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Computer Modelling Group Announces Second Quarter Results

CALGARY, ALBERTA--(Marketwired - Nov 13, 2013) - Computer Modelling Group Ltd. ("CMG" or the "Company") (CMG.TO) is very pleased to report our second quarter results for the three and six months ended September 30, 2013.

SECOND QUARTER HIGHLIGHTS
For the three months ended September 30,
($ thousands, except per share data)
2013 2012 $ change % change
Annuity/maintenance software licenses 13,153 12,012 1,141 9 %
Perpetual software licenses 1,829 2,671 (842 ) -32 %
Total revenue 17,184 16,073 1,111 7 %
Operating profit 8,296 8,032 264 3 %
Net income 5,608 5,361 247 5 %
Earnings per share - basic 0.15 0.14 0.01 7 %
For the six months ended September 30,
($ thousands, except per share data)
2013 2012 $ change % change
Annuity/maintenance software licenses 27,111 25,192 1,919 8 %
Perpetual software licenses 4,160 4,741 (581 ) -12 %
Total revenue 35,300 32,539 2,761 8 %
Operating profit 17,646 16,137 1,509 9 %
Net income 12,689 11,451 1,238 11 %
Earnings per share - basic 0.33 0.31 0.02 6 %

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 November 12, 2013, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three and six months ended September 30, 2013 and the audited consolidated financial statements and MD&A for the years ended March 31, 2013 and 2012 contained in the 2013 Annual Report for CMG. 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 and rounded to the nearest thousand.

FORWARD-LOOKING INFORMATION

Certain information included in this MD&A is forward-looking. Forward-looking information includes statements that are not statements of historical fact and which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as investment objectives and strategy, the development plans and status of the Company's software development projects, the Company's intentions, results of operations, levels of activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), business prospects and opportunities, research and development timetable, and future growth and performance. When used in this MD&A, statements to the effect that the Company or its management "believes", "expects", "expected", "plans", "may", "will", "projects", "anticipates", "estimates", "would", "could", "should", "endeavours", "seeks", "predicts" or "intends" or similar statements, including "potential", "opportunity", "target" or other variations thereof that are not statements of historical fact should be construed as forward - looking information. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management of the Company. The Company believes that the expectations reflected in such forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking information should not be unduly relied upon.

With respect to forward-looking information contained in this MD&A, we have made assumptions regarding, among other things:

  • Future software license sales
  • The continued financing by and participation of the Company's partners in the DRMS project and it being completed in a timely manner
  • Ability to enter into additional software license agreements
  • Ability to continue current research and new product development
  • Ability to recruit and retain qualified staff

Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company's actual results, performance or achievements, or future events or developments, to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors which are described in the MD&A of CMG's 2013 Annual Report under the heading "Business Risks":

  • Economic conditions in the oil and gas industry
  • Reliance on key clients
  • Foreign exchange
  • Economic and political risks in countries where the Company currently does or proposes to do business
  • Increased competition
  • Reliance on employees with specialized skills or knowledge
  • Protection of proprietary rights

Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.

NON-IFRS FINANCIAL MEASURES

This MD&A includes certain measures which have not been prepared in accordance with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs." Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance.

"Direct employee costs" include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. "Other corporate costs" include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IFRS. People-related costs represent the Company's largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See "Expenses" heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.

"EBITDA" refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to consideration of how those activities are amortized, financed or taxed. See "EBITDA" heading for a reconciliation of EBITDA to net income.

CORPORATE PROFILE

CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced processes reservoir modelling software with a blue chip client base of international oil companies and technology centers in over 50 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, Caracas, Dubai, Bogota and Kuala Lumpur. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".

