Computer Modelling Group (TSX:CMG) Basic Data, Overview
UPDATED: 2025.10.14
Computer Modelling Group is a Canadian software company that provides IT services to oil and gas companies, primarily in the form of image analysis software. They create models for drilling, draw strata patterns, determine the direction of drilling, where to push back water - in the case of fracturing procedures - and are skilled in various other imaging techniques. They are headquartered in Alberta, Canada, employ 178 people, and generate their income primarily from licensed simulation software - CMOST-AI, IMEX, GEM, STARS, CoFlow, Builder and WinProp. They have partners in 60 countries around the world and cooperate with several universities - approximately 100. The company also has a consulting and educational arm that relates to the software. It has been a listed company since 1997, and its IPO was on March 18. The stock is also available under the tickers CMG.TO and TSE:CMG, the latter on Interactive Brokers.
Market Cap: CAD 565 million (basically denominated in CAD)
Investor Relations: https://www.cmgl.ca/investors/
📒Table of Contents📒
I have created a table of contents to make it easier for you to navigate the longer articles:
- Computer Modeling Group (TSX:CMG) Specialties
- How does Computer Modelling Group (TSX:CMG) make money and what market advantages does it have?
- Metrics for Computer Modeling Group (TSX:CMG).
- Computer Modelling Group (TSX:CMG) acquisitions
- Management of Computer Modelling Group (TSX:CMG)
- Competitors: Opponents of Computer Modelling Group (TSX:CMG)
- What risks does Computer Modelling Group (TSX:CMG) face?
- Computer Modelling Group (TSX:CMG) valuation
- Major news and the last quarter
- Other interesting facts about Computer Modelling Group (TSX:CMG)
〽️Market segment analysis〽️
In this section, I examine the dynamics of the market segment, how it operates, who the main players are, and what tailwinds or headwinds the players in the given market have to deal with. I will not analyze companies in depth, but I will touch on the market share of individual companies.
Computer Modelling Group operates in a rather specific, specialized software market: they supply imaging software to oil and gas companies. Although I am not particularly familiar with the subject, from reading the materials on the CMG website, the company is engaged in the production of reservoir simulation software - which is the science of fluid flow. This includes analyzing the position of gases and fluids flowing in underground cavities, their location in layers and the like. The figure below shows how the software 3D model looks in reality:
💡The point is that the software can be used to predict how much gas, oil, and other liquids are found in which layers, since, for example, shale oil is produced using fracturing technology, where water is injected between the rock layers, breaking them up with high pressure. CMG's software is good for simulating operations like this, but primarily for telling how companies will bring up the raw materials, i.e. they implement a kind of route planning. One of the biggest costs for companies engaged in exploration and drilling in oil production is that some of the test drillings are unsuccessful, which is why they cost the companies a significant amount of money. CMG's software helps to increase this success rate, and its pricing is dwarfed by the costs of drilling.
It is worth knowing that the individual steps and technologies complement each other, but not everyone knows everything. Some people only model, some process seismic data, some understand imaging, drilling support, and the interpretation of special geological data. Moreover, all of these are also separated by the exact area and how they are explored. It doesn't matter whether it is traditional exploration, shale oil, oil sands, deep-sea drilling, or what exactly is in focus.
Since this is a legacy industry, efforts are being made to organize all such processes under one umbrella, on a common platform, and to move all of this to the cloud, due to the high computing capacity required.
Software used by CMG:
- IMEX: fluid flow simulator for conventional oil fields.
- GEM: advanced simulator for complex gas-powered and unconventional extraction techniques.
- STARS: thermal simulator, which is especially useful for simulating oil sands and heavy oil production.
- CoFlow: integrated simulation platform (combining the above-mentioned processes).
☝️ Another activity of CMG is the BHV segment, which they entered with the acquisition of Sharp Reflection in November 2024. BHV is very similar to reservoir simulation modeling, with the difference that it does not determine the method of extraction, but where the oil and gas are based on certain models, so it helps to designate drilling points in the deposits. The above can be used not only in the extraction of materials, but also, for example, in the pumping of carbon dioxide, and in determining the location of hot water required for geothermal energy.
The above activities are so-called “mission critical” elements, a service that is very difficult to replace, which is why the company's contracts are renewed 65% for services and 71% for software licenses, and Computer Modelling Group (TSX:CMG) is present in 100% of the largest oil companies - they are also called the Seven Brothers: Exxon, Shell, Total, BP, Chevron, ENI, ConocoPhillips - and in 90% of the ten largest national oil companies. They have practically dominated their own niche market, and are in a relative monopoly position with the big players. (actually duopolistic, as you will see later).
