Computer Modelling Group Announces Year End Results
(firmenpresse) - CALGARY, ALBERTA -- (Marketwired) -- 05/19/17 -- 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 . 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
Quarterly Performance
Highlights
During the year ended March 31, 2017, as compared to the same period of the previous fiscal year, CMG:
During the year ended March 31, 2017, CMG:
Revenue
CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and fees for professional services.
Total revenue for the three months ended March 31, 2017 remained consistent compared to the same period of the previous fiscal year. Total revenue for the year ended March 31, 2017 decreased by 7% compared to the previous fiscal year, due to decreases in both software license revenue and professional services.
Software License Revenue
Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company's software products, which is generally for a term of one year or less, and perpetual software license sales, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Annuity/maintenance license fees have historically had a high renewal rate and, accordingly, provide a reliable revenue stream, while perpetual license sales are more variable and unpredictable in nature as the purchase decision and its timing fluctuate with the customers' needs and budgets. The majority of CMG's customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG's software.
Total software license revenue for the three months ended March 31, 2017 remained relatively consistent with the same period of the previous fiscal year, due to a decrease in annuity/maintenance license revenue offset by an increase in perpetual license revenue. Total software license revenue for the year ended March 31, 2017 decreased by 6% compared to the previous fiscal year, due to decreases in both annuity/maintenance license revenue and perpetual license revenue.
CMG's annuity/maintenance license revenue decreased by 14% during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, primarily due to decreases in the Eastern Hemisphere and Canada.
CMG's annuity/maintenance license revenue decreased by 4% during the year ended March 31, 2017, compared to the previous fiscal year, due to decreases in Canada, the Eastern Hemisphere and the United States, partially offset by an increase in South America.
Our annuity/maintenance license revenue can be significantly impacted by the variability of the amounts recorded from a long-standing customer for whom revenue recognition criteria are fulfilled only at the time of the receipt of funds (see the discussion about revenue earned in the current quarter that pertains to usage of products in prior quarters above the "Quarterly Software License Revenue" graph). The timing of such payments may skew the comparison of annuity/maintenance license revenue between periods. No payments were received from this customer during the three months ended March 31, 2017 and March 31, 2016. To provide a normalized comparison, if we remove the revenue from this particular customer from the year ended March 31, 2017, we note that the annuity/maintenance license revenue decreased by 11% instead of 4%. Due to the economic conditions in the country where this customer is located, revenue from this customer will continue to be recognized on a cash basis, which may result in fluctuations in our annuity/maintenance license revenue.
Perpetual license revenue increased by 288% for the three months ended March 31, 2017, compared to the same period of the previous fiscal year, due to more perpetual sales having been realized in most geographic areas, with the exception of Canada. Perpetual license revenue decreased by 31% for the year ended March 31, 2017 due to fewer perpetual sales having been realized in all geographic areas, compared to the previous fiscal year. 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 we expect to achieve a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year.
We can observe from the tables below that the exchange rate between the US and Canadian dollars during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, had a negative impact on reported software license revenue and the exchange rate between the US and Canadian dollars during the year ended March 31, 2017, compared to the same period of the previous fiscal year, had a positive impact on our reported software license revenue.
The following table summarizes the US dollar-denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars:
The following table quantifies the foreign exchange impact on our software license revenue:
Software Revenue by Geographic Segment
During the three months ended March 31, 2017, on a geographic basis, Canada experienced a decrease in total software license sales, which was partially offset by increases in the Eastern Hemisphere and South America, as compared to the same period of the previous fiscal year.
During the year ended March 31, 2017, on a geographic basis, total software license sales decreased in all geographic segments, with the exception of South America, as compared to the previous fiscal year.
The Canadian market (representing 27% of total annual software license revenue) experienced a 15% and 18% decrease in annuity/maintenance license revenue during the three months and year ended March 31, 2017, respectively, compared to the same periods of the previous fiscal year, due to a reduction in licensing by some customers. No perpetual sales were realized in Canada during the three months ended March 31, 2017. Fewer perpetual sales were realized during the year ended March 31, 2017, compared to the previous fiscal year.