QUARTERLY PERFORMANCE
Fiscal 20121 Fiscal 20132 Fiscal 20143
($ thousands, unless otherwise stated) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Annuity/maintenance licenses 12,056 12,497 13,179 12,012 14,004 15,359 13,958 13,153
Perpetual licenses 2,321 3,416 2,070 2,671 1,365 2,300 2,331 1,829
Software licenses 14,377 15,913 15,249 14,683 15,369 17,659 16,289 14,982
Professional services 1,521 1,302 1,216 1,390 1,433 1,620 1,827 2,202
Total revenue 15,898 17,215 16,465 16,073 16,802 19,279 18,116 17,184
Operating profit 8,093 9,193 8,105 8,032 8,276 9,877 9,350 8,296
Operating profit (%) 51 53 49 50 49 51 52 48
EBITDA4 8,414 9,543 8,423 8,425 8,687 10,294 9,725 8,675
Profit before income and other taxes 8,184 9,104 8,577 7,703 8,556 10,314 9,999 8,133
Income and other taxes 2,394 2,484 2,487 2,342 2,437 3,061 2,918 2,525
Net income for the period 5,790 6,620 6,090 5,361 6,119 7,253 7,081 5,608
Cash dividends declared and paid 4,079 4,848 9,736 6,020 6,050 6,099 8,841 6,994
Per share amounts - ($/share)
Earnings per share - basic 0.16 0.18 0.16 0.14 0.16 0.19 0.19 0.15
Earnings per share - diluted 0.15 0.17 0.16 0.14 0.16 0.19 0.18 0.14
Cash dividends declared and paid 0.11 0.13 0.26 0.16 0.16 0.16 0.23 0.18
(1) Q3 and Q4 of fiscal 2012 include $2.6 million and $2.7 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.
(2) Q1, Q2, Q3 and Q4 of fiscal 2013 include $2.1 million, $0.2 million, $1.8 million and $2.6 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.
(3) Q1 and Q2 of fiscal 2014 include $1.2 million and $0.2 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.
(4) 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".

Highlights

During the six months ended September 30, 2013, as compared to the same period of the prior fiscal year, CMG:

  • Increased annuity/maintenance revenue by 8%
  • Increased operating profit by 9%
  • Increased spending on research and development by 16%
  • Increased EBITDA by 9%
  • Realized basic earnings per share of $0.33, representing a 6% increase
Revenue
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Software licenses 14,982 14,683 299 2 %
Professional services 2,202 1,390 812 58 %
Total revenue 17,184 16,073 1,111 7 %
Software license revenue - % of total revenue 87 % 91 %
Professional services - % of total revenue 13 % 9 %
For the six months ended September 30,
($ thousands)
2013 2012 $
change
% change
Software licenses 31,271 29,933 1,338 4 %
Professional services 4,029 2,606 1,423 55 %
Total revenue 35,300 32,539 2,761 8 %
Software license revenue - % of total revenue 89 % 92 %
Professional services - % of total revenue 11 % 8 %

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 increased by 7% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year, primarily due to an increase in professional services.

Total revenue increased by 8% for the six months ended September 30, 2013, compared to the same period of the previous fiscal years, as a result of increases 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 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.

For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Annuity/maintenance licenses 13,153 12,012 1,141 9 %
Perpetual licenses 1,829 2,671 (842 ) -32 %
Total software license revenue 14,982 14,683 299 2 %
Annuity/maintenance as a % of total software license revenue 88 % 82 %
Perpetual as a % of total software license revenue 12 % 18 %
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
Annuity/maintenance licenses 27,111 25,192 1,919 8 %
Perpetual licenses 4,160 4,741 (581 ) -12 %
Total software license revenue 31,271 29,933 1,338 4 %
Annuity/maintenance as a % of total software license revenue 87 % 84 %
Perpetual as a % of total software license revenue 13 % 16 %

Total software license revenue grew by 2% and 4% in the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous fiscal year due to increases in the annuity/maintenance revenue offset by decreases in perpetual license sales.

CMG's annuity/maintenance license revenue increased by 9% and 8% during the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous year. This increase was driven by annuity sales to new and existing customers as well as an increase in maintenance revenue tied to perpetual sales generated in the previous fiscal year.

During the three months ended September 30, 2013, all of our regions experienced growth in annuity/maintenance revenue with the exception of Canada which remained flat. All of our regions, except South America, experienced growth in annuity/maintenance revenue during the six months ended September 30, 2013, but the most significant growth during this period came from the US region.

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 variability of the amounts of the payments received and the timing of such payments may skew the comparison of the recorded annuity/maintenance revenue amounts between periods. During the current quarter no payments have been received or recorded for this arrangement which is consistent with the same quarter of the previous year. To provide a normalized comparison, if we were to remove revenue from this one customer from the year-to-date recorded revenue, we will notice that the annuity/maintenance revenue increased by 12%, instead of 8% as compared to the same period of the previous year. Given our long-term relationship with this customer, and their on-going use of our licenses, we expect to continue to receive payments from them; however, the amount and timing are uncertain and will continue to be recorded on a cash basis, which may introduce some variability in our reported quarterly annuity/maintenance revenue results.

We can observe from the table below that the exchange rates between the US and Canadian dollars during the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported annuity/maintenance revenue.

