Computer Modelling Group Announces Year End Results

May 20, 2016

CALGARY, ALBERTA--(Marketwired - May 20, 2016) - Computer Modelling Group Ltd. (CMG.TO) ("CMG" or the "Company") is very pleased to report our financial results for the fiscal year ended March 31, 2016.

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG," the "Company," "we" or "our"), presented as at May 19, 2016, should be read in conjunction with the audited consolidated financial statements and related notes of the Company for the years ended March 31, 2016 and 2015. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com. The financial data contained herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars.

Corporate Profile

CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced process reservoir modelling software with a blue chip customer base of international oil companies and technology centers in approximately 60 countries. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities. CMG has sales and technical support services based in Calgary, Houston, London, Dubai, Bogota and Kuala Lumpur. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".

Vision, Business and Strategy

CMG's vision is to be the leading developer and supplier of dynamic reservoir modelling systems in the world. Early in its life CMG made the strategic decision to focus its research and development efforts on providing solutions for the simulation of difficult hydrocarbon recovery techniques, a decision that created the foundation for CMG's dominant market presence today in the simulation of advanced hydrocarbon recovery processes. CMG has demonstrated this commitment by continuously investing in research and development and working closely with its customers to develop simulation tools relevant to the challenges and opportunities they face today. This includes the CoFlow project, a collaborative effort with our partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras") to jointly develop the newest generation of reservoir simulation software. Our target is to develop a dynamic system that does more than optimize reservoir recovery; it will model the entire hydrocarbon reservoir system, including production systems.

Since its inception more than 35 years ago, CMG has remained focused on assisting its customers in unlocking the value of their hydrocarbon reservoirs. With petroleum production using conventional methods on the decline, the petroleum industry must use more difficult and costly advanced process extraction methods, while being faced with more governmental and regulatory requirements over environmental concerns. CMG's success can, in turn, be correlated with the oil industry becoming more reliant on the use of simulation technology due to the maturity of conventional petroleum reservoirs and the complexities of both current and emerging production processes.

CMG's success can specifically be attributed to a number of factors: advanced physics, ongoing enhancements to the Company's already robust product line, improved computational speed, parallel computing ability, ease of use features of the pre- and post-processor applications, cost effectiveness of the CMG solution for customers, and the knowledge base of CMG's personnel to support and advance its software.

CMG currently licenses reservoir simulation software to more than 500 oil and gas companies, consulting firms and research institutions in approximately 60 countries. In combination with its principal business of licensing its software, CMG also provides professional services consisting of highly specialized consulting, support, training, and funded research activities for its customers. While the generation of professional services revenue specifically tied to the provision of consulting services is not regarded as a core part of CMG's business, offering this type of service is important to CMG operationally. CMG performs a limited amount of specialized consulting services, which are typically of a highly complex and/or experimental nature. These studies provide hands-on practical knowledge, allowing CMG staff to test the boundaries of our software, and provide us the opportunity to increase software license sales to both new and existing customers. In addition, providing consulting services is important from the customer service perspective as it enables our customers to become more proficient users of CMG's software. The funded research revenue is derived from the customers who partner with CMG to assist in the development, testing and refinement of new simulation technologies.

In addition to consulting, we allocate significant resources to training, which is an instrumental part of our company's success. Our training programs enable our customers to become more efficient and effective users of our software, which, in turn, contributes to higher customer satisfaction. Our training is continuous in nature and it helps us in developing and maintaining long-term relationships with our customers.

CMG remains committed to advancing its technological superiority over its competition. CMG firmly believes that, to be the dominant supplier of dynamic reservoir modelling systems in the world, it must be responsive to customers' needs today and accurately predict their needs in the future.

CMG invests a significant amount of resources each year toward maintaining its technological superiority. During fiscal 2016, CMG maintained the same level of spending on research and development as in the previous fiscal year (representing 21% of total revenue). The continued investment by CMG in its current product suite offering helps to ensure that its existing proven technology continues to be industry-leading. These significant levels of investment, in combination with partnering with Shell and Petrobras in the CoFlow project to jointly develop the newest generation of reservoir simulation software, are targeted strategies to achieve our vision to be the leading developer and supplier of dynamic reservoir modelling systems in the world.

Overall Performance

Key Performance Drivers and Capability to Deliver Results

One of the challenges the petroleum industry faces in trying to overcome barriers to production growth is the continuing need for breakthrough technologies. The facts facing the petroleum industry today are that brand new fields are increasingly difficult to find, especially on a large scale, and that there are a large number of mature fields and unconventional prospects where known petroleum reserves exist; the question is how to economically extract the petroleum reserves in place while utilizing environmentally conscious processes. These challenges have been made even more formidable given that the current economic environment and global political climate have led to increased uncertainty regarding capital markets and commodity prices.

