Computer Modelling Group Ltd. (CMG) Earnings Call Transcript

Thank you. Good day and thank you for standing by. Welcome to the Computer Modeling Group first quarter 2027 earnings call. This time all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Kim McEachran, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to Computer Modeling Group's conference call to discuss financial results for the first quarter of fiscal 2027. My name is Kim McEachran, Director of Investor Relations, and with me today are Pramod Jain, Chief Executive Officer, and Bipin Kular, Chief Financial Officer. I'll remind everyone that today's discussion contains forward-looking statements within the meaning of applicable securities laws. These statements reflect our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please review the forward-looking information section of our MD&A and news release, both filed yesterday on CDAR Plus and available on our website. We will also reference non-IFRS measures, including adjusted EBITDA, organic recurring revenue, and free cash flow. Reconciliations to the most directly comparable IFRS measures are provided in our financial reports and news release, both of which are available on our website and on CDAR+. We'll begin this morning with roughly 15 minutes of prepared remarks from Promote and BIPIN after which the operator will open the line for questions. A replay of this call will be available on our website later today.

With that, I'll turn it over to Pramod. Thank you, Kim, and good morning, everyone. So until now, my letter to shareholders has been the main way of communicating with you. And as I said in my letter yesterday, it is not going away. The reason we decided to begin quarterly conference calls is because our business has grown. EMG today is a different company than it was even three years ago. We have moved from a single product reservoir simulation business to a group of businesses at different stages of maturity. That complexity deserves a forum where questions can be asked and answered in real time. And that's what this call is for. So my key messages for today are, number one, our strategy hasn't changed. We remain committed to growth both organically and through acquisitions. Number two, our outlook is for stabilization to return to the business. And number three, we are going to deploy our capital towards the highest risk adjusted return opportunities, and that includes the substantial issuer bid we announced yesterday. After that, I will turn it over to Vipin to discuss the financials for the quarter. So let's talk strategy first. Fundamentally, our strategy hasn't changed since I joined. So what's our strategy? It is to preserve what CMG has built over almost five decades and put the free cash flow it generates to work buying businesses that build our next stage of growth. Our core business is physics-based reservoir simulation software that energy companies rely on to make decisions that are expensive to get wrong. So, for example, how our other ward will behave, how our recovery process will perform, how and how a CO2 storage project will hold up over decades. That software sits deep in our customers' workflows, and it is critical to their capital decisions. That's the market position we have held for close to five decades, and it is the foundation everything else sits on. So on top of that foundation, we've been building a second growth engine through acquisitions. bringing in complementary technologies across the upstream energy workflow. These acquisitions are building a portfolio of best-in-class technologies that expand the number of ways we support our customers. and build resilience beyond reservoir simulation. In just over two and a half years, we have deployed over $90 million in capital, completing four major acquisitions. To date, the return on our portfolio of these investments is on track. And we are developing a reputation as a good home for specialized energy tech businesses. That's because when a well-run technical business is deciding who to sell to, price is one factor. And so is what happens to the team, the product, and the customers after closing. Our technical credibility and our commitment to growth means the founders and the engineers behind these businesses can expect their work to keep growing under CMG rather than being absorbed and stripped for cost synergies. Taken together, our strong foundation and simulation and our focus on growing capabilities through acquisitions gives us a clear path to becoming a more complete technology partner to our customers and to create value over the long term for our shareholders. Turning to the business, the KPIs that really matter to us when we evaluate the success of our strategy are growing recurring revenue and growing free cash flow. While we have been successful in growing acquired recurring revenue, organic recurring revenue has been a challenge in the past several quarters, and that has flowed through our cash flow. This quarter, our organic recurring revenue was down 4%. And this is the final quarter of headwind from a lost contract from last year. And our priority is now moving on to organic repelling revenue to stabilize this year. ultimately back to growth. My outlook for the business is based on the insights I get during the considerable time I spend traveling and talking to the customers. I shared some of my observations in my letter yesterday, but to recap two things that stood out to me in customer conversations. First, operators are focused on maximizing recovery. Many are targeting recovery factors as high as 50 percent, which is very high for the industry. To get there, they're turning to a range of enhanced soil recovery, or EOR technologies, And this is where CMG shines and where we are focusing our sales efforts as EOR grows in importance globally. Second is a desire for the best specific technology to solve a specific problem. I have always believed that the biggest strength of AspireG is having a portfolio of the best tools and allowing customers to choose what works best. With four acquisitions complementing our core simulation offering, customers were eager to explore solutions across the group of companies. Adding to that, relationships, our simulation business built over decades, are now opening doors for our seismic solutions. customers who wouldn't have seen them otherwise. And we are more frequently pursuing joint proposals with two or three of our companies coming together. forth a broader package of technology than any of them could have done alone. This is a compelling example of the upside of our portfolio strategy. I'm also seeing renewed interest from international operators in countries like Venezuela and Mexico and African countries like Algeria, Angola, Nigeria, and Libya. Now, these are shaping up to be important markets for CMG. They are the types of markets and assets where we do our best work. Complex reservoirs, heavy oil, and mature fuels that demand the science we have spent decades building. As international companies return their attention to these regions, they are surfacing new opportunities across the CMG group of companies. It is early, and I will report on the progress as it becomes tangible, but I am optimistic at what we can do here. Before I turn to capital deployment, a brief word on AI. I think it's essential these days to talk about it. My view is unchanged. In the subsurface, AI does not replace physics. It needs physics. The data exists in silos. The cost of a wrong answer is enormous. and the companies that win with AI will be the ones who own the science underneath it. We are pursuing AI on two fronts. First, in our products. So for example, Interactive AI, BlueWave's AI-assisted seismic interpretation tool, is now in its sixth release and in use at some of the largest operators in the world. And across our simulation portfolio, we are building a common architecture for AI agents that work alongside the reservoir engineers. Today, we have working prototypes that can launch a simulation run, monitor it, and flag it when something is wrong. These are still in the build phase, but they illustrate how we are using AI to secure the advantages where AI excels while not risking outcomes to apply AI where it isn't appropriate. The second part is how we build it. Much of the code shipped this year was AI-assisted, with every line still passing the same human review and testing gates as before. This is making a lean R&D organization meaningfully more productive. So now let's talk capital deployment. To date, under our CMG 4.0 strategy, acquisitions have been our primary capital deployment priority, and that remains unchanged. The reality is that while the M&A pipeline is active, we are holding to our standards on price and the returns, which has meant closing fewer transactions than we might otherwise expect. This means that we have capital available through both our cash flows and our credit facility. Add to that, the market price of our shares is below what we believe the business is worth. This gives us an opportunity to capture value. by repurchasing our shares. Our responsibility was to determine a size for the SIB that allows us to act without compromising our ability to pursue acquisitions. And as you saw in the announcement yesterday, we will draw up to $20 million on our credit facility to fund the SIV now. This is an opportunistic way to create value for our shareholders while we remain committed to pursuing the right acquisitions to diversify and strengthen our company. We remain committed to acquisitions because we believe the opportunities in our pipeline have the potential to meet or exceed the return threshold of buying back shares. So ones that cannot, we will pass on. And I don't see acquisitions and buybacks as mutually exclusive. I believe this approach balances the upside of the M&A pipeline against the value returned by buying back shares. So, as I turn the call over to Vipin to walk through the numbers for the quarter, I will reiterate that A, our strategy hasn't changed. We remain committed to growth both organically and through acquisition. B, our outlook is for stabilization to return to the business, which supports our view of the valuation of the business. And C, we will continue to deploy capital towards the highest risk adjusted return opportunities, and that includes the substantial issuer bid we announced yesterday.