The United States market (representing 24% of total annual software license revenue) experienced a 2% and 5% decrease in annuity/maintenance license revenue during the three months and year ended March 31, 2017, respectively, compared to the same periods of the previous fiscal year, due to decreased spending by existing customers. Perpetual license revenue for the three months ended March 31, 2017 was comparable to the same period of the previous fiscal year. Perpetual license revenue decreased by 83% during the year ended March 31, 2017, compared to the previous fiscal year, as a result of a significant perpetual sale in the first quarter of the previous fiscal year.
South America (representing 17% of total annual software license revenue) experienced a decrease of 9% in annuity/maintenance license revenue during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, due to decreased spending by some customers. Annuity/maintenance license revenue for the year ended March 31, 2017 increased by 62%, compared to the previous fiscal year. Our revenue in South America can be significantly impacted by the variability of the amounts recorded from a customer for whom revenue is recognized only when cash is received (see the discussion about revenue earned in the current quarter that pertains to usage of products in prior quarters on the next page, above the "Quarterly Software License Revenue" graph). The most recent payments from this customer were recognized during the quarter ended December 31, 2016. No payments were received from this customer during the year ended March 31, 2016. To provide a normalized comparison, if we remove the revenue from this particular customer from the year ended March 31, 2017, we note that the annuity/maintenance license revenue decreased by 14% instead of increasing by 62%.
More perpetual sales were realized in South America during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, resulting in a 187% increase. On a year-to-date basis, perpetual license revenue was comparable to the previous fiscal year.
The Eastern Hemisphere (representing 32% of total annual software license revenue) experienced a 24% and 8% decrease in annuity/maintenance license revenue during the three months and year ended March 31, 2017, respectively, compared to the same periods of the previous fiscal year. While some of the decrease in both periods is due to reduced licensing by some customers, a portion of the quarter-over-quarter decrease is also due to the timing of finalizing certain contracts that come up for renewal in the fourth quarter of each fiscal year. Since some of those contracts were still under negotiation as at March 31, 2017, no revenue was recognized on them in the three months ended March 31, 2017.
The Eastern Hemisphere experienced a 464% increase in perpetual license revenue during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, as a result of several large perpetual sales realized in Asia and the Middle East. During the year ended March 31, 2017, the Eastern Hemisphere realized fewer perpetual sales, leading to an 11% decrease in perpetual license revenue compared to the previous fiscal year.
As footnoted in the Quarterly Performance table, in the normal course of business CMG may complete the negotiation of certain annuity/maintenance contracts and/or fulfill revenue recognition requirements within a current quarter that includes usage of CMG's products in prior quarters. This situation particularly affects contracts negotiated with countries that face increased economic and political risks leading to the revenue recognition criteria being satisfied only at the time of the receipt of cash. The dollar magnitude of such contracts may be significant to the quarterly comparatives of our annuity/maintenance license revenue stream and, to provide a normalized comparison, we specifically identify the revenue component where revenue recognition is satisfied in the current period for products provided in previous quarters.
To view the Quarterly Software License Revenue ($thousands) chart, please visit the following link:
Deferred Revenue
CMG's deferred revenue consists primarily of amounts for pre-sold licenses. Our annuity/maintenance revenue is deferred and recognized on a straight-line basis or according to usage over the life of the related 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.
Deferred revenue as at Q4 of fiscal 2017 increased by 14% compared to Q4 of fiscal 2016. The deferred revenue balance at March 31, 2017 includes a number of contracts that were not included in the deferred revenue balance in the comparative quarter, because the contracts were finalized and invoiced prior to March 31, 2017, whereas in the previous fiscal year the contracts were finalized and invoiced subsequent to March 31, 2016.
Professional Services Revenue
CMG recorded professional services revenue of $1.4 million for the three months ended March 31, 2017, which represented an increase of $0.2 million compared to the same period of the previous fiscal year. The increase was due to the new CoFlow development agreement with Shell, which entitles CMG to higher contract research revenue compared the old joint venture agreement. The increase in contract research revenue was offset by lower consulting revenue due to a decline in project activity by our customers.
Professional services revenue for the year ended March 31, 2017 was $4.9 million, which represented a decrease of $1.0 million compared to the same periods of the previous fiscal year, primarily due to a decline in project activity by our customers, partially offset by higher contract research revenue.
Professional services revenue consists of specialized consulting, training, and contract research activities. CMG performs consulting and contract research activities on an ongoing basis, but such activities are not considered to be a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner, combined with servicing our customers' needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within customer companies.