The petroleum industry utilizes reservoir simulation to provide both vital information and a visual interpretation on how reservoirs will behave under various recovery techniques. Understanding the science of how a petroleum reservoir will react to difficult hydrocarbon recovery processes through simulation prior to spending the capital on drilling wells and injecting expensive chemicals and steam, for instance, is far less costly and risky than trying the various techniques on real wells.

CMG's existing product suite of software is the market leader in the simulation of difficult hydrocarbon recovery techniques. To maintain this dominant market position, CMG actively participates in research consortia that experiment with new petroleum extraction processes and technologies. CMG then incorporates the simulation of new recovery methods into its product suite and focuses on overcoming existing technological barriers to advance speed and ease of use, amongst other benefits, in its software.

In late September 2015, we released the most recent version of CoFlow, R10, to our partners Shell and Petrobras, which was deployed in a target asset selected by our partners to assist with day-to-day business decisions. R10 will continue to be used on the selected asset; however, due to identified issues with the software runtime performance, further deployment has been temporarily suspended. In the meantime, the CoFlow team continues to work on the next version of software, R11, with a heavy focus on performance, which is scheduled to be released in the latter part of calendar 2016.

During fiscal 2016, in addition to numerous customer-requested and internally-driven enhancements, we developed CMG's third generation simulator output format "SR3" and a significantly improved, SR3-capable version of our RESULTS product, all of which are expected to be released in the first quarter of fiscal 2017. SR3 reduces output file sizes and enables users to efficiently open large-model, memory-intensive results files very quickly. These order of magnitude improvements in file loading times improve user experience and optimize simulation post-processing activities. In addition, redesign and enhancements to the graphical user interface of RESULTS, such as the ribbon menu, data filtering and automated plotting, make RESULTS easier to use, more intuitive, and give users greater power in analyzing results, discovering new reservoir knowledge and communicating business decisions via simulation results. This next generation RESULTS will help our users improve productivity and efficiency in their day to day simulation work.

In a low oil price environment, producers have shifted their focus to lower-cost assets, improving production margins and low-cost enhanced oil recovery, instead of drilling new wells. Reservoir simulation is a cost-effective and high-value tool to further reduce risks, improve recovery processes, increase margins and incremental recovery, all of which are more valuable in a low-price environment.

The development of our CoFlow system, the newest generation reservoir and production system simulation software, is a significant project for CMG and its partners; a project that to-date has represented over 410 man-years of development. The CoFlow team consists of 70 full-time equivalent persons made up of 47 CMG employees and consultants and 4 partner-seconded staff members, all working in CMG's Calgary offices, with an additional 19 partner staff members working remotely from their respective offices in the Netherlands, Brazil and the United States. CMG, through its participation in this joint project, will have full commercialization rights to the developed technology. CMG's share of project costs is estimated to be $6.5 million ($3.7 million net of overhead recoveries) for the upcoming fiscal year. As project operator, CMG receives a fee for operator services, which is reflected in revenue as professional services. Petrobras' financial participation in the joint development project will end in December 2016 and the remaining partner participation will be sized in accordance with the plan for the next release, referred to as R12.

CMG is in a very strong financial position with $56.2 million in working capital, no bank debt and a long history of generating earnings and cash from operating activities. In addition to its financial resources, CMG's real strength lies in the outstanding quality and dedication of its employees in all areas of the Company. While it has never been easy to find qualified staff as CMG has grown through the years, our expanding reputation as a challenging and rewarding place to work has somewhat eased this burden. CMG added 7 new full-time equivalent staff members to its employee complement in fiscal 2016.

Our focus will remain on licensing software to both existing and new customers and, with diversification of our geographic profile, we plan to strengthen our position in the global marketplace. Approximately 90% of our software license revenue is derived from our annuity and maintenance contracts, which generally represent a recurring source of revenue. We continue to be profitable despite the ongoing economic challenges in the oil and gas industry, and we are taking prudent measures, such as suspending employee recruitment, to control our costs and run the business efficiently. During the fiscal year ended March 31, 2016, our EBITDA represented 46% of total revenue, which demonstrates our ability to effectively manage our corporate costs.

As a result of ongoing adverse economic conditions in Venezuela and in the oil and gas industry in general, we have decided to close our office in Caracas effective May 2016. Our customers in the region will be supported from other locations, mainly the office in Bogota.

We continue to return value to our shareholders in the form of regular quarterly dividend payments. During the year ended March 31, 2016, we paid dividends of $0.40 per share, which is consistent with the prior fiscal year.

