Summary of Computer Modelling Group (CMDX.F) FY Conference Call Company Overview - **Company**: Computer Modelling Group (CMG) - **Industry**: Oil and Gas Simulation Technology - **Founded**: 1978 as a nonprofit research foundation at the University of Calgary - **Public Listing**: 1997 on TSX, raised $11 million at that time - **Current Workforce**: Approximately 350 employees across 10 global locations - **Customer Base**: Serves the oil and gas industry in 60 countries, with 9 out of 10 supermajors as clients [8][10] Core Business and Financial Performance - **Core Business**: Reservoir Simulation, which has been the foundation for CMG's growth for 47 years - **Revenue Growth**: Total revenue increased from $66 million three years ago to current levels, effectively doubling [11] - **Recurring Revenue**: Represents 67% of total revenue, with an adjusted EBITDA margin consistently above 40% [11] - **EBITDA**: Achieved $44 million last year with a 34% margin across the group [11] - **Acquisition Strategy**: Since 2022, CMG has deployed $73 million in capital for acquisitions, generating $50 million in revenue from these businesses [13] Strategic Initiatives - **Four Point Zero Strategy**: Focuses on growth, profitability, and acquisitions, with a strong emphasis on the core Reservoir Simulation business [12] - **Acquisition Framework**: Aims to deploy 100% of available capital at high rates of return, with a focus on enhancing core business capabilities [14] - **Recent Acquisitions**: Includes GluWare, Sharp Reflection, and Sizware, which are part of a broader platform strategy to integrate seismic solutions [16] Market Dynamics and Challenges - **Industry Complexity**: The oil and gas sector is characterized by high complexity and significant data requirements, necessitating advanced simulation technologies [4][5] - **Transition to Software**: CMG is shifting from service-based revenue to software-based revenue, which is expected to improve margins [36][40] - **Competitive Landscape**: Notable pricing behavior from competitors has been observed, indicating potential market volatility [50] Future Outlook - **Expansion Plans**: CMG aims to expand into midstream and downstream sectors, as well as adjacent verticals like mining and utilities [18][19] - **M&A Pipeline**: The company has a robust M&A pipeline and is actively seeking opportunities to enhance its market position [33] - **Dividend Strategy**: Recently cut dividends by 80% to allocate more capital for acquisitions, reflecting a strategic shift towards growth [32][36] Key Takeaways - **Mission-Critical Technology**: CMG's products are essential for the oil and gas industry, providing a strong competitive moat [34] - **High Customer Engagement**: The company emphasizes a high-touch customer success model, which is critical for software adoption and retention [29] - **Long-Term Vision**: CMG is focused on building a sustainable business model that leverages its scientific expertise to solve complex industry problems [19][34]

Financial Data and Key Metrics Changes - Net sales for Q2 reached $12.79 billion, up 10.9% year over year in U.S. dollars and 10.2% on an FX neutral basis [17] - Adjusted EBITDA was $294 million, an increase of nearly 6% in U.S. dollars and 5% in constant currency [26] - Non-GAAP net income increased to $142 million from $120 million in 2024, representing an over 18% increase in U.S. dollars [27] Business Line Data and Key Metrics Changes - Client and Endpoint Solutions grew nearly 14% on an FX neutral basis, driven by strong demand in desktop, notebook, and smartphone categories [17] - Advanced Solutions saw mid-single digit growth, supported by servers, storage, and cybersecurity, particularly in Asia Pacific markets [17] - Cloud business continued to grow, contributing to overall positive performance across all business lines [7][16] Market Data and Key Metrics Changes - North America net sales were $4.98 billion, up 13.8% year over year on an FX neutral basis, driven by strong growth in servers, storage, and cybersecurity [20] - Asia Pacific demonstrated the highest net sales growth at 16.2% year over year in U.S. dollars, with strong performance in Client and Endpoint Solutions [21] - Latin America returned to growth with net sales of $853 million, increasing 0.8% in U.S. dollars and 6.4% in constant currency [22] Company Strategy and Development Direction - The company is focusing on its xVantage platform to streamline operations and enhance customer experiences through AI and automation [11][12] - Recent divestitures of non-core assets are part of a strategy to improve operational effectiveness and concentrate on core strengths [10] - The evolution into a platform company aims to provide customers with speed, scale, and service, enhancing overall business efficiency [11][12] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the ransomware attack in July but confirmed it had no impact on Q2 results, emphasizing a strong recovery and operational resilience [4][6] - The company expects continued year-over-year top line growth in Q3, with guidance reflecting some conservatism due to the cyber incident [30][31] - Management remains optimistic about the impact of the platform strategy and the overall business environment moving forward [16] Other Important Information - The company ended Q2 with net working capital of $4.6 billion, an increase from $3.9 billion year over year, driven by higher sales and investment needs [28] - Adjusted free cash flow was an outflow of $263 million, reflecting investments to grow the business [29] - The company announced a 2.6% increase in its quarterly dividend to be paid in Q3 [29] Q&A Session Summary Question: Expectations for endpoint and advanced solutions revenue growth in Q3 - Management expects mid-single digit growth for client and endpoint solutions, with stronger performance in desktop and notebook categories, while smartphone growth is anticipated to be lower [36][38] Question: Impact of government subsidies on mobility growth in China - Management noted that some growth in mobility was likely driven by government subsidies, but overall demand remained strong [39][41] Question: Demand pull forward in North America - Management did not observe significant demand pull forward across categories, with some minor effects in desktop and notebook refresh [46][47] Question: Implications of the recent bill on customer discussions - Management indicated that the impact of the recent bill is not significant for their business, as public sector sales are a minor part of their overall revenue [49][50] Question: Market cycle positioning for various products - Management believes the market is in a mid-cycle phase, with growth observed in storage, server, and networking categories [57] Question: Cash flow dynamics and expectations for the year - Management expects Q3 cash flow to be neutral to slightly negative due to inventory investments, with a positive cash flow anticipated in Q4 as inventory converts to receivables [91][92]