Expenses
CMG's total operating expenses decreased by 5% and 7% for the three months and year ended March 31, 2017, compared to the same periods of the previous fiscal year, mainly due to a decrease in direct employee costs.
Direct Employee Costs
As a technology company, CMG's largest area of expenditure is its people. Approximately 80% of the total operating expenses for the year ended March 31, 2017 related to direct employee costs, consistent with the same period of the previous fiscal year. Staffing levels in the current fiscal year were lower compared to the previous fiscal year. At March 31, 2017, CMG's full-time equivalent staff complement was 199 employees and consultants, down from 212 full-time equivalent employees and consultants at March 31, 2016, mainly due to the closure of the Venezuelan office and the reduction of the CoFlow development team. Direct employee costs decreased during the three months and year ended March 31, 2017, compared to the same periods of the previous fiscal year, due to lower bonuses, lower stock-based compensation expense and the closure of the Venezuelan office in May of 2016.
Other Corporate Costs
Other corporate costs remained flat during the three months ended March 31, 2017 and decreased by 2% during the year ended March 31, 2017, compared to the same periods of the previous fiscal year, mainly due to less travel for business and training and lower depreciation, partially offset by increased operating costs of the Colombian branch.
Research and Development
CMG maintains a belief that its strategy of growing long-term value for shareholders can only be achieved through continued investment in research and development. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes.
The above research and development costs include $1.9 million and $6.0 million of costs for CoFlow for the three months and year ended March 31, 2017, respectively, (2016 - $1.5 million and $5.9 million, respectively). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties".
Research and development costs (gross) increased by 6% during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, as a result of the new agreement with our CoFlow partner Shell, under which CMG is responsible for a larger share of CoFlow costs starting January 1, 2017.
Research and development costs (gross) decreased by 3% during the year ended March 31, 2017, compared to the previous fiscal year, mainly as a result of a lower bonus accrual and lower stock-based compensation expense, offset by the aforementioned increase due to CMG being responsible for a larger share of CoFlow costs.
SR&ED credits decreased by 27% and 5% for the three months and year ended March 31, 2017, respectively, compared to the same periods of the previous fiscal year, mainly due to a decrease in hours spent on SR&ED-eligible projects.
Depreciation
Depreciation for the three months and year ended March 31, 2017 decreased compared to the same periods of the previous fiscal year, because most of the existing leasehold improvements were fully depreciated during the year.
Finance Income and Costs
Interest income for the three months and year ended March 31, 2017 was comparable to the same periods of the previous fiscal year.
CMG is impacted by foreign exchange fluctuations as approximately 78% of CMG's revenue for the year ended March 31, 2017 (2016 - 76%) is denominated in US dollars, whereas only approximately 26% (2016 - 28%) of CMG's total costs are denominated in US dollars.
The following chart shows the exchange rates used to translate CMG's US dollar-denominated working capital at March 31, 2017, 2016 and 2015 and the average exchange rates used to translate income statement items during the year ended March 31, 2017, 2016 and 2015:
CMG recorded a net foreign exchange loss of $0.1 million for the three months ended March 31, 2017 due to a weakening of the US dollar, which negatively affected the valuation of the US-dollar denominated portion of the Company's working capital.
CMG recorded a net foreign exchange gain of $0.3 million for the year ended March 31, 2017 due to a strengthening of the US dollar during fiscal 2017.
Income and Other Taxes
CMG's effective tax rate for the year ended March 31, 2017 is 29.0% (2016 - 29.0%), whereas the prevailing Canadian statutory tax rate is now 27.0%. This difference is primarily due to the non-tax deductibility of stock-based compensation expense.
The benefit recorded in CMG's books on the scientific research and experimental development ("SR&ED") investment tax credit program impacts deferred income taxes. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce income taxes otherwise payable for the current fiscal year and the federal portion of this benefit bears an inherent tax liability as the amount of the credit is included in the subsequent year's taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a non-current deferred tax liability and then, in the following fiscal year, is transferred to income taxes payable.
Operating Profit and Net Income
Operating profit as a percentage of total revenue for the three months ended March 31, 2017 and March 31, 2016 was 40% and 37%, respectively. The higher operating profit as a percentage of total revenue in the current quarter was due to lower operating expenses.