We are confident that our sustainable business model driven by superior technology, commitment to research and development initiatives, and customer-oriented approach will continue contributing to CMG's future success.

Annual Performance

($ thousands, unless otherwise stated) March 31, 2016   March 31, 2015   March 31, 2014  
             
Annuity/maintenance licenses 67,805   63,431   57,139  
Perpetual licenses 7,169   13,405   9,074  
Software licenses 74,974   76,836   66,213  
Professional services 5,824   8,025   8,290  
Total revenue 80,798   84,861   74,503  
Operating profit 36,036   41,516   36,782  
Operating profit (%) 45 % 49 % 49 %
EBITDA(1) 37,418   43,099   38,373  
Net income for the year 25,302   32,648   27,630  
Cash dividends declared and paid 31,514   31,462   30,304  
Total assets 101,413   106,456   100,268  
Total shares outstanding 78,819   78,487   78,419  
Trading price per share at March 31 10.14   12.72   14.58  
Market capitalization at March 31 799,220   998,353   1,143,351  
Per share amounts - ($/share)            
Earnings per share - basic 0.32   0.42   0.36  
Earnings per share - diluted 0.32   0.41   0.35  
Cash dividends declared and paid 0.40   0.40   0.39  
             
(1) EBITDA is defined as net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. See "Non-IFRS Financial Measures".

Quarterly Performance

  Fiscal 2015(1) Fiscal 2016(2)
($ thousands, unless otherwise stated) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
                 
Annuity/maintenance licenses 15,966 15,331 16,071 16,063 16,738 16,790 17,297 16,980
Perpetual licenses 1,432 2,661 7,150 2,162 2,563 1,095 2,729 782
Software licenses 17,398 17,992 23,221 18,225 19,301 17,885 20,026 17,762
Professional services 2,154 1,739 1,985 2,147 2,139 1,240 1,191 1,254
Total revenue 19,552 19,731 25,206 20,372 21,440 19,125 21,217 19,016
Operating profit 9,121 9,560 14,315 8,520 10,494 8,160 10,342 7,040
Operating profit (%) 47 48 57 42 49 43 49 37
EBITDA 9,488 9,949 14,717 8,945 10,824 8,519 10,686 7,389
Profit before income and other taxes 8,733 10,411 15,144 11,310 9,742 9,365 10,974 5,550
Income and other taxes 2,489 2,938 4,162 3,361 2,941 2,599 3,121 1,668
Net income for the period 6,244 7,473 10,982 7,949 6,801 6,766 7,853 3,882
Cash dividends declared and paid 7,872 7,880 7,862 7,848 7,876 7,891 7,871 7,876
Per share amounts - ($/share)                
Earnings per share - basic 0.08 0.09 0.14 0.10 0.09 0.09 0.10 0.05
Earnings per share - diluted 0.08 0.09 0.14 0.10 0.09 0.08 0.10 0.05
Cash dividends declared and paid 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
(1) Q1, Q2, Q3 and Q4 of fiscal 2015 include $1.5 million, $0.2 million, $0.2 million, and $0.3 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.
(2) Q1, Q2, Q3 and Q4 of fiscal 2016 include $1.0 million, $0.3 million, $0.7 million, and $0.9 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.

Highlights

During the year ended March 31, 2016, as compared to the previous fiscal year, CMG:

  • Increased annuity/maintenance revenue by 7%;
  • Experienced a decrease in total revenue of 7%;
  • Maintained the same level of spending on research and development.

During the year ended March 31, 2016, CMG:

  • Declared and paid dividends of $0.40 per share;
  • Realized basic earnings per share of $0.32;
  • Purchased 589,000 Common Shares for cancellation under the Normal Course Issuer Bid ("NCIB").

Revenue

Three months ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Software licenses 17,762   18,225   (463 ) -3 %
Professional services 1,254   2,147   (893 ) -42 %
Total revenue 19,016   20,372   (1,356 ) -7 %
                 
Software license revenue - % of total revenue 93 % 89 %        
Professional services - % of total revenue 7 % 11 %        
                 
Year ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Software licenses 74,974   76,836   (1,862 ) -2 %
Professional services 5,824   8,025   (2,201 ) -27 %
Total revenue 80,798   84,861   (4,063 ) -5 %
                 
Software license revenue - % of total revenue 93 % 91 %        
Professional services - % of total revenue 7 % 9 %        

CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and fees for professional services.

Total revenue decreased by 7% and 5% for the three months and year ended March 31, 2016, respectively, compared to the same periods of the previous fiscal year, due to decreases in both software license revenue and professional services.

