CALGARY, ALBERTA — (Marketwired) — 05/23/13 — 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, 2013.
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 22, 2013, should be read in conjunction with the audited consolidated financial statements and related notes of the Company for the years ended March 31, 2013 and 2012. 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 and rounded to the nearest thousand.
CORPORATE PROFILE
CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced processes reservoir modelling software with a blue chip client base of international oil companies and technology centers in over 50 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, Caracas, Dubai and Bogota. CMG-s Common Shares are listed on the Toronto Stock Exchange (“TSX”) and trade under the symbol “CMG”.
Highlights
During the year ended March 31, 2013, as compared to the prior fiscal year, CMG:
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 increased by 12% for the three months ended March 31, 2013, compared to the same period of the previous fiscal year, mainly due to an increase in software license sales driven by the growth in annuity/maintenance license sales. Professional services also contributed to the overall growth in our quarterly total revenue.
Similarly, total revenue increased by 12% in the year ended March 31, 2013, compared to the previous fiscal year, primarily as a result of the increase in software license sales led by the increase in annuity/maintenance revenue, and a slight increase in fees for professional services earned during the current fiscal year.
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 grew by 11% in the three months ended March 31, 2013, compared to the same period of the previous fiscal year, due to the increase in annuity/maintenance license revenue offset by a decrease in perpetual sales. Similarly, total software license revenue grew by 13% for the year ended March 31, 2013, compared to the previous fiscal year, as a result of the increase in annuity/maintenance revenue stream offset by the decrease in perpetual license sales.
CMG-s annuity/maintenance license revenue increased by 23% and 27% during the three months and year ended March 31, 2013, respectively, compared to the same periods of last year. These increases were driven by sales to new and existing clients as well as an increase in maintenance revenue tied to perpetual sales generated in the current and previous fiscal years.
All of our regions experienced strong growth in annuity/maintenance revenue during both the three months and year ended March 31, 2013, for the reasons described above, but the most significant growth came from our Canadian market.
Our annuity/maintenance revenue is impacted by the revenue recognition on a multi-year contract for which revenue recognition criteria are fulfilled only at the time of the receipt of funds (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the “Quarterly Software License Revenue” graph). The variability of the amounts of the payments received and the timing of such payments may skew the comparison of the recorded annuity/maintenance revenue amounts between periods. The amounts received from this particular client and recognized during the three months ended March 31, 2013, are not significantly different from the amounts received and recognized in the same period of the previous fiscal year. If we were to adjust our annuity/maintenance license revenue, by removing revenue from this one customer from the years ended March 31, 2013 and 2012, we would see that the annuity/maintenance sales have grown by 29% instead of 27%.
Given our long-standing relationship with this client, and their on-going use of our licenses, we expect to continue to receive payments under this arrangement; however, the amount and timing are uncertain and will continue to be recorded on a cash basis, which may introduce some variability in our reported quarterly and annual annuity/maintenance revenue results.
Our annuity/maintenance license sales, representing our recurring revenue stream, have continued to experience consecutive quarterly increases over the past several fiscal years, with a double-digit growth experienced during each of the quarters in the current fiscal year as compared to the respective quarters of the previous fiscal year.
We can observe from the table below that the exchange rates between the US and Canadian dollars during the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported annuity/maintenance revenue.
Perpetual license sales decreased by 33% for the three months ended March 31, 2013, compared to the same period of the previous fiscal year, due to fewer perpetual sales being realized in the United States and Eastern Hemisphere markets in the current quarter.
Perpetual license sales for the year ended March 31, 2013, decreased by 34% compared to the previous fiscal year. In the first quarter of the previous fiscal year, we reported an amount associated with a multi-million dollar perpetual contract in the Eastern Hemisphere which contributed significantly to the revenue growth in the previous fiscal year.
Software licensing under perpetual sales is a significant part of CMG-s business, but 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 table below that the exchange rates between the US and Canadian dollars during the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported perpetual 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:
REVENUE BY GEOGRAPHIC SEGMENT
On a geographic basis, total software license sales increased across all regions with the exception of the Eastern Hemisphere market which experienced overall decreases of 13% and 12% during the three months and year ended March 31, 2013, respectively, compared to the same periods of the previous fiscal year, due to lower perpetual sales. The most significant growth came from our annuity/maintenance license sales, with increases experienced across all regions for the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year.