Operating profit as a percentage of total revenue for the years ended March 31, 2017 and March 31, 2016 was 44% and 45%, respectively. Both revenue and operating expenses decreased in fiscal 2017 compared to fiscal 2016, as a result of which operating profit as a percentage of total revenue remained consistent.
Net income as a percentage of revenue for the three months ended March 31, 2017 and March 31, 2016 was 27% and 20%, respectively. The higher net income as a percentage of total revenue in the current period was due to a large foreign exchange loss recorded in the comparative period.
Net income as a percentage of revenue for the years ended March 31, 2017 and March 31, 2016 remained consistent at 32% and 31%, respectively, because lower revenue in the current fiscal year was offset by lower operating expenses and a foreign exchange gain, as opposed to a foreign exchange loss in the previous fiscal year.
EBITDA
EBITDA for the three months and year ended March 31, 2017 was 41% and 46%, respectively, which is consistent with the same periods of the previous fiscal year.
Liquidity and Capital Resources
Operating Activities
Cash flow from operating activities increased by $3.7 million in the three months ended March 31, 2017, compared to the same period of the previous fiscal year. This was mainly due to the change in the deferred revenue balance, lower income tax payments and higher net income, offset by the negative impact of the timing difference of when sales are made and when the resulting receivables are collected.
Cash flow from operating activities decreased by $2.8 million in the year ended March 31, 2017, compared to the previous fiscal year. This was mainly due to the negative impact of the timing difference of when sales are made and when the resulting receivables are collected, and when trade payables and accrued liabilities are recorded and paid. This was partially offset by lower income tax payments and the change in the deferred revenue balance.
Financing Activities
Cash used in financing activities decreased by $1.0 million during the three months ended March 31, 2017, compared to the same period of the previous fiscal year, mainly due to higher proceeds from issue of Common Shares on option exercises. Cash used in financing activities decreased by $5.6 million during the year ended March 31, 2017, compared to the same period of the previous fiscal year, due to Common Share buy-backs in the previous year.
During the year ended March 31, 2017, CMG employees and directors exercised options to purchase 663,000 Common Shares, which resulted in cash proceeds of $4.9 million (2016 - 921,000 options exercised to purchase Common Shares, which resulted in cash proceeds of $6.0 million).
In the year ended March 31, 2017, CMG paid $31.7 million in dividends, representing the following quarterly dividends:
In the year ended March 31, 2016, CMG paid $31.5 million in dividends, representing the following quarterly dividends:
On May 18, 2017, CMG announced the payment of a quarterly dividend of $0.10 per share on CMG's Common Shares. The dividend will be paid on June 15, 2017 to shareholders of record at the close of business on June 7, 2017.
Based on our expectation of profitability and cash-generating ability, we are cautiously optimistic that the company is well positioned to continue paying quarterly dividends.
On May 21, 2015, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on May 25, 2015 to purchase for cancellation up to 7,447,000 of its Common Shares. This NCIB ended on May 24, 2016, and during the year ended March 31, 2016, 589,000 Common Shares were purchased at market price for a total cost of $6.9 million.
On May 20, 2016, the Company announced a NCIB commencing on May 25, 2016 to purchase for cancellation up to 7,485,000 of its Common Shares. During the year ended March 31, 2017, no Common Shares were purchased.
Investing Activities
CMG's current needs for capital asset investment relate to office infrastructure costs and computer equipment, all of which are being funded internally. During the year ended March 31, 2017, CMG's capital expenditures were $11.5 million, primarily for infrastructure for the new Calgary headquarters. Over the last three fiscal years, the Company invested $15.3 million in infrastructure for the new headquarters, of which $13.9 million was incurred in the year ended March 31, 2017 ($10.1 million of that was paid in cash and the remaining $3.8 million is included in trade payables and accrued liabilities as at March 31, 2017). The total budget for infrastructure is $16.0 million, and the remainder of the budget is expected to be spent in the first quarter of fiscal 2018.
CMG's capital budget for fiscal 2018 is $2.2 million, which includes the remaining spend for the new headquarters.
Liquidity and Capital Resources
At March 31, 2017, CMG has $63.2 million in cash, no debt, and has access to approximately $0.8 million under a line of credit with its principal banker. The company's primary non-operating uses of cash are for paying dividends, purchasing shares and infrastructure for the new Calgary headquarters.