Perpetual license sales decreased by 32% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year, due to decreases in Canada, the US and the Eastern Hemisphere offset by growth in perpetual sales generated by South America.

Perpetual license sales decreased by 12% for the six months ended September 30, 2013, compared to the same period of the previous fiscal year, due to decreases in Canada and the US offset by growth in perpetual sales generated by the Eastern Hemisphere.

Software licensing under perpetual sales is a significant part of CMG's business, but 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 table below that the exchange rates between the US and Canadian dollars during the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported perpetual 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:

For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
US dollar annuity/maintenance license sales US$ 8,767 6,938 1,829 26%
Weighted average conversion rate 1.012 1.005
Canadian dollar equivalent CDN$ 8,874 6,972 1,902 27%
US dollar perpetual license sales US$ 1,750 1,905 (155) -8%
Weighted average conversion rate 1.045 1.007
Canadian dollar equivalent CDN$ 1,829 1,918 (89) -5%
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
US dollar annuity/maintenance license sales US$ 18,108 15,576 2,532 16%
Weighted average conversion rate 1.010 1.001
Canadian dollar equivalent CDN$ 18,295 15,598 2,697 17%
US dollar perpetual license sales US$ 3,761 3,251 510 16%
Weighted average conversion rate 1.029 1.002
Canadian dollar equivalent CDN$ 3,869 3,257 612 19%
The following table quantifies the foreign exchange impact on our software license revenue:
For the three months ended September 30, 2013
($ thousands)
Q2 2013
Balance
Incremental
License
Growth
Foreign
Exchange
Impact
Q2 2014
Balance
Annuity/maintenance license sales 12,012 1,077 64 13,153
Perpetual license sales 2,671 (910 ) 68 1,829
Total software license revenue 14,683 167 132 14,982
For the six months ended September 30, 2013
($ thousands)
Q2 2013
Balance
Incremental
License
Growth
Foreign
Exchange
Impact
Q2 2014
Balance
Annuity/maintenance license sales 25,192 1,758 161 27,111
Perpetual license sales 4,741 (682 ) 101 4,160
Total software license revenue 29,933 1,076 262 31,271
REVENUE BY GEOGRAPHIC SEGMENT
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Annuity/maintenance revenue
Canada 5,452 5,473 (21 ) 0 %
United States 2,957 2,549 408 16 %
South America 1,566 1,172 394 34 %
Eastern Hemisphere1 3,178 2,818 360 13 %
13,153 12,012 1,141 9 %
Perpetual revenue
Canada - 753 (753 ) -100 %
United States - 258 (258 ) -100 %
South America 414 - 414 100 %
Eastern Hemisphere 1,415 1,660 (245 ) -15 %
1,829 2,671 (842 ) -32 %
Total software license revenue
Canada 5,452 6,226 (774 ) -12 %
United States 2,957 2,807 150 5 %
South America 1,980 1,172 808 69 %
Eastern Hemisphere 4,593 4,478 115 3 %
14,982 14,683 299 2 %
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
Annuity/maintenance revenue
Canada 10,882 10,413 469 5 %
United States 6,121 4,942 1,179 24 %
South America 3,898 4,334 (436 ) -10 %
Eastern Hemisphere1 6,210 5,503 707 13 %
27,111 25,192 1,919 8 %
Perpetual revenue
Canada 291 1,314 (1,023 ) -78 %
United States 427 662 (235 ) -35 %
South America 490 483 7 1 %
Eastern Hemisphere 2,952 2,282 670 29 %
4,160 4,741 (581 ) -12 %
Total software license revenue
Canada 11,173 11,727 (554 ) -5 %
United States 6,548 5,604 944 17 %
South America 4,388 4,817 (429 ) -9 %
Eastern Hemisphere 9,162 7,785 1,377 18 %
31,271 29,933 1,338 4 %
(1) Includes Europe, Africa, Asia and Australia.

During the three months ended September 30, 2013, on a geographic basis, total software license sales increased across all regions with the exception of the Canadian market which experienced an overall decrease of 12%, compared to the same period of the previous fiscal year.

During the six months ended September 30, 2013, on a geographic basis, total software license sales increased by 17% and 18% in the US and South America, respectively, while Canada and South America experienced decreases of 5% and 9%, respectively.