The Canadian market (representing 38% of year-to-date total software revenue) experienced strong increases in annuity/maintenance license sales during the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year. These increases were supported by the sales to both new and existing clients. Perpetual sales also experienced increases during both the current quarter and year-to-date. The Canadian market continues to be the leader in generating total software license revenue and, particularly, in generating the recurring annuity/maintenance revenue as evidenced by the quarterly year-over-year increases of 17%, 32%, 37% and 37% recorded during Q4 2012, Q1 2013, Q2 2013, and Q3 2013, respectively. This growth trend has continued into the fourth quarter of the current fiscal year with the recorded increase of 38%.
The US market (representing 18% of year-to-date total software revenue) also grew annuity/maintenance license sales during the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year, driven by sales to new and existing clients. Fewer perpetual license sales were made during the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year. Similar to the Canadian market, we have continued to see successive increases in the annuity/maintenance license sales in the US as evidenced by the quarterly year-over-year increases of 26%, 20%, 24% and 32% recorded during Q4 2012, Q1 2013, Q2 2013, and Q3 2013, respectively. This growth trend has continued into the fourth quarter of the current fiscal year with the recorded increase of 20%.
South America (representing 17% of year-to-date total software revenue) experienced only a slight increase of 3% in annuity/maintenance revenue during the three months ended March 31, 2013, compared to the same period of the previous fiscal year, and a more significant increase of 19% during the year ended March 31, 2013, compared to the previous fiscal year. The revenue recognition in our South American region is affected by the revenue recorded on the long-term contract for which revenue is recognized on a cash basis (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the “Quarterly Software License Revenue” graph). Payments received from this particular client and recognized in the current quarter are similar to payments received and recognized in the fourth quarter of the previous fiscal year, not having a significant effect on the comparability of the quarterly revenue amounts. However, if we were to adjust annuity/maintenance revenue recorded for the years ended March 31, 2013 and 2012 for the described amounts, we would notice that the year-to-date revenue actually increased by 25% instead of 19%. The increase in annuity/maintenance revenue for the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year, were mainly due to sales to both new and existing clients. The increase in annuity/maintenance license sales was offset by a decrease in perpetual license sales during the year ended March 31, 2013.
Eastern Hemisphere (representing 26% of the year-to-date total software revenue) grew annuity/maintenance license sales during both the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year. Perpetual license sales decreased in both the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year. Year-to-date perpetual sales decreased as a result of the large perpetual sale made during the first quarter of the previous fiscal year which contributed significantly to revenue growth in the previous fiscal year.
Movements in perpetual sales across regions are indicative of the unpredictable nature of the timing and location of perpetual license sales. Overall, our recurring annuity/maintenance revenue base continues to be strong and growing across all regions. We will continue to focus our efforts on increasing our license sales to both existing and new clients and, supported by our product suite offering and our customer-oriented approach, we will endeavor to continue expanding our market share globally.
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 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 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 accompanying graph, 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 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 increase in deferred revenue year-over-year as at June 30, September 30, December 31, and March 31 is reflective of the growth in annuity/maintenance license sales. The variation within the year is due to the timing of renewals of annuity and maintenance contracts that are skewed to the beginning of the calendar year which explains the increase in deferred revenue balance at fiscal year-end compared to the ending balances at June 30, September 30 and December 31. Our fourth quarter corresponds to 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 at March 31, 2013 increased by 17% compared to the prior fiscal year due to both renewal of the existing and signing of the new software licenses and maintenance contracts in the quarter. The increase in the current quarter did not match the growth in annuity/maintenance revenue due to the variation in renewal terms on two contracts and the non-renewal of two licensing agreements that amounted to approximately $700,000 of annual annuity/maintenance license revenue.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $1.6 million for the three months ended March 31, 2013, representing an increase of $0.3 million compared to the same period of the previous fiscal year, due to an increase in project activities by our clients and the associated consulting activities in the current quarter. Professional services for the year ended March 31, 2013 amounted to $5.7 million compared to $5.5 million recorded in the previous fiscal year, representing a $0.2 million increase. The year-to-date revenue related to consulting activities actually increased by $0.5 million; however, this increase was offset by the inclusion of a $0.3 million grant in the professional services revenue in the first quarter of the previous fiscal year, which was received from the CMG Reservoir Simulation Foundation (“Foundation CMG”) for the DRMS project. The grant was fulfilled during that same quarter; hence, no additional amounts related to the grant have been subsequently recorded as professional services.