During the year ended March 31, 2017, 18,780,000 shares of CMG's public float were traded on the TSX. As at March 31, 2017, CMG's market capitalization based upon its March 31, 2017 closing price of $10.35 was $822.6 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
Under the five-year development agreement between CMG and Shell, CMG will be responsible for research and development costs of CoFlow, while Shell will provide a fixed fee contribution for the continuing development of the software. The Company estimates that revenue and costs associated with CoFlow development will approximate $4.0 million and $8.3 million, respectively, in fiscal 2018, which will result in approximately $1.5 million net incremental cost to CMG in comparison to the previous joint project arrangement. CMG plans to continue funding project costs from internally generated cash flows.
CMG has very little in the way of other ongoing material contractual obligations other than pre-sold licenses, which are reflected as deferred revenue on the statement of financial position, and contractual obligations for office leases, which are estimated for our fiscal years as follows: 2018 - $4.3 million; 2019 - $4.9 million; 2020 - $4.8 million; 2021 - $4.8 million; 2022 - $4.8 million; thereafter - $82.3 million. These amounts include a twenty-year operating lease for the new Calgary headquarters, which will commence in fiscal 2018.
Critical Accounting Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to estimation uncertainty. The effect on the financial statements of changes in such estimates in future periods could be material and would be accounted for in the period in which the estimates are revised and in any future periods affected.
Revenue recognition
Revenue consists primarily of software license fees with some fees for professional services. We recognize revenue in accordance with the current rules of IFRS. We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policies.
Software license revenue is comprised of annuity/maintenance license fees charged for the use of our software products, which is generally for a term of one year or less, and perpetual software licensing, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. We recognize software license revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, providing all other criteria have been met.
Annuity/maintenance revenue is recognized on a straight-line basis over the license period, which is generally one year or less. License fees for perpetual licenses are recognized fully in revenue when all recognition conditions are satisfied.
Certain software license agreements contain multiple-element arrangements as they may also include maintenance fees. Judgment is used in determining a fair value of each element of a contract.
Professional services revenue earned from certain consulting contracts is recognized by the stage of completion of the transaction determined using the percentage-of-completion method. Judgment is used in determining progress of each contract at period end. In assessing revenue recognition, judgment is also used in determining the ability to collect the corresponding account receivable.
Functional currency
The determination of the functional currency is a matter of determining the primary economic environment in which an entity operates. IAS 21 The Effects of Changes in Foreign Exchange Rates sets out a number of factors to apply in making the determination of the functional currency. However, applying the factors in IAS 21 does not always result in a clear indication of functional currency. Where IAS 21 factors indicate differing functional currencies within a subsidiary, the Company uses judgment in the ultimate determination of that subsidiary's functional currency, including an assessment of the nature of the relationship between the Company and the subsidiary. Judgment was applied in the determination of the functional currency of certain of the Company's operating entities.
Research and development
Assumptions are made in respect to the eligibility of certain research and development projects in the calculation of SR&ED investment tax credits which are netted against the research and development costs in the statement of operations. SR&ED claims are subject to audits by relevant taxation authorities and the actual amount may change depending on the outcome of such audits.
Stock-based compensation
Assumptions and estimates are used in determining the inputs used in the Black-Scholes option pricing model, including assumptions regarding volatility, dividend yield, risk-free interest rates, forfeiture estimates and expected option lives.
Property and equipment
Estimates are used in determining useful economic lives of property and equipment for the purposes of calculating depreciation.
Accounting Standards and Interpretations Adopted During the Year
Amendments to IAS 1 Presentation of Financial Statements
Amended IAS 1 Presentation of Financial Statements to clarify existing requirements related to materiality, order of notes, subtotals, accounting policies and disaggregation. The Company adopted, with retrospective application, these amendments to IAS 1 in its consolidated financial statements beginning April 1, 2016. The amendments to IAS 1 did not have a material impact on the Company's disclosure.
Accounting Standards and Interpretations Issued But Not Yet Effective
The following standards and interpretations have not been adopted by the Company as they apply to future periods:
IFRS 9 Financial Instruments
Replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets, amends the impairment model and includes a new general hedge accounting standard. The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The Company intends to adopt IFRS 9 in its consolidated financial statements beginning April 1, 2018. The Company does not expect IFRS 9 to have a material impact on the consolidated financial statements because of the nature of the Company's operations and the types of financial assets that it holds.