Software License Revenue

Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company's software products, which is generally for a term of one year or less, and perpetual software license sales, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Annuity/maintenance license fees have historically had a high renewal rate and, accordingly, provide a reliable revenue stream, while perpetual license sales are more variable and unpredictable in nature as the purchase decision and its timing fluctuate with the customers' needs and budgets. The majority of CMG's customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG's software.

Three months ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Annuity/maintenance licenses 16,980   16,063   917   6 %
Perpetual licenses 782   2,162   (1,380 ) -64 %
Total software license revenue 17,762   18,225   (463 ) -3 %
                 
Annuity/maintenance as a % of total software license revenue 96 % 88 %        
Perpetual as a % of total software license revenue 4 % 12 %        
                 
Year ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Annuity/maintenance licenses 67,805   63,431   4,374   7 %
Perpetual licenses 7,169   13,405   (6,236 ) -47 %
Total software license revenue 74,974   76,836   (1,862 ) -2 %
                 
Annuity/maintenance as a % of total software license revenue 90 % 83 %        
Perpetual as a % of total software license revenue 10 % 17 %        

Total software license revenue decreased by 3% and 2% in the three months and year ended March 31, 2016, respectively, compared to the same periods of the previous fiscal year, due to a decrease in perpetual license revenue, partially offset by an increase in annuity/maintenance revenue.

CMG's annuity/maintenance license revenue increased by 6% and 7% during the three months and year ended March 31, 2016, respectively, compared to the same periods of the previous fiscal year, due to new contracts in the Eastern Hemisphere and the positive effect of the strengthening of the US dollar relative to the Canadian dollar.

During the three months ended March 31, 2016, all of our regions, with the exception of Canada, experienced growth in annuity/maintenance revenue, compared to the same period of the previous fiscal year.

During the year ended March 31, 2016, the Eastern Hemisphere and the United States experienced growth in annuity/maintenance revenue, compared to the same period of the previous fiscal year. This growth was partially offset by decreases in South America and Canada.

Our annuity/maintenance revenue is impacted by the revenue recognition from a long-standing customer for which revenue recognition criteria are fulfilled only at the time of the receipt of funds (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the "Quarterly Software License Revenue" graph). The timing of such payments may skew the comparison of the recorded annuity/maintenance revenue amounts between periods. The latest payment from this customer was received during the year ended March 31, 2015. No amounts were received from this customer during the year ended March 31, 2016. To provide a normalized comparison, if we were to remove revenue from this particular customer from the year ended March 31, 2015, we will notice that the annuity/maintenance revenue increased by 9%, instead of 7%, during the year ended March 31, 2016, as compared to the previous fiscal year. Historically, we have received payments from this particular customer; however, there is increasing uncertainty associated with the receipt of payments due to the economic conditions in the country where this customer is located. Payments from this customer will continue to be recorded on a cash basis, which may result in fluctuations in our annuity/maintenance revenue results.

Perpetual license sales decreased by $1.4 million, or 64%, for the three months ended March 31, 2016, compared to the same period of the previous fiscal year, mainly due to fewer perpetual sales being realized in South America and the Eastern Hemisphere.

Perpetual license sales decreased by $6.2 million, or 47%, for the year ended March 31, 2016, compared to the previous fiscal year, with the majority of the decline occurring in South America as a result of a large perpetual sale recorded in the third quarter of the previous fiscal year.

Software licensing under perpetual sales may fluctuate significantly between periods due to the uncertainty associated with the timing and the location where sales are generated. For this reason, even though we expect to achieve a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year.

We can observe from the tables below that the exchange rates between the US and Canadian dollar during the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, had a positive impact on our reported license revenue.

The following table summarizes the US dollar-denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars:

Three months ended March 31,   2016 2015 $ change   % change  
($ thousands)              
               
US dollar annuity/maintenance license sales US$ 10,023 10,119 (96 ) -1 %
Weighted average conversion rate   1.349 1.161        
Canadian dollar equivalent CDN$ 13,518 11,747 1,771   15 %
               
US dollar perpetual license sales US$ 470 1,713 (1,243 ) -73 %
Weighted average conversion rate   1.342 1.238        
Canadian dollar equivalent CDN$ 631 2,121 (1,490 ) -70 %
               
Year ended March 31,   2016 2015 $ change   % change  
($ thousands)              
               
US dollar annuity/maintenance license sales US$ 41,480 41,669 (189 ) 0 %
Weighted average conversion rate   1.260 1.098        
Canadian dollar equivalent CDN$ 52,277 45,756 6,521   14 %
               