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 client companies.
CMG-s total operating expenses increased by 17% for both the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year, due to increases in both direct employee and other corporate costs.
DIRECT EMPLOYEE COSTS
As a technology company, CMG-s largest area of expenditure is for its people. Approximately 80% of the total operating expenses in the year ended March 31, 2013 related to staff costs, compared to 79% recorded in the comparative period of last year. Staffing levels for the current fiscal year grew in comparison to the previous fiscal year to support our continued growth. At March 31, 2013, CMG-s staff complement was 173 employees and consultants, up from 149 employees as at March 31, 2012. Direct employee costs increased during the three months and year ended March 31, 2013, compared to the same periods of the previous fiscal year due to staff additions, increased levels of compensation, commissions and related benefits.
OTHER CORPORATE COSTS
Other corporate costs increased by 13% for the three months ended March 31, 2013 compared to the same period of the previous fiscal year, mainly due to computer-related purchases and the increase in direct costs associated with professional services.
Other corporate costs increased by 16% for the year ended March 31, 2013, compared to the previous fiscal year, mainly due to inclusion of the costs associated with CMG-s biennial technical symposium which took place during the first quarter of the current fiscal year. The remaining increase is attributable to the costs associated with the expansion of our office space, which are comprised of additional office rent, increased computing resources and increased depreciation associated with capital spending on the new space.
RESEARCH AND DEVELOPMENT
CMG maintains its 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 includes CMG-s share of joint research and development costs associated with the DRMS project of $0.9 million and $3.1 million for the three months and year ended March 31, 2013, respectively, (2012 – $0.7 million and $2.7 million). See discussion under “Commitments, Off Balance Sheet Items and Transactions with Related Parties.”
The increases of 13% and 19% in our gross spending on research and development for the three months and year ended March 31, 2013, respectively, demonstrate our continued commitment to advancement of our technology which is the focal part of our business strategy.
Research and development costs, net of research and experimental development (“SR&ED”) credits, increased by 15% during the three months ended March 31, 2013, compared to the same period of the previous fiscal year, due to increased employee compensation costs, and costs associated with computing resources.
Research and development costs, net of SR&ED credits, increased by 18% during the year ended March 31, 2013, compared to the same period of the previous fiscal year, due to increased employee compensation costs, investment in computing resources and facilities costs associated with the newly leased office space. We also had an increase in SR&ED credits for the year ended March 31, 2013, compared to the same period of the previous fiscal year, driven mainly by the increases in our direct employee costs as well as the increase in the eligibility of our expenses for SR&ED credits.
DEPRECIATION
The quarterly and year-to-date increases in depreciation, compared to the same periods of the previous fiscal year, reflect the increase in our asset base, mainly as a result of increased spending on computing resources and expansion of the office space in the third quarter of the previous fiscal year, and additional office space added in the second quarter of the current fiscal year.
Interest income increased in the three months and year ended March 31, 2013, compared to the same periods of the prior fiscal year, mainly due to investing larger cash balances.
CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 67% (2012 – 73%) of CMG-s revenue for the year ended March 31, 2013 is denominated in US dollars, whereas only approximately 23% (2012 – 24%) of CMG-s total costs are denominated in US dollars.
CMG recorded a net foreign exchange gain of $0.3 million for both the three months and year ended March 31, 2013, compared to a $0.2 million net foreign exchange loss and a $0.5 million net foreign exchange gain recorded in the three months and year ended March 31, 2012, respectively.
The weakening of the Canadian dollar during the fourth quarter of the current fiscal year, contributed positively to the valuation of our US-denominated working capital for the three months ended March 31, 2013 compared to the same period of the previous fiscal year. On the other hand, the fluctuation in the exchange rates between the Canadian and the US dollars during the current fiscal year, has contributed negatively to the valuation of our US-denominated working capital for the year ended March 31, 2013, compared to the same period of the previous fiscal year.
Income and Other Taxes
CMG-s effective tax rate for the year ended March 31, 2013 is reflected as 29.38% (2012 – 28.30%), whereas the prevailing Canadian statutory tax rate is now 25.0%. This is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the benefit of foreign withholding taxes being realized only as a tax deduction as opposed to a tax credit.
The benefit recorded in CMG-s books on the 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 as a percentage of total revenue for the three months and year ended March 31, 2013 was at 51% and 50%, respectively, compared to 53% and 52% recorded in the same periods of the previous fiscal year. While our total revenue grew by 12%, our operating expenses grew by 17%, having a slight negative impact on our operating profit. Our high levels of operating profit as a percentage of revenue demonstrate our ability to continue to effectively manage our costs.