IFRS 15 Revenue from Contracts with Customers
Replaces the guidance in IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue - Barter Transactions Involving Advertising Services with a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The effective date for IFRS 15 is for annual periods beginning on or after January 1, 2018. IFRS 15 is available for early adoption. The Company intends to adopt IFRS 15 in its consolidated financial statements for the annual period beginning April 1, 2018.
While we are continuing to assess the impact of the new standard, we currently believe that the most significant impact relates to our annuity agreements, which include term-based software licenses bundled with maintenance. Under the current standards, the revenue attributable to these software licenses is recognized on a straight-line basis over the license period. Under the new standard, the portion of the agreement fee that relates to the software license will be recognized as revenue upon delivery of the software license. We do not expect IFRS 15 to have a substantial impact on revenue related to our maintenance agreements, perpetual licenses, and professional services.
IFRS 16 Leases
Replaces the guidance in IAS 17 Leases and requires the recognition of most leases on the balance sheet. IFRS 16 effectively removes the classification of leases as either finance or operating leases and treats all leases as finance leases for lessees with exemptions for short-term leases where the term is twelve months or less and for leases of low value items. IFRS 16 is effective January 1, 2019, with earlier adoption permitted. The Company intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning April 1, 2019. The extent of the impact of adoption of the standard has not yet been determined.
Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
On July 13, 2005, CMG adopted a rolling stock option plan which allows the Company to grant options to its employees, officers and directors to acquire Common Shares of up to 10% of the outstanding Common Shares at the date of grant. Based upon this calculation, at May 18, 2017, CMG could grant up to 7,953,000 stock options.
Business Risks
The Company has the following business risks:
Commodity Price Risk
CMG's customers are oil and gas companies and it might, therefore, be assumed that its financial results are significantly impacted by commodity prices. CMG's actual experience of growth in software license revenues during depressed oil price markets makes us believe that software license sales are influenced more by the utility of the software as opposed to the prevailing commodity price, but different circumstances could prevail in the future. Low commodity prices and resulting lower cash flow in the industry could impact how customers license CMG software; one could expect sales of perpetual licenses to decrease in favour of leasing software on a term basis.
Volatility in commodity prices could have an impact on CMG's consulting business; however, this business segment generates less than 10% of total revenues and CMG has no current plans to significantly expand this area of business.
Credit and Liquidity Risks
Our product demand is dependent on the customers' overall spending plans, which are driven by commodity prices and the availability of capital. This risk is mitigated by having a diversified customer base with the majority of revenue being derived from larger entities which are not as affected by the market volatility or cyclical downturns in commodity prices. In addition, our diversified geographic profile helps to mitigate the effects of economic recessions and instability experienced in any particular geographic region.
The Company mitigates the collection risk by closely monitoring its accounts receivable and assessing creditworthiness of its customers. The Company has not had any significant losses to date.
In terms of liquidity, the Company held $63.2 million of cash at March 31, 2017, which more than covers its obligations, and it has approximately $0.8 million of the credit facility available for its use. The Company's cash is held with a reputable banking institution. For the described reasons, we believe that our liquidity risk is low.
Sales Variability Risk
CMG's software license revenue consists of annuity/maintenance software licensing, which is generally for a term of one year or less, and perpetual software licensing, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Software licensing under perpetual sales is a significant part of CMG's business but is more variable in nature as the purchase decision, and its timing, fluctuate with customers' needs and budgets. CMG has found that a number of customers prefer to acquire perpetual software licenses rather than leasing the software on an annual basis. The experience over the last few years is that a number of these customers are purchasing additional licenses to allow more users to access CMG technology in their operations. CMG has found that a large percentage of its customers who have acquired perpetual software licenses are subsequently purchasing maintenance licenses to ensure they have access to current CMG technology.
The variability in sales of perpetual licenses may cause significant fluctuations in the Company's quarterly and annual financial results, and these results may not meet the expectations of analysts or investors. Accordingly, the Company's past results may not be a good indication of its future performance.
CMG's customers are both domestic and international oil and gas companies and for the years ended March 31, 2017 and 2016, no customer represented revenue in excess of 10% of total revenue.
