 Assets Current assets: Cash 59,886 59,660 Trade and other receivables 18,555 17,507 Prepaid expenses 1,213 792 Prepaid income taxes 213 959 79,867 78,918 Property and equipment 10,302 10,908 Right-of-use assets 31,328 33,113 Deferred tax asset 2,273 2,209 Total assets 123,770 125,148 Liabilities and shareholders' equity Current liabilities: Trade payables and accrued liabilities 6,625 6,819 Income taxes payable - 13 Deferred revenue 26,717 30,454 Lease liabilities 1,803 1,626 35,145 38,912 Long-term stock-based compensation liabilities 1,412 1,556 Long-term lease liabilities 36,730 37,962 Total liabilities 73,287 78,430 Shareholders' equity: Share capital 81,080 80,248 Contributed surplus 15,438 15,009 Deficit (46,035) (48,539) Total shareholders' equity 50,483 46,718 Total liabilities and shareholders' equity 123,770 125,148 Condensed Consolidated Statements of Operations and Comprehensive Income Three months ended December 31 Nine months ended December 31 UNAUDITED (thousands of Canadian $ except per share amounts) 2022 2021 2022 2021 Revenue 19,392 17,045 53,581 47,408 Operating expenses Sales, marketing and professional services 4,111 3,810 11,574 11,062 Research and development 4,160 3,926 13,484 12,599 General and administrative 2,686 1,554 9,572 4,979 10,957 9,290 34,630 28,640 Operating profit 8,435 7,755 18,951 18,768 Finance income 548 115 2,028 339 Finance costs (633) (560) (1,458) (1,649) Profit before income and other taxes 8,350 7,310 19,521 17,458 Income and other taxes 2,002 1,736 4,950 4,005 Net and total comprehensive income 6,348 5,574 14,571 13,453 Earnings per share - basic and diluted 0.08 0.07 0.18 0.17 Dividend per share 0.05 0.05 0.15 0.15 Condensed Consolidated Statements of Cash Flows Three months ended December 31 Nine months ended December 31 UNAUDITED (thousands of Canadian $) 2022 2021 2022 2021 Operating activities Net income 6,348 5,574 14,571 13,453 Adjustments for: Depreciation 864 1,088 2,732 3,144 Deferred income tax expense recovery (145) (49 (64) (104) Stock-based compensation 1,102 409 462 244 Funds flow from operations 8,169 7,022 17,701 16,737 Movement in non-cash working capital: Trade and other receivables (4,872) (4,687) (1,048) 4,471 Trade payables and accrued liabilities 649 68 27 (141) Prepaid expenses 1 (45) (421) (245) Income taxes receivable (payable) 1,157 355 733 (1,172) Deferred revenue 2,553 1,814 (3,737) (7,405) Decrease in non-cash working capital (512) (2,495) (4,446) (4,492) Net cash provided by operating activities 7,657 4,527 13,255 12,245 Financing activities Proceeds from issuance of common shares 19 - 434 - Repayment of lease liabilities (413) (314) (1,055) (897) Dividends paid (4,025) (4,017) (12,067) (12,048) Net cash used in financing activities (4,419) (4,331) (12,688) (12,945) Investing activities Property and equipment additions (211) (481) (341) (641) Increase (decrease) in cash 3,027 (285) 226 (1,341) Cash, beginning of period 56,859 48,012 59,660 49,068 Cash, end of period 59,886 47,727 59,886 47,727 Supplementary cash flow information Interest received 548 115 1,105 339 Interest paid 482 500 1,458 1,510 Income taxes paid 1,732 1,107 4,615 4,617 See accompanying notes to consolidated financial statements, which are available on SEDAR at www.sedar.com or on CMG's website at www.cmgl.ca For further information, please contact: Pramod Jain Chief Executive Officer (403) 531-1300 [email protected] or Sandra Balic Vice President, Finance & CFO (403) 531-1300 [email protected] www.cmgl.ca SOURCE: Computer Modelling Group Ltd. 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