Net income for the period as a percentage of revenue remained consistent at 38% for the three months ended March 31, 2013, compared to the same period of the previous fiscal year.
Net income for the period as a percentage of revenue decreased to 36% for the year ended March 31, 2013, compared to 38% for the previous fiscal year, mainly as a result of recording a lower net foreign exchange gain and slightly higher tax expense in the current fiscal year.
We have continued to maintain our profitability by focusing our efforts on increasing license sales while, at the same time, effectively controlling our operating costs. Managing these variables will continue to be imperative to our future success.
EBITDA increased by 8% and 9% for the three months and year ended March 31, 2013, respectively, compared to the same periods of the previous fiscal year. These increases provide further indication of our ability to keep growing our recurring annuity/maintenance license sales while effectively managing costs in relation to this base.
EBITDA as a percent of total revenue for the three months and year ended March 31, 2013 was at 53% and 52%, respectively, compared to 55% and 54% recorded in the same periods of the previous fiscal year, respectively.
OPERATING ACTIVITIES
Cash flow generated from operating activities decreased by $0.4 million in the three months ended March 31, 2013, compared to the same period of last year, mainly due to the increase in trade receivables caused by the timing differences of when the sales are made and when the resulting receivables are collected, offset by the change in deferred revenue balance, higher net income, higher income tax expense, and the change in trade payables and accrued liabilities balance.
Cash flow generated from operating activities decreased by $2.1 million in the year ended March 31, 2013, compared to the same period of last year, mainly due to the increase in trade receivables caused by the timing differences of when the sales are made and when the resulting receivables are collected, change in the deferred revenue balance, and higher tax payments, offset by the increase in net income for the year.
FINANCING ACTIVITIES
Cash used in financing activities during the three months and year ended March 31, 2013 increased by $0.4 million and $7.0 million, respectively, compared to the same periods of last year, as a result of paying larger dividends. The year-to-date increase was also affected by the amount spent on buying back common shares.
During the year ended March 31, 2013, CMG employees and directors exercised options to purchase 913,000 Common Shares, which resulted in cash proceeds of $7.4 million.
In the year ended March 31, 2013, CMG paid $27.9 million in dividends, representing the following quarterly dividends:
In the year ended March 31, 2012, CMG paid $20.5 million in dividends, representing the following quarterly dividends:
On May 22, 2013, CMG announced the payment of a quarterly dividend of $0.18 per share and a special dividend of $0.05 per share on CMG-s Common Shares. The dividend will be paid on June 14, 2013 to shareholders of record at the close of business on June 7, 2013.
Over the past 10 years, we have consistently raised our total annual dividend and paid out a special dividend at the end of each fiscal year as determined by our corporate performance. In recognition of the importance of a more regular income stream to our shareholders, as reported in previous year-s Management-s Discussion and Analysis, we decided to increase the relative proportion of dividends paid quarterly and lower the amount paid as a special annual dividend beginning in fiscal 2013. The above table demonstrates this increase in the regular quarterly dividend which amounted to $0.64 per share in fiscal 2013 compared to $0.455 per share in fiscal 2012. Our total dividend paid also increased from $0.555 per share in fiscal 2012 to $0.74 per share paid in fiscal 2013, representing a 33% increase.
The special dividend, if any, will continue to be determined annually based on the Company-s performance.
Based on our expectation of solid profitability and cash-generating ability driven by the predictability of our software revenue base and effective management of costs, we are cautiously optimistic that the company is well positioned for future growth which will enable us to continue to pay quarterly dividends.
On April 16, 2012, the Company announced a Normal Course Issuer Bid (“NCIB”) commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its Common Shares. During the year ended March 31, 2013, a total of 91,000 Common Shares were purchased at market price for a total cost of $1,551,000.
On April 29, 2013, the Company announced a NCIB commencing on May 1, 2013 to purchase for cancellation up to 3,538,000 of its Common Shares.
INVESTING ACTIVITIES
CMG-s current needs for capital asset investment relate to computer equipment and office infrastructure costs, all of which will be funded internally. During the year ended March 31, 2013, CMG expended $2.0 million on property and equipment additions, primarily composed of computing equipment and leasehold improvements, and has a capital budget of $1.8 million for fiscal 2014.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2013, CMG has $59.4 million in cash, no debt, and has access to just over $0.8 million under a line of credit with its principal banker.