The Canadian market (representing 36% of year-to-date total software revenue) remained flat in annuity/maintenance revenue during the three months ended September 30, 2013. Even though we have experienced revenue growth during the quarter due to increased license usage by our existing large clients, and due to the addition of several new accounts, these increases have been offset due to a few clients cancelling their projects or experiencing financial difficulties which has reduced or eliminated their need for licenses. However, our diversified geographic profile enables us to take advantage of opportunities internationally which offsets the impact of market softening in any particular region. On a year-to-date basis, annuity/maintenance revenue in Canada experienced a 5% growth, compared to the same period of the previous year, and our expectation is that our existing and, in particular, our large clients will continue renewing and increasing their usage of our products. Perpetual sales were lower during the three and six months ended September 30, 2013, compared to the same period of the previous year, due to the fluctuations inherent in the perpetual revenue stream. Historically, the Canadian market has been strong in generating recurring annuity/maintenance revenue as evidenced by the quarterly year-over-year increases of 37%, 37%, 38% and 10% recorded during Q2 2013, Q3 2013, Q4 2013, and Q1 2014, respectively. During the second quarter of the current fiscal year, we recorded comparable revenue to the second quarter of the previous fiscal year due to the reasons described above.

The US market (representing 21% of year-to-date total software revenue) experienced significant growth in annuity/maintenance license sales, in comparison to other regions, during the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, driven by sales to new and existing customers. Perpetual license sales were lower during the three and six months ended September 30, 2013, compared to the same period of the previous year. We continue to experience successive increases in the annuity/maintenance license sales in the US as evidenced by the quarterly year-over-year increases of 24%, 32%, 20% and 32% recorded during Q2 2013, Q3 2013, Q4 2013, and Q1 2014 respectively. This double-digit growth trend has continued into the second quarter of the current fiscal year with the recorded increase of 16%.

South America (representing 14% of year-to-date total software revenue) experienced an increase of 34% in annuity/maintenance license sales during the three months ended September 30, 2013, compared to the same period of the previous fiscal year, mainly due to increased sales to existing clients. South America experienced a decrease of 10% in annuity/maintenance license sales during the six months ended September 30, 2013, compared to the same period of the previous fiscal year; however, the decrease was caused by the variability of the 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). To provide a normalized comparison, if we were to exclude the amounts received from this customer from the year-to-date annuity/maintenance revenue of the current and the previous fiscal years, we would notice that the annuity/maintenance revenue grew by 17% in the six months ended September 30, 2013. The South American region also experienced an increase in perpetual sales during the second quarter of the current year compared to the second quarter of the previous year while perpetual license sales remained relatively flat for the six months ended September 30, 2013, as compared to the same period of the previous fiscal year.

Eastern Hemisphere (representing 29% of the year-to-date total software revenue) grew annuity/maintenance license sales by 13% during both the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, due to increased license usage by our significant customers in the region. Compared to other regions, Eastern Hemisphere achieved the highest growth in perpetual license revenue during the six months ended September 30, 2013, compared to the same period of the previous year.

Movements in perpetual sales across regions are indicative of the unpredictable nature of the timing and location of perpetual license sales. Overall, our recurring annuity/maintenance revenue base continues to experience growth. We will continue to focus our efforts on increasing our license sales to both existing and new customers, and we will endeavor to continue expanding our market share globally.

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 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.

QUARTERLY SOFTWARE LICENSE REVENUE ($THOUSANDS)

To view accompanying graph, visit the following link: http://media3.marketwire.com/docs/CMG-Q2-2013-License-Revenue.pdf.

DEFERRED REVENUE
($ thousands) 2013 2012 $ change % change
Deferred revenue at:
March 31 25,289 21,693 3,596 17 %
June 30 22,014 18,779 3,235 17 %
September 30 19,346 18,241 1,105 6 %

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 increase in deferred revenue year-over-year as at September 30, June 30 and March 31 is reflective of the growth in annuity/maintenance license sales. The variation within the year is due to the timing of renewals of annuity and maintenance contracts that are skewed to the beginning of the calendar year which explains the decrease in deferred revenue balance at the end of the first quarter and second quarter (June 30 and September 30, respectively) compared to the fiscal year-end (March 31).

Deferred revenue at September 30, 2013 increased by 6% compared to the same period of the prior fiscal year. This increase is lower than the increases of 17% recorded in the previous two quarters due to the timing of the renewal of one significant contract. In the previous fiscal year, this contract was renewed and included in our second quarter's deferred revenue balance, whereas in the current fiscal year, the renewal is expected to be completed during the third quarter. To provide a normalized comparison, if we were to include this renewal in the current quarter's deferred revenue balance, we would notice that the deferred revenue would have increased by 12% at September 30, 2013 compared to the same period of the previous fiscal year.

