Computer Modelling Group Ltd. (CMG) Earnings Call Transcript & Summary

The next item of business is the approval of amendments to the corporation stock option plans, amendments and termination provision and approval of all unallocated stock options under the corporation stock option plan. The amendments to this provision of the stock option plan, set out in full on Pages 16 and 17 of the management information circular require shareholder approval according to the terms of the stock option plan. The approval of the unallocated options is required by the Toronto Stock Exchange every 3 years. I now ask for a motion on this matter.

I move that the ordinary resolution set out on Page 18 of the management information circular with respect to the approval of the amendment, the amendments and termination provision of the stock option plan and the approval of all unallocated entitlements of the corporation, be approved.

I second the motion.

Thank you. We will now address any questions or comments from shareholders or proxy holders that are directly related to the approval of the amendments to the amendments and termination provision of the stock option plan and the approval of all unallocated stock options. Have any questions come in?

No, we have no questions on this item.

Thanks, Kristin. We now invite shareholders and proxy holders to submit their vote if they've not already done so. We'll now have a short pause to allow shareholders and proxy holders to complete their voting on this matter. [Voting]

The next item of business is the approval of amendments to the corporation's performance share unit and restricted share unit plan's amendment and termination provision and approval of all unallocated awards under the corporation's PSU and RSU plan. The amendments to this provision of the PSU and RSU plan, set out in full on Pages 20 and 21 of the management information circular, require shareholder approval according to the terms of the PSU and RSU plan. The approval of the unallocated awards is required by the Toronto Stock Exchange every 3 years. I now ask for a motion on this matter.

I move that ordinary resolution set out on Page 22 of the management information circular with respect to the approval of amendment to the amendment and termination provision of the performance share unit and restricted share unit plan and the approval of all unallocated awards under the PSU and RSU plan effective until July 16, 2023.

I second the motion.

Thank you. We will now address any questions or comments from shareholders or proxy holders that are directly related to the approval of the amendments to the amendment and termination provision of the PSU and RSU plan, and the approval of all unallocated awards under the PSU and RSU plan effective until July 16, 2023. Have any questions come in?

No, no questions on this item.

Thank you, Kristin. We now invite shareholders and proxy holders to submit their vote if they've not already done so. We will now have a short pause to allow shareholders and proxy holders to complete their voting on this matter. Following this, the polls will close. [Voting]

As we have now dealt with all business items on the agenda, I declare voting on all matters closed.

The poll is closed for all motions.

Thank you. I understand that the scrutineers have a preliminary tabulation of votes cast in respect of each of the items of business before the meeting. The preliminary result with respect to the appointment of auditors is greater than 99% voted in favor of the appointment of KPMG LLP. As a result, I declare that KPMG LLP has been duly appointed as the auditor of the corporation. The preliminary result with respect to the number of directors to be elected at this meeting is over 99% voted in favor of fixing the number at 8. As a result, I declare the number of directors to be elected at this meeting fixed at 8. The preliminary results with respect to the election of directors are a substantial majority of the votes cast at the meeting were voted in favor of the 8 nominees named in the management information circular, with each nominee receiving an excess of 88% in favor. As a result, I declare that the 8 Director nominees named in the management information circular have been duly elected. On the resolution to approve the amendments to the corporation stock option plan and to approve the unallocated stock options of over 96% voted in favor. As a result, I declare that the resolution approving the amendments to the stock option plan and approving the unallocated stock options effective until July 16, 2023, has been passed. On the resolution to approve the amendments to the corporation's performance share unit and restricted share unit plan and to approve the unallocated awards under the PSU and RSU plan, over 97% voted in favor. As a result, I declare that the resolution approving the amendments to the performance share unit and restricted share unit plan and approving the unallocated awards under the PSU and RSU plan effective until July 16, 2023, has been passed. The final results of today's vote will be posted tomorrow on SEDAR. That concludes the formal business of this meeting of shareholders and I declare the meeting terminated. We will now have the corporate update presentation presented by our Chief Financial Officer, Sandra Balic, following which we will answer additional shareholders' questions as time permits. I remind you that questions should be of a general interest and not of a personal nature. Over to you, Sandra.