During the year ended March 31, 2013, 9,742,000 shares of CMG-s public float were traded on the TSX. As at March 31, 2013, CMG-s market capitalization based upon its March 31, 2013 closing price of $21.09 was $804.1 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
The Company is the operator of the DRMS research and development project (the “DRMS Project”), a collaborative effort with its partners Shell and Petrobras, to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and, with the ongoing support of the participants, it is expected to continue until ultimate delivery of the software. The Company-s share of costs associated with the project is estimated to be $5.5 million ($2.6 million net of overhead recoveries) for fiscal 2014. CMG plans to continue funding its share of the project costs associated with the development of the newest generation reservoir simulation software system from internally generated cash flows.
CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold licenses which are reflected as deferred revenue on its statement of financial position, and contractual obligations for office leases which are estimated as follows: 2014 – $2.1 million; 2015 to 2016 – $2.0 million per year; and 2017 – $1.0 million.
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, assuming all other criteria have been met.
Annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related 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.
Deferred income taxes
Assumptions and estimates are made regarding the amount and timing of realization and/or settlement of the temporary differences between the accounting carrying value of the Company-s assets versus the tax basis of those assets, and the tax rates at which the differences will be recovered or settled in the future.
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:
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 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 22, 2013, CMG could grant up to 3,815,000 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 $59.4 million of cash at March 31, 2013, which more than covers its obligations and it has over $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 clients- needs and budgets. CMG has found that a number of clients 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 clients 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, 2013 and March 31, 2012, 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 67% (2012 – 73%) of product revenues in fiscal 2013 were denominated in US dollars. Approximately 23% of CMG-s total costs in fiscal 2013 (2012 – 24%) were denominated in US dollars and provided 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 RISKS
CMG sells its products and services in over 50 countries worldwide, and has operations in a number of different countries. Some of these countries have greater economic, political and social risks than experienced in North America which may adversely affect the Company-s sales, costs and operations in those jurisdictions. 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 our financial condition. 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 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 four 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 $12.5 million (2012 – $10.6 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 clients.
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.
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, 2013, 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 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, 2013 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, 2013, 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 IFRS. People-related costs represent the Company-s largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See “Expenses” heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.
“EBITDA” refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company-s main business activities prior to consideration of how those activities are amortized, financed or taxed. See “EBITDA” heading for a reconciliation of EBITDA to net income.
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.
With respect to forward-looking information contained in this MD&A, we have made assumptions regarding, among other things:
Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company-s actual results, performance or achievements, or future events or developments, to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors which are discussed in greater detail in the “Business Risks” section of this MD&A:
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
This Management-s Discussion and Analysis was reviewed and approved by the Audit Committee and Board of Directors and is effective as of May 22, 2013.
Outlook
Our fiscal 2013 has continued to show growth in our annuity/maintenance revenue stream with double-digit increases experienced across all geographic regions. During fiscal 2013 our annuity/maintenance revenue increased by 27% whereas total revenue increased by 12%. Over 80% of our software license revenue is derived from our annuity and maintenance contracts, and with a strong renewal rate, we expect to see continued growth in this revenue base.
For the year ended March 31, 2013, our EBITDA represented 52% of our total revenue which demonstrates our continuous ability to effectively manage our corporate costs.
CMG continues to focus its resources on the development, enhancement and deployment of simulation software tools relevant to the challenges and opportunities facing its diverse customer base. With the growth in unconventional hydrocarbon and enhanced oil recovery (EOR) projects around the globe, we are seeing an increase in the use of reservoir simulation software by reservoir engineers. This growth in simulation use has been reflected in the number and types of projects being simulated and the amount of simulation done on each project, hence, increasing the demand for our software. While oil prices continue to fluctuate, they remain at levels that should allow our customers to move forward on projects involving various types of unconventional reserves and advanced recovery processes.
Another instrumental part of our success includes training programs which we offer to our clients to enable them to become more efficient and effective users of our software. Our training attendance has increased across all regions, but most notably in Canada, where the number of scheduled courses increased by 29% during fiscal 2013.
