Computer Modelling Group ( Toronto - CMG ) -- Energy Prices Reinforce Demand

Computer Modelling Group (CMG.to $18.00) appears on track to produce excellent on target Q2 (September) results.  The year ago period was affected by a temporary decline in perpetual software license sales.  Those generate higher immediate revenue than year to year licenses.  The latter often are more profitable over time, though.  A strong comparison is likely this year.  Demand remains robust because energy prices are high enough to justify new development projects, most of which are complicated and are candidates for the company's technology.  Shale oil, tar sands, heavy oil, and deep offshore programs have begun to dominate the industry's exploration agenda.  It's unknown what the split between annual and perpetual licenses will look like in the current period.  Even if perpetuals fall off again, a solid showing is expected. 

The long term outlook is positive.  Competition remains far to the rear from a technology standpoint.  Shlumberger and Halliburton are resorting to bundling other products with their offerings.  Many customers rebuff the offers because Computer Modelling's technology provides unique capabilities which generate paybacks far beyond any discounts the majors might offer.  Marketing is being beefed up in the Middle East to unlock that geographic market.  Halliburton and Schlumberger have controlled that segment due to longstanding relationships, but new reserves are becoming more difficult to develop even in the Middle East.  A sales breakthrough could emerge over the next 1-2 years.  Venezuela will have national elections later this year.  The incumbent party has boosted spending to help win reelection.  Much of those funds have been sourced from the energy industry.  So Computer Modelling may experience some slow payments as a result.  Venezuela always has paid up in the past, however.  So the potential for write-offs appears slim.

Our full year estimates are unchanged.

( Click on Table to Enlarge )