Foreign Exchange Risk
CMG's reported results are affected by the exchange rate between the Canadian dollar and the US dollar as approximately 78% (2016 - 76%) of product revenues in fiscal 2017 were denominated in US dollars. Approximately 26% of CMG's total costs in fiscal 2017 (2016 - 28%) were denominated in US dollars, which provides a partial economic hedge against the fluctuation in currency exchange between the US and the Canadian dollar on revenues. CMG's residual revenues and costs are primarily denominated in Canadian dollars, and its policy is to convert excess US dollar cash into Canadian dollars when received.
Geopolitical Risk
CMG sells its products and services in approximately 60 countries and maintains offices in Canada, the United States, the United Kingdom, the United Arab Emirates, Colombia and Malaysia. Some of these countries have greater economic, political and social risks than North America. Some of those risks include:
Any disruption in our ability to complete a sale cycle, including disruption of travel to customers' locations to provide training and support, and the cost of reorganizing daily activities of foreign operations, could have an adverse effect on CMG's business, financial condition and operational results. CMG mitigates the potential adverse effect on sales by invoicing for the full license term in advance for the majority of software license sales and by invoicing as frequently as the contract allows for consulting and contract research services. CMG consults with tax advisors on complex tax issues and engages professional tax firms to review its tax filings in foreign jurisdictions. CMG closely monitors the business and regulatory environments of the countries in which it conducts operations to minimize the potential impact on costs and operations.
Non-compliance with applicable anti-corruption and bribery laws could subject the Company to onerous penalties and the costs of prosecution. CMG has established business practices and internal controls to minimize the potential occurrence of any irregular payments. In addition, the Company has established well-defined anti-corruption and bribery policies and procedures that each employee and contractor is required to sign indicating their compliance.
Competition Risk
Competition is a risk for CMG as it is for almost every company in every sector. The reservoir simulation software industry currently consists of three major suppliers (including CMG) and a number of small suppliers. Some of the other suppliers, including two major suppliers, offer products or oil field services outside the scope of reservoir simulation. Some potential customers may prefer to deal with such multi-service suppliers, while others prefer an independent supplier, such as CMG.
Although competition is very active, CMG believes that its proven technology and the comprehensive scope of its products, combined with its international presence and recognition as a major independent supplier, provide distinct competitive advantages.
Sustaining competitive advantage is another issue, which CMG addresses by making a significant ongoing commitment to research and development spending. CMG expended $16.4 million (2016 - $16.9 million) in product research and development in its most recently completed fiscal year.
The introduction by competitors of products embodying new technology and the emergence of new industry standards and practices could render CMG's products obsolete and unmarketable and could exert price pressures on existing products, which could have negative effects on the Company's business, operating results and financial condition.
There is a significant barrier for new entrants into the reservoir simulation software industry. The cost of entry is substantial as a significant investment in research and development is required. In addition, to become a major supplier, a significant time investment is required to build up quality relationships with potential customers.
Labour Risk
The Company's continued success is substantially dependent on the performance of its key employees and officers. The loss of the services of these personnel as well as failure to attract additional key personnel could have a negative impact upon the Company's business, operating results and financial condition. Due to high levels of competition for qualified personnel, there can be no assurance that the Company will be successful in retaining and attracting such personnel. The Company attempts to overcome this by offering an attractive compensation package and providing an environment that provides the intellectual and professional stimulation sought by our employee group.
Intellectual Property Risk
CMG regards its software as proprietary and attempts to protect it with copyrights, trademarks and trade secret measures, including restrictions on disclosure and technical measures. Despite these precautions, it may be possible for third parties to copy CMG's programs or aspects of its trade secrets. CMG has no patents, and existing legal and technical precautions afford only limited practical protection. CMG could incur substantial costs in protecting and enforcing its intellectual property rights. Moreover, from time to time third parties may assert patent, trademark, copyright and other intellectual property rights to technologies that are important to CMG. In such an event, CMG may be required to incur significant costs in litigating a resolution to the asserted claim. There can be no assurance that such a resolution would not require that CMG pay damages or obtain a license of a third party's proprietary rights in order to continue licensing its products as currently offered, or, if such a license is required, that it will be available on terms acceptable to CMG.
CMG does not know of any infringement of any third party's patent rights, copyrights, trade secrecy rights or other intellectual property disputes in the development or support of its products.