PROFESSIONAL SERVICES REVENUE

CMG recorded professional services revenue of $2.2 million for the three months ended September 30, 2013, representing an increase of $0.8 million, compared to the same period of the previous fiscal year, due to both an increase in project activities by our clients and due to entering into a large consulting agreement with one of our clients which, we expect, will contribute to the professional services revenue during the current fiscal year. Professional services for the six months ended September 30, 2013 amounted to $4.0 million, representing an increase of $1.4 million, compared to the same period of the previous fiscal year, which again resulted from entering into a large consulting agreement with one of our clients in the current fiscal year.

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 client companies.

Expenses
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Sales, marketing and professional services 3,837 3,592 245 7 %
Research and development 3,418 3,028 390 13 %
General and administrative 1,633 1,421 212 15 %
Total operating expenses 8,888 8,041 847 11 %
Direct employee costs1 7,188 6,491 697 11 %
Other corporate costs 1,700 1,550 150 10 %
8,888 8,041 847 11 %
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
Sales, marketing and professional services 7,486 7,555 (69 ) -1 %
Research and development 6,890 5,925 965 16 %
General and administrative 3,278 2,922 356 12 %
Total operating expenses 17,654 16,402 1,252 8 %
Direct employee costs1 14,308 13,086 1,222 9 %
Other corporate costs 3,346 3,316 30 1 %
17,654 16,402 1,252 8 %
(1) Includes salaries, bonuses, stock-based compensation, benefits and commissions.

CMG's total operating expenses increased by 11% and 8% for the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous fiscal year, due to increases in both direct employee costs and other corporate costs.

DIRECT EMPLOYEE COSTS

As a technology company, CMG's largest area of expenditure is for its people. Approximately 81% of the total operating expenses in the six months ended September 30, 2013 related to staff costs, compared to 80% recorded in the comparative period of last year. Staffing levels for the current fiscal year grew in comparison to the previous fiscal year to support our continued growth. At September 30, 2013, CMG's staff complement was 185 employees and consultants, up from 167 employees as at September 30, 2012. Direct employee costs increased during the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, due to staff additions, increased levels of compensation, and related benefits.

OTHER CORPORATE COSTS

Other corporate costs increased by 10% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year, mainly due to increased computing costs.

Other corporate costs increased by 1% for the six months ended September 30, 2013, compared with the same period of the previous fiscal year, mainly due to increased computing costs in the six months ended September 30, 2013 offset by the inclusion of the costs associated with CMG's biennial technical symposium in the six months ended September 30, 2012.

RESEARCH AND DEVELOPMENT
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Research and development (gross) 3,935 3,487 448 13 %
SR&ED credits (517 ) (459 ) (58 ) 13 %
Research and development 3,418 3,028 390 13 %
Research and development as a % of total revenue 20 % 19 %
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
Research and development (gross) 7,955 6,872 1,083 16 %
SR&ED credits (1,065 ) (947 ) (118 ) 12 %
Research and development 6,890 5,925 965 16 %
Research and development as a % of total revenue 20 % 18 %

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 DRMS project of $1.0 million and $2.1 million for the three and six months ended September 30, 2013, respectively (2012 - $0.7 million and $1.5 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."

The increases of 13% and 16% in our gross spending on research and development for the three and six months ended September 30, 2013, respectively, demonstrate our continued commitment to advancement of our technology which is the focal part of our business strategy.

Research and development costs, net of research and experimental development ("SR&ED") credits, increased by 13% and 16% during the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous fiscal year, due to increased employee compensation costs and costs associated with computing resources.

We also had an increase in SR&ED credits driven mainly by the increases in our direct employee costs as well as the increase in hours spent on projects eligible for SR&ED credits.

DEPRECIATION
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Depreciation of property and equipment, allocated to:
Sales, marketing and professional services 103 119 (16 ) -13 %
Research and development 226 226 - 0 %
General and administrative 50 48 2 4 %
Total depreciation 379 393 (14 ) -4 %
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
Depreciation of property and equipment, allocated to:
Sales, marketing and professional services 203 217 (14 ) -6 %
Research and development 452 406 46 11 %
General and administrative 99 88 11 13 %
Total depreciation 754 711 43 6 %

Depreciation in the three and six months ended September 30, 2013 was relatively flat as compared to the same periods in the previous fiscal year.