Well, thank you, Mr. Chairman. Good morning, everybody or afternoon, depending on your dial-in location. For those of you who don't know me, my name is Sandra Balic, and I'm the CFO of CMG. Unfortunately, we weren't able to welcome you in our offices this year, but hopefully, that will change in the near future. Again, our apologies for Ryan's absence this morning, but I will go through our corporate presentation, which I will try to cover relatively quickly as many of you likely have had an opportunity to hear it in the past. Then I will provide a bit of an update related to COVID-19 and economic downturn, and specifically, what measures we have been taking at CMG. Following that, I'll answer any questions that have come in. I will now turn your attention to our corporate presentation, which is available on Lumi platform. And if you haven't done so already, I'll ask you to please click on the broadcast button appearing to the left of your screen. As I understand it, I will provide you with cues then to flip the pages as that will have to be done on your end. So moving to the second page of the presentation, it just contains our usual statement in respect to forward-looking information. Next slide, what we do. It describes that we are very niche focused on reservoir accumulation, although our new product, CoFlow, also takes us beyond the reservoir into production network. We also do consulting and training all in support of our license sales. Next slide is what we do for our customers. It describes our value proposition. So what we do is we help companies optimize their production by predicting how much oil is recovered under different recovery scenarios, where to drill, spacing between the wells, et cetera. Regular simulation still remains relatively inexpensive compared to other investments into assets. But for a relatively small investment into -- in reservoir simulator, a company can end up generally -- generating potentially millions in revenues as a result of optimizing their production. During current times of tight margins, arguably, a reservoir simulation is even more valuable. And just to mention that we don't own any of the data. It stays with the customer. We only provide a tool for simulation. Our next slide shows our product suite, starting with our 3 simulators. IMEX is our black well simulator. So it's used for a more simple model. GEM is for complex compositional model. IMEX and GEM, in combination, have been used in simulation of shale assets and have seen a pretty decent uptake in those products over the past 5 or so years. Next, STARS is our thermal simulator. CoFlow is, of course, our newest product, which also includes simulation of the production network. CMOST is our analytical optimization tool, which sits on top of simulators. And then we have what we call the supporting cast of products for building and visualization of the model. Next slide shows our competition, which hasn't really changed in a while, and it continues to compete mainly with Schlumberger and also with [ Rockwood Dynamics ]. Although we haven't seen [ RFC ] too much in North America or outside of the Eastern Hemisphere. We haven't heard too much on the competition front in general lately as everybody has been tucked in for the most part, but we've all heard of the reorganizational changes within Schlumberger, and we'll see what will be the outcome of that. We know that in the past, they tended to lay off staff during downturn. And that's a different approach from what we, at CMG, have been doing. Next slide is our specialization. We are the leader in EOR and advanced recovery processes. You can see on the slide what those are. And this hasn't really changed. Except now with CoFlow, we are also doing integrated reservoir and production system modeling. Next slide talks about our history. We started in 1978 as a research foundation, up to today when we are a profitable company, with 81 successive quarters of profitability and 66 quarterly dividend payments. More importantly, we have gone through ups and downs affecting the oil and gas industry over our long history, but we always managed to prevail. The next slide shows a deep bench of intellectual capital. More than half of the company is dedicated to R&D. And you can see on the slide that we continue to have a strong complement of PhDs and master degrees, all in support of advancing our products and R&D objectives. And we have that historic focus on research and development, which continues to be the case. On the next slide, we have our executive team. There are 7 of us. Our latest addition during the last fiscal year is Jason Close as the Vice President of CoFlow Commercialization. Jason, of course, coming from our sales team and bringing with him a key skill set of his sales background, as we continue to pursue commercialization of the product. On the next slide, entitled Global Reach, you can see that we have offices across different continents, enabling us to serve customers in all the regions across the globe. And you can also see the regional split in annuity and maintenance revenue, with Eastern Hemisphere and the U.S. generating over 30% of revenue each; Canada, bringing in 23%; and South America at 12%. Our next slide shows cumulative customer growth. Now aside from the economic downturns that we have been experiencing, simulation is pretty sticky. And under normal