Computer Modelling ( Toronto - CMG ) -- Positive Outlook

Computer Modelling (CMG.to $18.00) reported excellent on target Q1 (June) results.  The company is the leading provider of reservoir simulation software used by energy producers to retrieve heavy oil and other difficult deposits.  Licenses are sold on an annual and perpetual basis.  The latter are more unpredictable.  Most customers renew the annual licenses at a high rate.  In the June period perpetual sales dipped compared to the year ago, holding the overall year to year revenue gain to 3% ($16.5 million).  Annual revenues ($13.2 million) climbed 46%, however.  Non-GAAP income slid 6% to $.17 a share.  A large perpetual contract was finalized in early July.  Additional large contracts are in the pipeline.  Perpetual business is likely to rebound to normal levels, leveraging the sustained growth in annual licenses.  We are maintaining our full year earnings estimate at $.80 a share. 

The next generation DMRS software program appears to be back on track.  Computer Modelling is developing that technology in conjunction with Shell and Petrobas.  The giant companies' engineers steered the effort in a highly technical direction that made it hard for end users to operate.  Computer Modelling stepped in during the June period to shift gears towards a more user friendly format.  The streamlined software is functioning better.  And a less complicated user interface is being implemented.  Field testing is likely to start before long.  Commercial sales are expected by the end of next year.

Competition continues to fall behind.  Schlumberger has begun giving away its software, to little avail.  Halliburton recently licensed Computer Modelling's offering for shale gas applications.  There are a handful of small niche software providers but nobody measures up to the company's expertise and customer support.  Margins are likely to remain elevated.  Growth is poised to be sustained at above average rates.

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