The figure below shows the applications they developed and use, interestingly, the last three were acquired by the company:
No matter which part of the industry we look at, one thing is certain: Oil price fluctuations also largely determine CMG's revenue, which partly follows it - although the correlation is not complete. Since the lion's share of the costs is not software - but the construction of the rig superstructure, test drilling, maintenance, etc. - companies tend to use more software analysis than random test drilling.
☝️This can reduce risk and increase the probability of successful drilling, the amount of oil and gas found there, etc., so the process can be optimized overall.
A well will cost between 2 and 20 million USD in 2025, depending on whether it is to be drilled on solid ground or in water, while a Schlumberger Petrel license was 100K USD 7 years ago (Reservoir Analysis License costs), and SLB Eclipse is 40K/year/user, at least that's what I found data for. I think we're now looking at double that, which is still a ridiculous amount compared to a 2-20 million drill.
I see CMG's software a bit like Texas Instruments' cheap circuit components: it's not a large amount compared to the total cost, but it's essential for the machine to function, so even if the company raises its prices, the cost won't be visible to companies, which is roughly the same with seismographic/fluid analysis software, etc.
What is the SaaS model?
“We call it the SaaS – subscription-based – model, the sales form when customers purchase an electronic license at certain intervals – monthly, annually, etc. – within the framework of a subscription, and in return they receive continuous software updates and developments. The software is available from the cloud, meaning it is owned by the company and not by the customer” – as I wrote in the Adobe article (Adobe Inc. (ADBE) Stock Analysis).
💡The entire gas and oil industry has fallen brutally behind in software modernization. They run old, mammoth software, no AI, machine learning, cloud-based simulation has spread, so far. As you can see, this is not the industry where innovation is rampant, companies use a lot of old software, one of the reasons for which is that simulations are terribly complicated. Among other things, you need to understand physics, mathematical modeling, geological research, and various engineering industries. Previously, CMG earned most of its revenue from selling “boxed” products. If we look at the software industry, more serious companies have been operating in a SaaS model for a very long time, that is, they provide software access as a service, not as a boxed product.
Obviously, it's quite difficult to implement this in the middle of nowhere, in an oil field, since you measure in the field and then simulate in the office, where there is real computing capacity, but this can all be solved if you upload the data directly to the cloud. To solve this, in 2023, CMG acquired a company called Bluware-Headwave Ventures, which is a company that specializes in cloud-based and deep learning algorithms, and on the one hand, they started to push their software to the cloud, and on the other hand, they also integrated artificial intelligence into the decision-making processes. Whether this is a good thing or not, I don't know, since I'm not familiar with this profession, but starting from the fact that 25% of the company's free cash flow has been going to research and development for years to stay ahead of the competition, this doesn't seem like a bad direction.
In 2024, they also acquired Sharp Reflection GmBh, which is a German company and was basically a company that processed and interpreted seismic data. This practically means that they use supercomputers to model seismic data and then visualize and interpret it, as you can see in the top image in the article. These can be used not only in the gas and oil industry, but also in hydrogen production, for example. The EOR in the image is an abbreviation for Enhanced Oil Recovery, and it stands for advanced oil extraction techniques such as fracturing. That's why there are so many pictograms in the image, because they are separate from each other in the oil industry, meaning that conventional drilling, heavy oil, offshore oil drilling, fracturing, CO2 injection into the ground - carbon capturing -, geothermal energy and hydrogen production are also included in their repertoire.
🙋♂️Computer Modelling Group (TSX:CMG) Specialties🙋♂️
In this section, I examine what specialties the analyzed company has, what its position is in the market, and whether it does anything differently than its competitors. If so, what and how, and what impact does this have on their operations.
Computer Modelling Group (TSX:CMG) is a Canadian software company currently focused on the oil and gas sector, specifically reservoir simulation and modeling. The company began as a research organization under the University of Calgary in 1978, and its commercial operations—the licensing of reservoir simulation software—were spun off to CMG through an IPO in 1997 (the non-profit operations remained within the confines of Foundation CMG, and later Energi Simulation. They have no financial relationship with CMG, but collaborations continue).
