Computer Modelling Group ( CMG - Toronto Exchange ) - Follow-up Report

Computer Modelling (CMG $21.00 Canadian) reported excellent on target Q2 (September) results.  Sales advanced 47% to $13.3 million.  Earnings climbed 73% to $.26 a share, excluding non cash stock option expense.  The company sells its reservoir modelling software to the energy industry both as a perpetual license and on a recurring year to year basis.  Up front revenue is greater on perpetual sales.  That format does generate some recurring revenue in the form of annual maintenace contracts, however, ensuring customers they receive technology upgrades when they become available.  New unit sales typically are tied to new development projects.  Computer Modelling doesn't break out unit volume but it appears activity picked up sequentially in Q2, bolstered by stronger petroleum prices and improving access to capital.  Results also benefitted from a modest pick-up in perpetual license sales, especially compared to the first quarter when they were practically zero.  Year to year renewals still account for a majority of the business.

The next generation DRMS ("Dynamic Resource Management System") went into service in Q2.  The initial applications will be at sites being developed by Computer Modelling's software partners (Shell and Petrobas).  Those energy giants are each paying one third of the product development costs, although Computer Modelling will retain 100% rights to the technology.  The partners get first crack at the system, though, and that lock-up probably will extend for awhile.  Commercial sales to outside customers are likely to provide a major boost to results through the decade.  But that contribution is likely to modest over the next year or two as Shell and Petrobas fine tune the software and reap the initial benefits for themselves.

The core operation remains in a high growth mode.  New oil discoveries are being made, but they have become increasingly complicated to exploit.  Most of Computer Modelling's sales continue to come from North America.  Interest is building in the Middle East, Asia, and Africa, however.  Those markets promise to keep results marching higher well into the future.  We estimate fiscal 2011 (March) income will reach $1.10-$1.30 a share (Canadian) on sales of $55-$60 million.  Further improvement is likely next year, especially if inflationary pressure increases in the energy complex.  By then the DRMS line should start making a substantial contribution.  Note - Computer Modelling's stock also trades in the U.S. under the ticker symbol CMDXF.  Trading is more liquid in Toronto.

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