I'll turn the call over to you. Thanks, Ramon, and good morning, everyone. Because our financial results haven't been released yesterday afternoon, I won't go through line by line assuming you all had a chance to review. But we'll highlight some of the key messages before turning the call over for your questions. Starting with total revenue. Total revenue was down year over year to $27.8 million as 10% growth from acquisitions was offset by a 16% organic decline. So, looking at recurring revenue, which was down 3% this quarter, there are two main components. Organic recurring revenue declined, which we had supposed was as expected, as this quarter is the final quarter lacking the contract loss from last year. Starting next quarter, we expect the year-over-year comparisons to begin to normalize. Offsetting that decline, we delivered 9% recurring revenue growth from acquisitions, which included contributions from sizewear and rows, to acquisitions we closed in fiscal 2026. On the professional services side, we had a decline, a significant organic decline, which was also disclosed and expected. The two main components driving this quarter's decline in professional services are the absence of co-flow related development funding, which concluded at the end of the 2025 calendar year, and the continued wind down of non-port professional services activity at Blue Work. As of As a reminder, we underwrote the Blueware acquisition on its software revenue growth potential, and we assumed the non-core professional services would line down. remaining services work is the portion that directly supports our software. Partially offsetting that decline in professional services was 13% growth from acquisitions, which for Context is largely the contribution from Rose, which had a strong Q1, our first full quarter ownership of the Rose business. Adjusted EBITDA and adjusted EBITDA margin for the quarter decline, reflecting the impact of lower organic recurring revenue and lower commercial services revenue, offset by ongoing cost management discipline. While the lower organic recurring revenue weighed on adjusted EBITDA, I'm pleased to say that both acquisitions completed in fiscal 2026, Sizelor and Rose contributed positively to adjusted EBITDA in the quarter, despite the seasonal weighting of their software revenue recognition towards the back half of the year. On free cash flow, we experienced a decline to $3.5 million in a quarter due to the revenue dynamics I just discussed and due to higher income taxes in a quarter, both of which impacted net income. Retail conversion from EBITDA decreased year over year primarily due to higher income taxes in the quarter. expense for the quarter was $1.5 million this quarter compared to $900K a year ago. That change included a $400,000 prior period adjustment taken in the current quarter. Our current tax expense and tax rate will fluctuate by quarter based on the jurisdictional mix of our income, how cross-border transactions get taxed, and foreign exchange loans. Looking forward to the second quarter recurring revenue, we expect organic recurring revenue to increase sequentially versus Q1, driven by a higher renewal cycle in Q2 relative to Q1. As a reminder, recurring revenue is expected to build as we move throughout the year as each quarter takes up more renewal revenue than the one before. So Q1 is typically our lightest quarter and Q4 generally expected to be the heaviest. On professional services, we expect both a sequential and a year-over-year decline, and we expect that Q2 will be the lowest quarter of the fiscal year for professional services revenue. comes as we finish the wind down of non-corp blue wire services and from product timing and lower billable project activity during the summer months. On adjusted EBITDA, we expect both the sequential and year-over-year decline driven by two things in Q2. First, the lower progression services revenue. And second, we expect higher sales and marketing expenses due to, which is tied to agent commissions that regularly occur in Q2 on contract renewals that come up in the quarter. For the full year, we are reaffirming our expectation for stable, organic recurring revenue and no reduction in adjusted EBITDA relative to fiscal 2026. We also continue to expect free cash flow to improve year-over-year in fiscal 2027. We are adjusting our expectation on professional services decline for the year, which is now anticipated to be in the range of $6 to $7 million, trending to the higher end of the range versus the $6 million that we previously disclosed. The revision of the professional services guidance is due to the blue error non-core services winding down faster than originally forecasted. Finally, as Pramod mentioned, we announced an SIV. From a leverage perspective, we expect to draw up to $20 million for the bid from our existing credit facility. SIP size took into consideration many factors, including making sure that we can keep sufficient capital for our acquisition pipeline and taking into account our expected free cash flow for this year. We expect our free cash flow for the year to be more than sufficient to deliver the portion of the credit facility we need to fund the SIP.