economic conditions, we have over 90% of customers renewing their licenses. Now next 8 slides show some icons from our customers from various regions as well as the universities that we do business with. But just in the interest of time, I won't go into too much detail. But I will ask you to please scroll down to the slide entitled annual software license revenue. And we will talk a little bit about the -- our fiscal 2020 results. So in this chart, we can see stability in software revenue over the past number of years. And our fiscal 2020 total software revenue was comparable to fiscal 2019 at over $68 million, with one of the positives being that it wasn't as a result of onetime nonratable revenue that we had during fiscal 2019. It was all what we consider better quality recurring revenue. And now next slide, entitled Quarterly Software License Revenue. Focusing our attention on the purple bars, you can see that we started having some decent growth earlier in fiscal 2020 with consecutive growth in annuity and maintenance revenue in Q1 through to Q3. And as I mentioned before, the yellow bars are smaller, meaning that we didn't have too much skewing as a result of onetime payments related to prior quarters. However in Q4, which is our main renewal period, January to March, we did start experiencing some headwinds in our software revenue, partially being caused by the COVID-19 situation, which you can also see in the graph. I will skip the next slide as they represent the same of what we just discussed. And I will move on to deferred revenue. This slide shows our normal contract renewal cycle, where over 50% of our annuity and maintenance revenue renews in Q4, hence the spike in those bars. Our deferred revenue in Q4 of fiscal 2020, once at a comparable performance at Q4 of the previous year, being down just slightly by 3%. On the next slide, we can see our perpetual license revenue. We achieved $4.6 million in fiscal 2020, which is close to fiscal 2019 achievement and close to our target of about $5 million. Our target, of course, under normal economic conditions. On the next slide, we show our margin. Now I should mention that there was some positive effect from IFRS 16 conversion on our operating profit and EBITDA in fiscal 2020. But aside from that, we are still generating very outstanding margins over 40% that many companies would desire to have, and it's a testament to the fiscal prudence in how we manage our business. Next slide entitled -- it's entitled Dividend Yield. Now in the fiscal 2020, we paid $0.40 a share or -- which is $0.10 a share on a quarterly basis. Last quarter, we announced a reduction in quarterly dividend to $0.05 a share. And that will normalize our dividend yield, which approached 6% last year. Next slide shows our institutional ownership. We continue to be tightly held by good institutional names and didn't have too much turnover in the names during the year. And directors, officers and employees continue to hold just over 6%. Now I'm going to move into talking a little bit about CoFlow, which is going to appear on the next 4 to 5 slides. So our latest product, CoFlow, is aimed at integrated reservoir and production modeling. So it takes us into new space and new markets, which is production network. It has been under development for a number of years, and we've been working on additional features, as well we've had operational success with running models. We have received positive feedback and companies are expressing interest in seeing value in that type of technology. Shell has also been implementing and using CoFlow in conjunction with their own software on their assets and continue to be committed to the product. Now we are focusing our attention on commercial discussions with customers, although we do acknowledge that the current downturn in the industry might slow down or push down the road some of those discussions. On one of the last slides related to CoFlow, if you scroll down, it's entitled CoFlow Now, offers implicit and explicit solution. The reference is made to CoFlow X which uses our existing emulators, IMEX and GEM, in conjunction with CoFlow production network, which is just another way of packaging and selling our CoFlow solution. Next 3 slides address unconventional oil and gas. Second slide shows some of the history of the development related to unconventional features in our products. And the third slide shows a graph, which demonstrates continued area -- it's a continued area of growth over the past number of years, when we continue to add to the customer base, particularly in the U.S. but in other regions as well. That now brings us down to CMG Cloud. So next few slides will be dealing with our cloud solution. So we introduced the cloud solution about 2 years ago in our fiscal 2019. The cloud changes the way the company's approach computing by removing technological limitations associated with the availability of the latest and fastest hardware. It allows customers the flexibility of running models based on their project needs. And this leads to increased efficiency and productivity by lowering their infrastructure costs. So the solution does hold a lot of appeal. During the past fiscal year, we continued with the improvements to the application and we saw companies adopting it, particularly in North America. In terms of revenue contribution, it has been a