🏫The advantage of CMG software comes from its Canadian and especially university roots. CMG provides free software access to students at 100 universities around the world – Texas A&M, University of Adelaide, Stanford, Imperial College etc. This also means that most universities use CMG software in their engineering departments and train engineers on it, so fresh graduates already have basic CMG software knowledge, so they will naturally promote it. The product is strong in modeling unconventional reserves – this is also visible in the pictograms above – which is probably due to the fact that Canada’s resource base contains a lot of oil sands and other unconventional resources, such as shale oil. I have previously written two articles about oil companies, in which I examined the operation of the sector in detail (OPEC, oil stocks and Playing Oil with Oil Stocks). According to previous management comments, the market share of unconventional oil and gas products is larger than the company's overall market share. In quantitative terms, this looks like this:
〽️Market share in the traditional gas and oil reservoir simulation software market by application:
- Schlumberger (Eclipse Solution): 55%
- CMG: 35%
The two together: 90%
- Competitors with outdated software: Halliburton, Baker Hughes
- small player: ResFrac (funded by Altria Venture Group, nothing to do with the tobacco company)
- Rock Flow Dynamics: Schlumberger Eclipse copy, with approx. 50-75 million USD per year (Russian software company, private, therefore its data is only estimated, no exact information. In the current political situation, I see exactly 0 chance of it being used against a product from an American/Canadian company)
- Other competitors according to CBInsights (CBInsights, nothing serious, mostly startups)
In the unconventional gas and oil reservoir simulation software market (shale oil, fracturing, oil sands)
- CMG: 50%
- Schlumberger: 40-45%
And if we filter down to heavy oil, all of the Top 20 oil companies in Canada use CMG software.
It is important to note that running simulations requires a lot of data, which is largely owned by these two companies, making it extremely difficult to enter their market, as the same is not available to anyone else, and of course these two companies will not transfer their data and experience to the competition. This is why the switching cost is very high, as you either go to one company or the other, creating a typical duopolistic market.
Of course, I also wondered how big the reservoir simulation market could be and how much it could grow. This of course goes beyond CMG's simulation software and includes software, geophysical data analysis, engineering consulting, drilling data analysis, petrophysical investigations, and hardware, so obviously the entire market cannot be captured by Computer Modelling Group (CMG).
I couldn't find any clear data, but Fortune Business Insights' analysis gives a pretty good approximation (Reservoir Analysis). In 2018, the market size was estimated at 3.13 billion USD, which could increase fivefold by 2023 in the US. CMG is not included in the study, as it is a Canadian company, but is listed elsewhere (Market Research Future analysis) I read this year's data as 6.64 billion USD, while its growth is anywhere between 5.13-7.92%. I'm probably not wrong if I say that the market can grow by 5-8% per year, which is of course a pretty big difference. A company with 128 million CAD - 90 million USD - in revenue can still grow a lot in such a large market, and of course there is the possibility of entering additional markets.
What is very interesting about CMG is that half of the 178 people work in R&D, meaning the research and development branch is brutally large, and they spend 20+% of their revenue on this.
It’s obvious that this is an oil and gas company, so I drew a price chart on TradingView to see the correlation with oil. In the picture you can see the changes in the Computer Modelling Group (TSX:CMG) WTI crude and Canadian crude oil price indices, there is not much correlation with the movement of CMG’s share price. This makes sense, since this is a SaaS software company and not an oil business.
☝️What makes Computer Modeling Group much more appealing to me than traditional oil companies is that it is a capital light business, unlike the big oil companies, which are capex heavy, so it doesn't cost a lot to run their business. CMG takes out exactly the risk factor that I don't like.
Interestingly, a decade ago, CMG's revenue was 85 million CAD, which has fallen to 66 million CAD. In 2016, there was a pretty big drop in oil prices, and this is clearly reflected in the share price. But there's no need to panic, because the share price has increased by 21.1% CAGR since the IPO.
💰How does Computer Modelling Group (TSX:CMG) make money and what market advantages does it have?💰
In this section, we examine what exactly the company does to generate revenue, what products and services it has, how indispensable they are. Does it have any competitive advantage (economic moat), how defensible is it, and whether the trend is decreasing or increasing, and what is likely to happen in the long term.
CMG generates its revenues primarily through its software licenses, as follows:
- Canada: 16%
- USA: 25%
- South America: 13%
- Eastern Hemisphere (all other): 46%
The company is currently moving its software to the cloud, moving away from traditional, outdated boxed products and licenses, and towards a SaaS model. Revenues are divided between:
- software sales: 85%
- services: 15%
What is interesting is that the customer churn rate is extremely low, supposedly 98% of them will become customers again - contract renewal rate, different from the software renewal percentage mentioned above - there is simply no similar product, the company's products are very difficult to replace.