that I'll turn it over to the operator for your questions. As a reminder if you'd like to ask a question at this time please press star 1 1 on your touchtone phone and wait for your name to be announced. To withdraw To withdraw your question, please press star 1 1 again. Our first question comes from Erin Kyle with CIBC.

Hi, good morning. Thanks for taking the questions. Happy to chat on a live conference call here. Maybe first question just on the outlook here. You're calling for stable organic recurring revenue growth for the full year compared to the decline this quarter. understanding that Q1 was that final quarter of lapping the loss of the customer contract last year, can you maybe walk us through some of the drivers of the growth outlook for the remainder of the year on the organic side? Sure.

Yes, thank you. Thank you, Aaron, for the question. So a couple of factors, and I'm hoping to have Vipin also add more to it. So the first one is looking at our renewal cycle. We have a very good understanding of our overall renewals for especially our simulation business, and that's the key for us to secure that for the remaining of the year and beyond. The number two, looking at the market and the macro, which is changing positive to positively in industry favor, in our favor, which will require more technologies overall. The third part is the investments that we have made in our products. I talked about sales in the last quarter and more investments that are happening in the product will result.

in giving me confidence that we will hit a stable outlook. Nathan, anything you want to add? Yes, I would also add just we talked about new markets as sort of being an area of strategic focus. So that will kind of come into our revenue in the quarters ahead. And just as our acquisitions start to further integrate, start to see more growth, some of the revenue is sort of –.

weighted towards the back half of the year, given the revenue recognition towards Q3, Q4. Okay, thank you. And maybe just to follow up that as a related question, Pramod, you mentioned the macro there. So maybe just if you can comment a bit more broadly on customer spending trends in the current environment. We've been in an elevated oil price environment for some time now. So it sounds like maybe you're seeing some customer behavior change or are customers still exercising any caution given the volatility? And then I'll pass the line.

Yes, sure. No, I think it's a – broadly I would say the investments that companies are now looking at to say we need to invest now in energy security, I'm seeing that more and more. I was last – two weeks ago I was in Asia, spoke to a bunch of customers, especially large NOCs and IOCs. The trend is that We can't wait. We need to invest in the energy upstream. We need to invest in technologies because overall countries have to be energy secure. But on the other side, I also see companies in Canada, companies in the US, they're still cost conscious as well, because nobody kind of knows where the oil price will turn out to be, but broadly, I see a positive trend in terms of looking for the next oil that they can recover from the subsurface. And for that, they need to go to EOR, they need to go to higher seismic interpretation, fidelity. So all of those signs are very positive for us. So I have a huge conviction in terms of what the future will look like for us.