relatively steady contributor to revenue quarter-over-quarter over the past year. The 2 last slides entitled Public Cloud, show the number of trials and how many customers are paying as well as the commercial contracts in place. Now next 2 sections, I'm just going to scroll through for the sake of time. They are more for your information purposes in respect of some R&D advances, related first to artificial intelligence and machine learning and in CMOs and then also performance enhancement technology. One thing I did want to address, if you scroll down to the slide entitled Online Training, we did want to point out today that we've had a significant uptake in online training, particularly during COVID-19, with some record attendance and engagement from customers. It appears that they have more time to spend on engineering efforts and this was positive to see during these challenging times. Now our -- one of the last slides in the presentation, Reasons to Invest in CMG. This is another slide that hasn't changed over time as we believe these qualities still prevail. We are a dominant player in the reservoir simulation space, particularly of advanced processes. We have a loyal customer base, high barriers to entry still persist. We are profitable, have very loyal and talented employee base, and we have been a consistent dividend payer. Now we don't have the slides for the next part, but I'd like to address some more recent events, particularly surrounding COVID-19 and the downturn in the oil and gas industry, both of which have had an impact on us and our industry. In relation to COVID-19, our entire company has been working from home since mid-March. Given that we are a technology company, this transition was relatively smooth. And we have been able to continue with our operations without interruptions, and that includes R&D activities, support and training to our customers and all the other supporting activities. Now we continue to work from home in most of our offices and will be reassessing our back to work arrangements over the upcoming weeks and months. We expect that the ongoing COVID-19 crisis, combined with the disruption to the oil and gas industry as a result of both reduced energy consumption and volatility in commodity prices that we are seeing, will/were is already having a direct negative impact on our customers and hence, will have an impact on our operations. In order to proactively manage our business, including preserving liquidity and managing costs, protect our margins, we have implemented a number of actions, including salary rollbacks, the executives and employees, reduction of director compensation and as many of you are aware, we reduced the dividend payout with the goal of achieving a more sustainable level of dividend payment. In terms of cost reduction measures, just to note that we will not see their impact on the financials until the second quarter as they were implemented effective July 1. One of the reasons that we focus on salary reductions across the company rather than layoff is that as a technology company, the knowledge of our employees is our most important asset, which can't be easily replaced. And we recognize that it is important for the long-term success of CMG to retain that talent and continue focusing on various R&D initiatives, which will position our company to emerge strong and hopefully ahead of the competition following the downturn. We don't know how long the downturn will last or how quickly the recovery will take place, but eventually, things will go back to normal. And we believe that the demand for oil will pick up again, given it's the most competitive energy resource, which we believe will continue to be the case in the future. In the meantime, our belief is that our product brings value even during downturn or especially during downturn, then companies need to optimize their assets and focus on their engineering efforts. Reservoir simulation is relatively low cost but it adds value. So in a tight margin environment, companies should be simulating even more. So we will continue with these discussions with the customers, but at the same time, recognizing that many companies are working in budgetary constraints and uncertainty. Now with that, I would like to close my presentation. On behalf of CMG management, thank you all very much for your attendance at today's meeting as well as your support of CMG. Again, please accept our apologies that Ryan was unable to attend. But if you have any questions, please feel free to follow-up with us. Most of you will have our contact information, but otherwise, you can contact us through our investor e-mail available on the Investors page on our website. And now I will ask if any questions have come in.

No questions have been submitted.

Okay. In that case, again, thank you all very much for your attendance. And please stay safe and healthy and have a nice rest of the day. Bye now.

Thank you very much, Sandra, for an excellent presentation. Ladies and gentlemen, this concludes the meeting. On behalf of the corporation, I'd like to thank you as well for participating in this meeting and for your ongoing commitment to Computer Modeling Group. We wish you all the best, to you and your families and hope that you stay safe and healthy. Thank you very much. The meeting is concluded.

This concludes the meeting. You may now disconnect.