Finance Income and Costs
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Interest income 162 131 31 24 %
Finance income 162 131 31 24 %
Net foreign exchange loss (325 ) (460 ) 135 -29 %
Finance costs (325 ) (460 ) 135 -29 %
For the six months ended September 30,
($ thousands)
2013 2012 $ change % change
Interest income 319 276 43 16 %
Net foreign exchange gain 167 - 167 100 %
Total finance income 486 276 210 76 %
Net foreign exchange loss - (133 ) 133 -100 %
Finance costs - (133 ) 133 -100 %

Interest income increased in the three and six months ended September 30, 2013, compared to the same periods of the prior fiscal year, mainly due to investing larger cash balances.

CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 71% (2012 - 65%) of CMG's revenue for the six months ended September 30, 2013 is denominated in US dollars, whereas only approximately 25% (2012 - 23%) of CMG's total costs are denominated in US dollars.

CDN$ to US$ At June 30 At September 30 Six month trailing average
2011 1.0370 0.9626 1.0252
2012 0.9813 1.0166 0.9977
2013 0.9513 0.9723 0.9670

CMG recorded a net foreign exchange loss of $0.3 million for the three months ended September 30, 2013, compared to a $0.5 million foreign exchange loss recorded in the same period of the previous fiscal year, due to a strengthening of the Canadian dollar during the quarter which contributed negatively to the valuation of our US-denominated working capital.

CMG recorded a net foreign exchange gain of $0.2 million for the six months ended September 30, 2013, compared to a $0.1 million foreign exchange loss recorded in the same period of the previous fiscal year, as the net foreign exchange loss recorded in the three months ended September 30, 2013 was offset by the $0.5 million foreign exchange gain recorded in the three months ended June 30, 2013.

Income and Other Taxes

CMG's effective tax rate for the six months ended September 30, 2013 is reflected as 30.0% (2012 - 29.7%), whereas the prevailing Canadian statutory tax rate is now 25.0%. This difference is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the benefit of foreign withholding taxes being realized only as a tax deduction as opposed to a tax credit.

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
For the three months ended September 30,
($ thousands, except per share amounts)
2013 2012 $ change % change
Total revenue 17,184 16,073 1,111 7 %
Operating expenses (8,888 ) (8,041 ) (847 ) 11 %
Operating profit 8,296 8,032 264 3 %
Operating profit as a % of total revenue 48 % 50 %
Net income for the period 5,608 5,361 247 5 %
Net income for the period as a % of total revenue 33 % 33 %
Basic earnings per share ($/share) 0.15 0.14 0.01 7 %
For the six months ended September 30,
($ thousands, except per share amounts)
2013 2012 $ change % change
Total revenue 35,300 32,539 2,761 8 %
Operating expenses (17,654 ) (16,402 ) (1,252 ) 8 %
Operating profit 17,646 16,137 1,509 9 %
Operating profit as a % of total revenue 50 % 50 %
Net income for the period 12,689 11,451 1,238 11 %
Net income for the period as a % of total revenue 36 % 35 %
Earnings per share ($/share) 0.33 0.31 0.02 6 %

Operating profit as a percentage of total revenue for the three months ended September 30, 2013 was at 48% compared to 50% recorded in the same period of the previous fiscal year. While our total revenue grew by 7% during this period of time, our operating expenses grew by 11%, having a negative impact on our operating profit. The slight decrease in operating profit as a percentage of total revenue is due to the fluctuations inherent in our perpetual revenue stream given that more perpetual license revenue was recorded during the second quarter of the previous year, compared to the same quarter of the current year.

Operating profit as a percentage of revenue for the six months ended September 30, 2013 remained flat at 50% as compared to the same period of the previous fiscal year.

Net income for the period as a percentage of revenue was consistent at 33% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year.

Net income for the period as a percentage of revenue increased to 36% for the six months ended September 30, 2013, compared to 35% for the same period of the previous fiscal year.

We have continued to maintain our profitability by focusing our efforts on increasing effectively controlling our operating costs. Managing these variables will continue to license sales while, at the same time, be imperative to our future success.

...
EBITDA
For the three months ended September 30,
($ thousands)
2013 2012 $ change % change
Net income for the period 5,608 5,361 247 5 %
Add (deduct):
Depreciation 379 393 (14 ) -4 %
Finance income (162 ) (131 ) (31 ) 24 %
Finance costs 325 460 (135 ) -29 %
Income and other taxes 2,525 2,342 183 8 %
EBITDA 8,675 8,425 250 3 %
EBITDA as a % of total revenue 50 % 52 %