Computer Modelling Group’s 1Q Results Failed To Meet Expectations

Before the markets opened Wednesday On August 13, Computer Modelling Group (CMDXF) posted weaker-than-expected first quarter (fiscal year 2015) earnings results having EPS of $0.08, little lower than our estimation of $0.09 and the Street consensus of $0.10. Revenue of $19.6 million remained in-line with our forecast, with more-than-expected annuity and maintenance license revenue offsetting lower-than-expected perpetual license and professional services revenue.

We believe that deferred revenue (initially from pre-sold licenses) increased by 21% year-over-year (irrespective down little sequentially). Investors will remember that deferred revenue is a major leading sign of future revenue. In the course of the quarter, company’s annuity and maintenance revenue persisted its upside growth, increasing nearly 14% year-over-year. Remarkably, over 80% of the firm’s software license revenue is created by its annuity and maintenance contracts. Backed up by a strong renewal rate, this revenue stream is inclined to continue to grow.

In general, fiscal first quarter 2015 was nearly in-line with our estimates. Gross margins serrated 77.6%, 140 basis points weaker than our estimate and down 280 basis points year-over-year mainly because of healthier-than-expected sales, marketing and professional service spending. Increased R&D spending associated with the firm’s DRMS project continue to crawl on margins in the short term; however, these costs are anticipated to fade as the project goes to its final stages. Margins should be better in succeeding quarters as R&D costs back to normal levels. Geographically, the firm reports forte in North American unconventional gas lead development together with boosted unconventional oil and gas activity in the Middle East.

We strongly believe in investment theory after company and the fundamentals of reservoir pattern. The latest recoil in company shares indicates an exceptional buying opportunity relative to company’s historical increasing share price growth. We maintain our “Outperform” rating and $19 target, depending on our DCF valuation, which includes a 7% growth rate along with 9% discount rate.

About

Patrick Allen, CFA, is equity analyst and reports Consumer Goods, Financial & REIT and Energy & Utilities sectors. Prior joining Whitestone Wire, Patrick Allen worked with Goldman Sachs Research.

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