This is further proven by another thing: there are two types of software licenses, perpetual – permanent, you buy it, it's yours - and term licenses, which expire but can be renewed – like monthly or annual subscriptions -, the latter accounting for 95% of the revenue. There are two reasons for this: you also have to pay a maintenance fee for the perpetual license – updates and the like – and it is also more expensive overall. This looks like a SaaS model, but it's not called that. Just like what Microsoft – Office -, Adobe – Adobe Cloud software – and a lot of other software companies have been doing for years. It's a very stable, recurring revenue-generating model. Another thought: since the annual term license is renewed annually, these revenues typically fall in the second two quarters of the year or shift to the new year, which causes fluctuations in revenues.
Management completely changed direction in 2022, the new strategy was called the CMG 4.0 model - because Pramod Jain is the 4th CEO - which is a kind of roadmap for what they want to do in the future. Pramod Jain transformed the entire incentive system of management - see management section - and created a much more flexible pricing structure for the company's products. They started raising prices, and the company also opened up to faster-growing areas such as carbon dioxide capture, which is already generating high double-digit revenues for Computer Modelling Group (TSX:CMG). Geothermal energy and hydrogen production are also changing direction.
I think the above is a bit vaguely worded, but I tried to get the gist of it:
- Core simulation: the current situation
- Energy transition: this is the CO2 capture and storage business
- Consulting: It is relatively clear that this is the additional services segment, which has already generated 15% of revenue.
- CoFlow Production: This is something more interesting, a joint collaboration with Shell, the software is called CoFlow and an integrated platform on which different steps can be analyzed at once (IPSM).
- Strategic partnerships: Shell, NVIDIA (simulation requires fast chips), etc.
- Acquisitions: see below
The whole thing is really only interesting because there is a major drop in the numbers in 2022, when software deployments started to move to the cloud. This reminds me of Adobe Inc. (ADBE), who started moving from offline solutions to a SaaS model in 2013 and did it brilliantly. That means revenue dropped from CAD 84.9 million a decade ago to CAD 66.2 million, and then started growing at a 28% annual rate.
Carbon Capture Storage Market
The market for CO2 sequestration and sequestration – carbon capture storage (CCS) – The industry is expecting low double-digit annual growth through 2030, thanks in part to government incentives, which is quite surprising. I don't know if this is hype driven by global warming or a real market, but the technology really does exist, and it fits right in with CMG's profile.
💡The gist of it is that during the production of hydrogen, CO2 is released, which is bound with a molecule called amine – a form of ammonia – the whole thing is liquefied, then the amine is extracted from it and pumped into the ground at high pressure, into a cavity/storage at least 0.62 miles – 1 kilometer – deep, but I've also read about a depth of 2 kilometers.
In principle, carbon dioxide released during industrial processes – e.g. cement production, burning fossil fuels, i.e. oil and gas – can also be captured, but this is a more complicated process, so CCS can be more closely linked to hydrogen production, the process can be seen in this video (Carbon Capture & Storage). This is where underground areas that have already been emptied or never contained liquid come into play, which Computer Modeling Group (TSX:CMG) models with its software. So in theory it doesn't seem impossible, but in practice it certainly poses a serious technical challenge.
Another question is how fast these are physically built – CMG only models and estimates – and I have indeed found companies that are actively building wells, such as a consortium called 1PointFive, whose activities are shown in the image above. Also interesting news is that the British government has allocated 21.7 billion GBP for CCS alone – this is about thirty times the market capitalization of CMG! – over a 25-year period to develop such solutions. It is a completely new technology, CCS has only been on the market for a few years, it is an interesting growth opportunity, but no one knows yet exactly what will happen (e.g. the political narrative changes, Trump is a good example of this).
Looking at the numbers, there are currently 46 operational CCS plants and another 500! are under construction, which surprised me. The global market size was estimated at 6 billion USD two years ago - the US market at 1.53 billion USD - and in a decade it will grow to 43.8 billion USD - the US market at 11.9 billion USD - which is a CAGR of 22% per year. Of course, these are the estimates that almost never come true and always provide some negative surprise, but if I halve this growth, it is also 11% CAGR. It is an uncertain industry, but thanks to the booming - EOR, Enhanced Oil Recovery - oil extraction technologies, the cavity created in the place of the extracted oil is already there, so it is natural to fill it with something.