CMG-s joint project to develop the newest generation of dynamic reservoir modelling systems (“DRMS Project”) made significant progress in fiscal 2013. During the first quarter, Rob Eastick, now Vice President, DRMS took over the role of Project Manager for the DRMS Project. The most recent beta version of the software was released during our fourth quarter. Rob and the entire DRMS team continue to make progress toward the anticipated limited commercial release of the software by the end of calendar 2013. CMG and its partners remain committed to funding the ongoing development and to the future success of the project.
We will continue to extend our reach globally and focus our efforts on increasing our license sales to both existing and new clients. Our newest effort towards this expansion includes opening a branch office in Colombia which will help us to grow our presence in the South American market.
The excellent reputation behind our Company and its product suite offering will continue to enable us to grow and sustain a healthy market share while generating solid software license revenue. With our strong working capital position, we are well positioned to continue to invest in all aspects of our business in order to continue to grow and diversify our revenue base and to ultimately return value to our shareholders in the form of regular quarterly dividend payments and growth in share value. During fiscal 2013, our total dividends declared and paid increased by 33%.
Kenneth M. Dedeluk, President and Chief Executive Officer
May 22, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2013 and 2012.
1. Reporting Entity:
Computer Modelling Group Ltd. (“CMG”) is a company domiciled in Alberta, Canada and is incorporated pursuant to the Alberta Business Corporations Act, with its Common Shares listed on the Toronto Stock Exchange under the symbol “CMG”. The address of CMG-s registered office is Suite 200, 1824 Crowchild Trail N.W., Calgary, Alberta, Canada, T2M 3Y7. The consolidated financial statements as at and for the year ended March 31, 2013 comprise CMG and its subsidiaries (together referred to as the “Company”). The Company is a computer software technology company engaged in the development and licensing of reservoir simulation software. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities.
2. Basis of Preparation:
(a) STATEMENT OF COMPLIANCE:
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements as at and for the year ended March 31, 2013 were authorized for issuance by the Board of Directors on May 22, 2013.
(b) BASIS OF MEASUREMENT:
The consolidated financial statements have been prepared on the historical cost basis, which is based on the fair value of the consideration at the time of the transaction.
(c) FUNCTIONAL AND PRESENTATION CURRENCY:
The consolidated financial statements are presented in Canadian dollars, which is the functional currency of CMG and its subsidiaries. All financial information presented in Canadian dollars has been rounded to the nearest thousand.
(d) USE OF ESTIMATES, JUDGMENTS AND ASSUMPTIONS:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the period. Estimates and underlying assumptions are based on historical experience and other assumptions that are considered reasonable in the circumstances and are reviewed on an on-going basis. Actual results may differ from such estimates and it is possible that the differences could be material. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
(i) Key judgments in applying accounting policies
The key judgments made in applying accounting policies, apart from those involving estimations (note 2(d)(ii) below), that have the most significant effect on the amounts recognized in these consolidated financial statements are as follows:
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 scientific research and experimental development (“SR&ED”) investment tax credits which are netted against the research and development costs in the statement of comprehensive income. SR&ED claims are subject to audits by relevant taxation authorities and the actual amount may change depending on the outcome of such audits (note 8).
Revenue recognition – 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 the 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 (note 7).
(ii) Estimation uncertainty
The following are the key sources of estimation uncertainty and key assumptions concerning the future, that have a significant risk of causing material adjustments to the carrying amount of assets and liabilities within the next financial year:
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 (note 12(d)).
Property and equipment – estimates are used in determining useful economic lives of property and equipment for the purposes of calculating depreciation (note 5).
Deferred income taxes – assumptions and estimates are made regarding the amount and timing of realization and/or settlement of the temporary differences between the accounting carrying value of the Company-s assets versus the tax basis of those assets, and the tax rates at which the differences will be recovered or settled in the future (note 11).
3. Significant Accounting Policies:
(a) BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of CMG and its subsidiaries, all 100% owned. All inter-company transactions and balances have been eliminated on consolidation. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.
(b) REVENUE RECOGNITION:
Revenue consists of software license fees and professional service fees.
Software License Revenue
Software license revenue is comprised 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 licensing fees, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity.
Software license revenue is recognized 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, assuming all other criteria have been met.
Annuity/maintenance revenue is recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Revenue for licenses billed in advance is deferred and recognized in revenue over the relevant license period.
License fees for perpetual licenses are recognized fully in revenue when all recognition conditions are satisfied.
Software license agreements with multiple-element arrangements, such as those including license fees and maintenance fees, are recognized as separate units of acc
You must be logged in to post a comment Login