US dollar perpetual license sales US$ 5,028 11,333 (6,305 ) -56 %
Weighted average conversion rate   1.297 1.135        
Canadian dollar equivalent CDN$ 6,524 12,867 (6,343 ) -49 %

The following table quantifies the foreign exchange impact on our software license revenue:

Three months ended March 31, 2015 Incremental License   Foreign Exchange 2016
($ thousands)   Growth   Impact  
           
Annuity/maintenance license sales 16,063 (965 ) 1,882 16,980
Perpetual license sales 2,162 (1,429 ) 49 782
Total software license revenue 18,225 (2,394 ) 1,931 17,762
           
Year ended March 31, 2015 Incremental License   Foreign Exchange 2016
($ thousands)   Growth   Impact  
           
Annuity/maintenance license sales 63,431 (2,354 ) 6,728 67,805
Perpetual license sales 13,405 (7,051 ) 815 7,169
Total software license revenue 76,836 (9,405 ) 7,543 74,974

Software Revenue by Geographic Segment

Three months ended March 31, 2016 2015 $ change   % change  
($ thousands)            
Annuity/maintenance revenue            
  Canada 4,963 6,475 (1,512 ) -23 %
  United States 4,426 4,279 147   3 %
  South America 1,885 1,502 383   25 %
  Eastern Hemisphere(1) 5,706 3,807 1,899   50 %
  16,980 16,063 917   6 %
Perpetual revenue            
  Canada 151 42 109   260 %
  United States 35 175 (140 ) -80 %
  South America 177 848 (671 ) -79 %
  Eastern Hemisphere 419 1,097 (678 ) -62 %
  782 2,162 (1,380 ) -64 %
Total software license revenue            
  Canada 5,114 6,517 (1,403 ) -22 %
  United States 4,461 4,454 7   0 %
  South America 2,062 2,350 (288 ) -12 %
  Eastern Hemisphere 6,125 4,904 1,221   25 %
  17,762 18,225 (463 ) -3 %
             
Year ended March 31, 2016 2015 $ change   % change  
($ thousands)            
Annuity/maintenance revenue            
  Canada 22,648 25,538 (2,890 ) -11 %
  United States 17,409 15,958 1,451   9 %
  South America 6,710 7,742 (1,032 ) -13 %
  Eastern Hemisphere(1) 21,038 14,193 6,845   48 %
  67,805 63,431 4,374   7 %
Perpetual revenue            
  Canada 647 539 108   20 %
  United States 1,404 349 1,055   302 %
  South America 1,159 7,427 (6,268 ) -84 %
  Eastern Hemisphere 3,959 5,090 (1,131 ) -22 %
  7,169 13,405 (6,236 ) -47 %
Total software license revenue            
  Canada 23,295 26,077 (2,782 ) -11 %
  United States 18,813 16,307 2,506   15 %
  South America 7,869 15,169 (7,300 ) -48 %
  Eastern Hemisphere 24,997 19,283 5,714   30 %
  74,974 76,836 (1,862 ) -2 %

(1) Includes Europe, Africa, Asia and Australia.

During the three months ended March 31, 2016, on a geographic basis, total software license sales declined in Canada and South America, partially offset by an increase in the Eastern Hemisphere, while sales in the United States remained unchanged, as compared to the same period of the previous fiscal year.

During the year ended March 31, 2016, on a geographic basis, total software license sales declined in Canada and South America, partially offset by increases in the Eastern Hemisphere and United States, as compared to the previous fiscal year.

The Canadian market (representing 31% of year-to-date total software revenue) experienced declines in annuity/maintenance license sales during the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, due to a reduction in licensing by customers and due to shifting of some licenses from Canada to the US.

The United States market (representing 25% of year-to-date total software revenue) grew annuity/maintenance license sales during the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, mainly as a result of the positive effect of foreign exchange on the conversion of the US dollar-denominated revenue. While perpetual revenue decreased slightly during the three months ended March 31, 2016, it increased by $1.1 million during the year ended March 31, 2016, as compared to the same periods of the previous fiscal year, as a result of a large perpetual sale in the first quarter of the current fiscal year.

South America (representing 11% of year-to-date total software revenue) experienced an increase of 25% in annuity/maintenance license sales during the three months ended March 31, 2016, compared to the same period of the previous fiscal year, mainly due to sales to an existing customer. The results for the year ended March 31, 2016 were impacted by the variability of amounts recorded from a customer for which revenue is recognized only when cash is received (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the "Quarterly Software License Revenue" graph). The latest payment from this customer was received during the year ended March 31, 2015. No amounts were received from this customer during the year ended March 31, 2016. To provide a normalized comparison, if we were to remove revenue from this particular customer from the year ended March 31, 2015, we will notice that the annuity/maintenance revenue increased by 6%, instead of decreasing by 13%, during the year ended March 31, 2016, as compared to the previous fiscal year. The year-over-year increase in annuity/maintenance revenue is mainly due to the positive effect of foreign exchange on the conversion of the US dollar-denominated revenue.

