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

The next item of business is the appointment of the auditor. I now ask for a motion on this matter.

I move that KPMG LLP, chartered professional accountants, be appointed the auditor of the corporation to hold office until the next Annual Meeting of Shareholders of the corporation or until their successor is appointed at such remuneration as may be determined by the Board of Directors and that the Board of Directors be authorized to fix such remuneration.

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 appointment of the auditor. Have any questions come in?

No, we haven't received any questions on this item.

Thank you. We now invite shareholders and proxy holders to submit their vote if they have not already done so. As a reminder, if you have already voted or sent in a proxy, there is no need to do anything unless you wish to change your vote. We will now have a short pause to allow shareholders and proxy holders to complete their voting on this matter. [Voting]

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

Mr. Chair, AGM Connect has closed voting on 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 auditor -- of the auditor is 98.18% 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 84.40% 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 in excess of 90.64 in favor. As a result, I declare that the 8 director nominees named in the management information circular have been duly elected. 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. I will now invite the CEO, Pramod Jain, super happy to have Pramod on board, to make his remarks, which will be followed by a brief presentation by Sandra Balic, CFO. Additional questions by shareholders are invited to be submitted via the Investor Relations e-mail, which is cmg-investors@cmgl.ca or through the Contact Us section of the CMG website. Electronic responses will be provided as received. So over to you, Pramod.

Thank you. Thank you, Mark, and good morning to all the attendees. I got muted. I hope you can hear me okay?

Yes, you're good.

I think I keep on getting muted. I hope it's good. Okay. All right. Thanks again, Mark, and good morning, everyone, to all the attendees. I would like to begin by thanking you for taking the time to attend CMG's virtual AGM. I have been in the CEO seat for almost 2 months now, and I've been busy familiarizing myself with the business, people and customers. Today, I'll provide you with a bit of my background and some initial high-level thoughts on CMG. As I immerse myself in the business, I'll be able to provide you with more updates in the future. In terms of my background, I come from Plusgrade, a global travel SaaS business, where I was the President and Chief Operating Officer. And prior to that, I was at Sabre, a large global travel technology company in North America for 13 years. In both of these roles, I ran product organizations and brought products to market successfully. I also led a number of strategic acquisitions in Europe. In travel technology business, we're dealing with a limited number of customers. And we have to pursue both sides on growth spectrum, whether that's organic or inorganic from a strategy point of view. There are a finite number of enterprise customers, namely airlines, hotels, rails or cruise providers that you can sell into. Hence, the opportunities are around growing the wallet share and being part of the digital transformation. This has parallel to the space in which CMG operates, where we have a limited number of oil and gas companies to sell into. This industry is now ripe for the acceleration of digital transformation. Having an electrical masters -- electrical engineering degree and then masters in operations research, where my thesis focused on metasearch and neural networks for shipping industry and with prior experience working with simulation softwares, for me, it was a natural fit to join CMG. And I was especially excited by CMG's technology and future prospects. There are 4 areas that stood out for me when I decided to join CMG: number one, highly technical expertise; number two, strong products; number three, world-class customer base; number four, solid financials. And I won't discount the people. CMG employees are very smart with advanced degrees, who have helped build a strong brand in the industry to solve very hard and complex problems. The level of passion and commitment to the company from CMG employees, deep obsession to help customers is something I'm so happy to see in my first 60 days. CMG has a highly advanced technology and impressive technical expertise with a strong brand recognition, particularly in the simulation of advanced processor space. We have a very loyal customer base with some of the world renowned companies in the customer list, and that's a very impressive achievement. Our technological experience is supported with strong financial fundamentals. We have solid cash generation and high margin levels, which provides us with options as we pursue future avenues of growth. This is a solid base to build from. We'll continue to leverage CMG's existing extensive technical expertise to meet our customer needs and to remain one step ahead of competition. We have a great business model and talented people. And I'm working with the leadership team on formulating a short and a midterm strategy as well as a long-term plan with an emphasis on growth. I'm excited to be part of CMG's future and its next chapter. And I look forward to providing you with future updates on the business. Thank you for attending today, and I will turn over to Sandra now for the overview of our corporate presentation. Thank you.