Cyber Risk
CMG is dependent on information technology ("IT") infrastructure to process, transmit and store electronic information, to advertise, inform and train around CMG's products and services, to manage business operations and for the functioning and/or delivery of the Company's products and services. CMG's IT infrastructure is composed of hardware, software, networks, data center facilities, web servers, and all related equipment required to operate. Natural disasters, energy blackouts, operating malfunction, software virus or malware, cyber security attacks, human error, employee misconduct or other sources could result in the temporary or permanent loss of any or all parts of CMG's IT infrastructure. Any such incident or breach could create system disruptions or slowdowns. In such an event, the information stored in CMG's IT infrastructure could be accessed, publicly disclosed, lost, or stolen, which could subject CMG to liability and cause the Company to incur significant costs to eliminate or alleviate the problem. Additionally, such occurrences could cause negative publicity and harm to CMG's reputation. CMG mitigates such risks by ensuring the core network is not connected to the Internet, firewalling the servers that are connected to the Internet, restricting access to information through user authentication, completing frequent back-ups of data, and having a disaster recovery plan in place.
Although CMG has implemented disaster recovery plans and extensive technology security initiatives to prevent, detect and address these threats, it is virtually impossible to entirely mitigate these risks. To date, CMG has not experienced any material losses relating to cyber attacks or other information security breaches.
CMG's website collects limited user information; the website is not used for e-commerce transactions, and CMG neither receives nor retains financial information from its website users. CMG's products are not known to have any security vulnerabilities. CMG's products are engineering decision-making tools and are not employed in a cyber security (mitigation or defensive) role, as part of our client's IT infrastructure. CMG's software releases are scanned for software viruses and malware, confirming a lack thereof, prior to delivery to clients.
Tax Liability Risk
With operations and sales in various countries, CMG is subject to taxes in several jurisdictions around the world. Significant judgment is required in determining the Company's worldwide liability for income, indirect and other taxes, as well as potential penalties and interest. Although management believes that all expenses and tax credits claimed by the Company, including research and development expenses and foreign tax credits, are reasonable, deductible and have been correctly determined, tax authorities may disagree with the treatment of items reported by the Company, the result of which could have a material adverse effect on our financial condition and results of operations. CMG mitigates these risks by staying informed of changes in tax legislation, consulting with tax advisors on complex tax issues and having professional tax firms review the Company's tax filings.
CMG conducts operations worldwide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements with its subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arm's length. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, a tax authority in one or more jurisdictions could challenge the validity of our related-party transfer pricing methodologies, which could result in adjustments in favor of the taxing authority. To address this risk, CMG engages local professional tax firms to review the Company's transfer pricing agreements and dealings with foreign tax authorities.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Management is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR") as defined under National Instrument 52-109.
At March 31, 2017, the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") concluded that the design and operation of the Company's DC&P were effective (in accordance with the COSO control framework (2013)) and that material information relating to the Company, including its subsidiaries, was made known to them and was recorded, processed, summarized and reported within the time periods specified under applicable securities legislation. Further, the CEO and the CFO concluded that the design and operation of the Company's ICFR were effective at March 31, 2017 in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. It should be noted that while the Company's CEO and CFO believe that the Company's disclosure controls and procedures and internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that such controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
During the year ended March 31, 2017, there have been no significant changes to the Company's ICFR that have materially affected, or are reasonably likely to materially affect, the Company's ICFR.
Non-IFRS Financial Measures
This MD&A includes certain measures which have not been prepared in accordance with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs." Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance.
"Direct employee costs" include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. "Other corporate costs" include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IF
Themen in dieser Pressemitteilung:
Unternehmensinformation / Kurzprofil:
Datum: 19.05.2017 - 11:00 Uhr
Sprache: Deutsch
News-ID 543487
Anzahl Zeichen: 0
contact information:
Town:
CALGARY, ALBERTA
Kategorie:
Software
Diese Pressemitteilung wurde bisher 195 mal aufgerufen.
Die Pressemitteilung mit dem Titel:
"Computer Modelling Group Announces Year End Results"
steht unter der journalistisch-redaktionellen Verantwortung von
Computer Modelling Group Ltd. (Nachricht senden)
Beachten Sie bitte die weiteren Informationen zum Haftungsauschluß (gemäß TMG - TeleMedianGesetz) und dem Datenschutz (gemäß der DSGVO).