The South American region experienced decreases in perpetual license sales during the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, mainly as a result of the large perpetual sale made during the third quarter of the previous fiscal year.

The Eastern Hemisphere (representing 33% of the year-to-date total software revenue) grew annuity/maintenance license sales by 50% and 48%, during the three months and year ended March 31, 2016, respectively, compared to the same periods of the previous fiscal year, mainly due to higher sales to existing customers. Fewer perpetual license sales were realized in the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year.

Software license revenue in the US, South America and the Eastern Hemisphere was positively affected by the strengthening of the US dollar during the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year.

As footnoted in the Quarterly Performance table, in the normal course of business, CMG may complete the negotiation of certain annuity/maintenance contracts and/or fulfill revenue recognition requirements within a current quarter that includes usage of CMG's products in prior quarters. This situation particularly affects contracts negotiated with countries that face increased economic and political risks leading to the revenue recognition criteria being satisfied only at the time of the receipt of cash. The dollar magnitude of such contracts may be significant to the quarterly comparatives of our annuity/maintenance revenue stream and, to provide a normalized comparison, we specifically identify the revenue component where revenue recognition is satisfied in the current period for products provided in previous quarters.

To view the graph associated with this release, please visit the following link: http://media3.marketwire.com/docs/1055641_graph.jpg

Deferred Revenue

  Fiscal Fiscal        
  2016 2015 $ change   % change  
($ thousands)            
Deferred revenue at:            
Q1 (June 30) 27,006 26,628 378   1 %
Q2 (September 30) 22,608 22,928 (320 ) -1 %
Q3 (December 31) 17,243 19,180 (1,937 ) -10 %
Q4 (March 31) 33,629 32,663 966   3 %

CMG's deferred revenue consists primarily of amounts for pre-sold licenses. Our annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time.

The above table illustrates the normal trend in the deferred revenue balance from the beginning of the calendar year (which corresponds with Q4 of our fiscal year), when most renewals occur, to the end of the calendar year (which corresponds with Q3 of our fiscal year). Our fourth quarter corresponds with the beginning of the fiscal year for most oil and gas companies, representing a time when they enter a new budget year and sign/renew their contracts.

Deferred revenue as at March 31, 2016 increased by 3% compared to March 31, 2015. The increase is primarily due to the timing of finalizing annual agreements with certain customers. These agreements had been finalized by March 31, 2016 and, therefore, included in deferred revenue as at March 31, 2016, while the previous year's agreements with the same customers had not been finalized by March 31, 2015 and, therefore, had not been included in deferred revenue as at that date. Deferred revenue was also positively impacted by strengthening of the US dollar relative to the Canadian dollar.

Professional Services Revenue

CMG recorded professional services revenue of $1.3 million and $5.8 million for the three months and year ended March 31, 2016, representing decreases of $0.8 million and $2.2 million, respectively, compared to the same periods of the previous fiscal year, due to a decline in project activities by our customers.

Professional services revenue consists of specialized consulting, training, and contract research activities. CMG performs consulting and contract research activities on an ongoing basis, but such activities are not considered to be a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner, combined with servicing our customers' needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within customer companies.

Expenses

Three months ended March 31, 2016 2015 $ change   % change  
($ thousands)            
             
Sales, marketing and professional services 6,071 5,529 542   10 %
Research and development 4,208 4,406 (198 ) -4 %
General and administrative 1,697 1,917 (220 ) -11 %
Total operating expenses 11,976 11,852 124   1 %
             
Direct employee costs(1) 9,634 9,486 148   2 %
Other corporate costs 2,342 2,366 (24 ) -1 %
  11,976 11,852 124   1 %
             
Year ended March 31, 2016 2015 $ change   % change  
($ thousands)            
             
Sales, marketing and professional services 21,450 19,278 2,172   11 %
Research and development 16,865 16,994 (129 ) -1 %
General and administrative 6,447 7,073 (626 ) -9 %
Total operating expenses 44,762 43,345 1,417   3 %
             
Direct employee costs(1) 36,026 34,377 1,649   5 %
Other corporate costs 8,736 8,968 (232 ) -3 %
  44,762 43,345 1,417   3 %
(1) Includes salaries, bonuses, stock-based compensation, benefits, commissions, and professional development. See "Non-IFRS Financial Measures".