Thank you, Pramod, and good morning to everybody. My name is Sandra Balic. I'm the CFO of Computer Modelling Group, and it is my pleasure to guide you through our corporate presentation this morning, giving you a brief overview of who we are and where we are as a company today. Our focus is on providing software solutions for reservoir simulation needs of our customers, but also our new product CoFlow takes us into simulation of production network space. We also engage in collaborative research and provide consulting, training and support, which are an integral part of our service offering. In terms of our value proposition to our customers, the value of the software tool itself is that it helps reservoir engineers estimate the performance of an asset under different producing scenarios. But it ultimately helps our customers enhance their returns by improving oil and gas recovery, optimizing well and reservoir planning and improving efficiency of reservoir by evaluating alternative producing strategies. Our optimization tool CMOST allows companies to select the most optimal set of producing conditions for the reservoir. So it is expensive to develop and produce an asset, but a simulation model can be run many times at a relatively low cost. Consequently, a small investment in software can yield significant financial benefits for a company. Now some of the current industry trends make this value proposition even more important. Even though we are seeing an improvement in the price of oil in the current environment, oil and gas companies are focused on capital discipline and prioritize return of capital to shareholders over investing in growth. A number of factors are contributing to this, including inflation, labor issues and geopolitical uncertainty, making it difficult for the producer to make big investment decisions about future. It means that with the decrease in new projects, there is a focus on optimizing existing production and focus on brownfield developments. These incremental barrels of oil are becoming harder to produce. And this is where simulation tools become even more important and valuable part of the decision-making process. Companies are also focusing on ESG initiatives, including responsible development of hydrocarbons. Through the use of reservoir simulation software, producers are able to analyze and visualize the consequences of drilling and production, allowing them to reduce operational risk associated with various recovery techniques. And all of these factors bode well for the use of reservoir simulation tools. Taking a look at our product suite. Our product suite consists of the 3 main simulators, IMEX, GEM and STARS, which are our black oil compositional and thermal simulators enabling us to simulate any asset in any geography, in any stage of life. CMOST is our AI-enabled analysis and optimization tool, which helps in selecting the most optimal producing case scenario. CoFlow extends us into the production network space and is an integrated reservoir and production system. It allows for faster decision-making on projects, which becomes even more critical on more expensive assets. We offer both on-premise licenses and cloud solution for our products. In terms of the cloud solution, it allows customers flexibility in running models based on their project needs and allows access to the latest and fastest hardware technology. We have also seen an increase in cloud usage in the last quarter of fiscal '22. Now as I mentioned previously, we are able to simulate any asset in any location in any stage of life, but our specialization is in EOR and advanced recovery, which includes all more complex reservoirs and recovering methods. As the conventional production decreases, the more complex assets and recovery methods become more important. And this is where reservoir simulation increases in importance as well. Energy transition continues to be an area of opportunity for CMG as our technology has been effectively used in addressing our customers' needs predominantly in carbon capture and storage but also in hydrogen storage and geothermal processes. We are getting new customers in this space, but a lot of our current oil and gas customers are also allocating their capital to this area. And we will continue to focus on providing solutions to our customers in this space. Next, I will provide a brief financial overview of the recently completed fiscal 2022. We entered fiscal '22 while still facing a difficult economic and geopolitical environment. Our software license revenue for fiscal '22 was at just over $58 million, slightly down from the previous year. But more importantly, looking at the quarterly trend, well, our performance in the first 2 quarters was impacted by the headwinds we faced due to the pandemic and resulting in disruption in the oil and gas industry. We increased software revenue in the last 2 quarters of fiscal '22, bringing us to -- which was supported by strong perpetual sales and bringing us to the same levels of revenue that we saw in fiscal 2020 before the pandemic. The momentum of the industry changed towards the end of the year as we saw increases in commodity prices and lifting of the pandemic restrictions, which reflected in contract increases. During the year, we continued to see increased levels of activity in energy transition space, and we continue to pursue commercial sales of CoFlow for which we closed 4 additional leases in fiscal '22 and one lease subsequent to year-end. Now taking a look at deferred revenue. Over 50% of our revenue renews in Q4, mainly in January, and this is why we see the spike in Q4 bars. Our balance in Q4 of this year was comparable to Q4 of the previous fiscal year. But we did have a more positive renewal season in terms of discussions with customers that we are also still having to work within the current trend of companies exercising capital discipline that I mentioned previously. Taking a look at the operating profit and EBITDA margins. During fiscal '21 and fiscal '22, we received government subsidies related to COVID, which, in particular, had a positive effect on our margins in fiscal '21. Additionally, in fiscal '22, we absorbed some onetime expenses related to restructuring charges, and we also wrote off receivables as a result of suspending our business in Russia. Adjusted for onetime items as disclosed and reconciled in our MD&A, operating profit margin was at 37% in fiscal '21 and 38% in fiscal '22. And the adjusted EBITDA was up 44% during both of those periods. We generated $21.8 million in free cash flow and continue to maintain a strong balance sheet. Our margins were -- reflect a pretty solid performance in what was a challenging year. On our last slide, we show the reasons to invest in CMG. We are a dominant player in the complex reservoir simulation market with advanced software offering and loyal and recurring customer base. The specialized nature of technology means high barriers to entry. We generate strong margins and possess deep bench of intellectual capital necessary for continuous innovation of software. And just as the last thing in the presentation, on behalf of the company, I would like to thank all CMG's employees for their efforts and dedication throughout the year. Thank you for listening. And with that, I will hand it back over to Mark for the closing remarks.

Thank you so much, Sandra and Pramod. I appreciate that. So this concludes the meeting. On behalf of the corporation, I would like to thank you for participating in this meeting and for your ongoing commitment to Computer Modelling Group. I wish all the best to you and your families, and hope that you stay safe and healthy. Thank you very much. This concludes the meeting then. Thank you.