CMG's total operating expenses remained relatively flat during the three months ended March 31, 2016, compared to the same period of the previous fiscal year, due to a slight increase in direct employee costs being offset by a slight decrease in other corporate costs. Approximately 28% of the Company's total operating expenses are denominated in USD, the majority of which impacts the sales, marketing and professional services line item.

CMG's total operating expenses increased by 3% for the year ended March 31, 2016, compared to the previous fiscal year, due to an increase in direct employee costs, partially offset by a decrease in other corporate costs. The increase in total operating expenses is attributable to sales, marketing and professional services, mainly due to the foreign exchange impact as a result of the weakening Canadian dollar, and due to staff additions.

Direct Employee Costs

As a technology company, CMG's largest area of expenditure is its people. Approximately 80% of the total operating expenses in the year ended March 31, 2016 related to direct employee costs, compared to 79% recorded in the comparative period of the previous fiscal year. Staffing levels for the current fiscal year grew in comparison to the previous fiscal year. At March 31, 2016, CMG's staff complement was 212 full-time equivalent employees and consultants, up from 205 full-time equivalent employees and consultants as at March 31, 2015. Direct employee costs increased during the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, due to staff additions, increased levels of compensation and related benefits, partially offset by a decrease in stock-based compensation expense.

Other Corporate Costs

Other corporate costs decreased by 1% for the three months ended March 31, 2016, compared to the same period of the previous fiscal year.

Other corporate costs decreased by 3% for the year ended March 31, 2016, compared to the previous fiscal year, mainly attributable to the costs associated with CMG's biennial technical symposium that took place during the year ended March 31, 2015.

Research and Development

Three months ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Research and development (gross) 4,623   4,757   (134 ) -3 %
SR&ED credits (415 ) (351 ) (64 ) 18 %
Research and development 4,208   4,406   (198 ) -4 %
                 
Research and development as a % of total revenue 22 % 22 %        
                 
Year ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Research and development (gross) 18,366   18,313   53   0 %
SR&ED credits (1,501 ) (1,319 ) (182 ) 14 %
Research and development 16,865   16,994   (129 ) -1 %
                 
Research and development as a % of total revenue 21 % 20 %        

CMG maintains its belief that its strategy of growing long-term value for shareholders can only be achieved through continued investment in research and development. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes.

The above research and development costs include CMG's share of joint research and development costs associated with the CoFlow project of $1.5 million and $5.9 million for the three months and year ended March 31, 2016, respectively (2015 - $1.5 million and $6.1 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties".

Research and development costs (gross) decreased by 3% during the three months ended March 31, 2016, compared to the same period of the previous fiscal year, mainly as a result of lower consulting costs and lower stock-based compensation expense.

Research and development costs (gross) remained flat during the year ended March 31, 2016, compared to the previous fiscal year, due to an increase in employee compensation costs, offset by a decrease in stock-based compensation, consulting and depreciation expenses.

SR&ED credits increased by 18% and 14% for the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, mainly due to an increase in hours spent on SR&ED-eligible projects.

Depreciation

Three months ended March 31, 2016 2015 $ change   % change  
($ thousands)            
             
Depreciation of property and equipment, allocated to:            
  Sales, marketing and professional services 132 151 (19 ) -13 %
  Research and development 178 230 (52 ) -23 %
  General and administrative 39 44 (5 ) -11 %
Total depreciation 349 425 (76 ) -18 %
             
Year ended March 31, 2016 2015 $ change   % change  
($ thousands)            
             
Depreciation of property and equipment, allocated to:            
  Sales, marketing and professional services 514 509 5   1 %
  Research and development 712 877 (165 ) -19 %
  General and administrative 156 197 (41 ) -21 %
Total depreciation 1,382 1,583 (201 ) -13 %

Depreciation decreased slightly for the three months and year ended March 31, 2016, as compared to the same periods in the previous fiscal year.

Finance Income

Three months ended March 31, 2016   2015 $ change   % change  
($ thousands)              
               
Interest income 133   153 (20 ) -13 %
Net foreign exchange gain -   2,637 (2,637 ) -100 %
Total finance income 133   2,790 (2,657 ) -95 %
               
Net foreign exchange loss (1,623 ) - (1,623 ) 100 %
Total finance costs (1,623 ) - (1,623 ) 100 %
               
Year ended March 31, 2016   2015 $ change   % change  
($ thousands)              
               
Interest income 549   699 (150 ) -21 %
Net foreign exchange gain -   3,383 (3,383 ) -100 %
Total finance income 549   4,082 (3,533 ) -87 %
               
Net foreign exchange loss (954 ) - (954 ) 100 %
Total finance costs (954 ) - (954 ) 100 %

Interest income decreased for the three months and year ended March 31, 2016, compared to the same periods of the previous fiscal year, mainly due to investing smaller cash balances at lower interest rates.

CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 76% (2015 - 74%) of CMG's revenue for the year ended March 31, 2016 is denominated in US dollars, whereas only approximately 28% (2015 - 25%) of CMG's total costs are denominated in US dollars.

The following chart shows the exchange rates used to translate CMG's US dollar denominated working capital at March 31, 2016, 2015 and 2014 and the average exchange rates used to translate income statement items during the years ended March 31, 2016, 2015 and 2014:

CDN$ to US$ At March 31 Yearly average
2014 0.9047 0.9452
2015 0.7885 0.8717
2016 0.7710 0.7617

CMG recorded a net foreign exchange loss of $1.6 million for the three months ended March 31, 2016, compared to a net foreign exchange gain of $2.6 million recorded in the same period of the previous fiscal year, due to a weakening of the US dollar during the quarter, which negatively impacted the valuation of the US dollar-denominated portion of the Company's working capital.

CMG recorded a net foreign exchange loss of $1.0 million for the year ended March 31, 2016, compared to a net foreign exchange gain of $3.4 million recorded in the previous fiscal year. The foreign exchange loss was largely due to the timing of collection of receivables, since the majority of US dollar-denominated customer receivables outstanding at March 31, 2015 were collected during the first quarter of the current fiscal year, when a significant weakening of the US dollar occurred. This foreign exchange loss was partially offset by the strengthening of the US dollar at March 31, 2016 compared to March 31, 2015, which contributed positively to the valuation of the US dollar-denominated portion of the Company's working capital.

Income and Other Taxes

CMG's effective tax rate for the year ended March 31, 2016 is reflected as 29.0% (2015 - 28.4%), whereas the prevailing Canadian statutory tax rate is currently 26.5%. This difference is primarily due to the non-tax deductibility of stock-based compensation expense.

The benefit recorded in CMG's books on the SR&ED investment tax credit program impacts deferred income taxes. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce income taxes otherwise payable for the current fiscal year, and the federal portion of this benefit bears an inherent tax liability as the amount of the credit is included in the subsequent year's taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a non-current deferred tax liability and then, in the following fiscal year, is transferred to income taxes payable.

Operating Profit and Net Income

Three months ended March 31, 2016   2015   $ change   % change  
($ thousands, except per share amounts)                
                 
Total revenue 19,016   20,372   (1,356 ) -7 %
Operating expenses (11,976 ) (11,852 ) (124 ) 1 %
Operating profit 7,040   8,520   (1,480 ) -17 %
Operating profit as a % of total revenue 37 % 42 %        
Net income for the period 3,882   7,949   (4,067 ) -51 %
Net income for the period as a % of total revenue 20 % 39 %        
                 
Basic earnings per share ($/share) 0.05   0.10   (0.05 ) -50 %
                 
Year ended March 31, 2016   2015   $ change   % change  
($ thousands, except per share amounts)                
                 
Total revenue 80,798   84,861   (4,063 ) -5 %
Operating expenses (44,762 ) (43,345 ) (1,417 ) 3 %
Operating profit 36,036   41,516   (5,480 ) -13 %
Operating profit as a % of total revenue 45 % 49 %        
Net income for the period 25,302   32,648   (7,346 ) -23 %
Net income for the period as a % of total revenue 31 % 38 %        
Basic earnings per share ($/share) 0.32   0.42   (0.10 ) -24 %

Operating profit as a percentage of total revenue for the three months ended March 31, 2016 was at 37%, compared to 42% for the same period of the previous fiscal year, due to a decline in total revenue.

Operating profit as a percentage of total revenue for the year ended March 31, 2016 was at 45%, compared to 49% for the previous fiscal year, due to a decline in total revenue and an increase in operating expenses.

Net income as a percentage of revenue decreased to 20% from 39% and to 31% from 38% for the three months and year ended March 31, 2016, respectively, compared to the same periods of the previous fiscal year.

EBITDA

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Three months ended March 31, 2016   2015   $ change   % change  
($ thousands)                
                 
Net income for the period 3,882   7,949   (4,067 ) -51 %
Add (deduct):                
  Depreciation 349   425   (76 ) -18 %
  Finance costs (income) 1,490   (2,790 ) 4,280   -153 %
  Income and other taxes 1,668   3,361   (1,693 ) -50 %
EBITDA 7,389   8,945   (1,556 ) -17 %
                 
EBITDA as a % of total revenue 39 % 44 %