From the above, software could cost roughly 0.5-1%, which could mean $220-440 million in revenue (i.e. for the entire software market, not CMG) by 2033.
🏰Economic moat🏰
In this segment, I examined whether the company has any economic competitive advantage, what Warren Buffett called an “economic moat,” which prevents competitors from besieging the company’s stronghold, i.e. its business, and taking over its market. In the case of Computer Modelling Group (TSX:CMG), these could be the following:
- 🫸Cost/scale advantage: no. I don't think this can really be stated in the size of CMG.
- 🫸Switching cost: strong. This is a very expertise-oriented industry, you have to understand software, special engineering knowledge is required for analysis, the process is data-driven, there are few competitors, and software plays a critical role.
- 🫸Network effect: no. There's not much of that in the B2B sector.
- 🫸Intangible assets, know-how, trademark: yes. On the one hand, the software itself is included, and on the other hand, the simulation data is also with the company. The software of the Computer Modelling Group is also considered strong university educational material, this type of know-how is difficult to replace.
- 🫸Barriers to entry: relatively high. On the one hand, you need software development experience, and on the other hand, modeling is complicated. But even if a competitor has the capital to develop this type of software, it would take many years, and then they would still have to assemble the same team of experts that the competing companies have. This is a rather unlikely scenario.
Overall, I think CMG is a wide economic moat company, BUT, it is a tiny niche market, and the organic growth of the reservoir modeling segment is not very high, a few percent per year. This company looks like a serial acquirer and their operating model implies that all their targets must be small companies with wide margins, otherwise their cash generation capacity would not be high enough. But the growth dynamics in such markets are low (which is why CMG can buy companies cheaply).
🎢Computer Modeling Group (TSX:CMG) metrics🎢
In this section, I examined what metrics characterize the company, how it stands on the revenue side, what margins it operates with, whether it has debt, what the balance sheet shows. I look for items that are extreme – too high debt, high goodwill, etc. - what return on capital the company works with, what its cost of capital is, how the revenue and cost sides are structured. I also examine trends, owner value creation, and how the company uses the cash generated.
Let's start with the market averages so that we have something to compare the metrics to. S&P 500 data/CMG data (based on Finchat):
- Revenue Growth: 6.7% / 32.5%
- Gross Margin: 69.09% / 80.7%
- Net Profit Margin: 12% / 19.2%
- FCF margin:* / 27% (*couldn't find it for S&P 500, but 10% for Top 27 companies)
- Return on Capital Employed (ROCE): 4.2% (median) / 31.8% (5-year average)
- Return on Invested Capital (ROIC): 3.9% (median) / 25.9% (5-year average)
CMG is a capital light company, which means that they need to reinvest very little money into the business to maintain their operations, a typical software company. The chart below shows the distribution of revenues, in 2024 the total was 125.3 million CAD, of which the Cost of Revenue is 24.7 million CAD, which is roughly 20% of the total revenue, meaning the remaining 80% can be spent on expenses, which is a very healthy value. Veeva Systems, which I hold in high regard, which is also an IT company in the healthcare sector, only reinvests 24% of its revenue back into the business to maintain its operations, and Microsoft is around 30%, so CMG is a fairly cash generative business.
Looking at their margins, I also find nothing to criticize, but I would note that the downward trend was primarily due to the change in direction and the acquisitive nature. The current values are considered low, but previously there was a 45% FCF margin here.
📉Obviously, these numbers are significantly affected by the two acquisitions, which resulted in a net cash outflow, so it is completely normal that you see a minimal decrease in some values. In return, you can see in the image below that revenue has been continuously increasing since the Blueware acquisition.
🚀The BHV acquisition added +20.7 million CAD to revenues, while the transaction cost 29 million CAD, so the investment will be returned in one and a half years, which is outstanding.
⚖️In comparison, when Adobe tried to acquire FIGMA in 2022, it would have paid $20 billion for the company, which had revenue of $200 million. That's a pretty rough 100x multiple, compared to the 1.5x multiple of the CMG-BHV acquisition. Even if I don't count BHV's revenue, the core revenue grew from 73.8 to 87.8 - by 24 million CAD, or roughly 33% - which is also fine.
Since CMG is likely to be a serial acquirer, it is worth looking at the internal rate of return, i.e. how efficiently the company can convert its revenues into free cash flow. To do this, it is worth looking at the FCF Margin (income/free cash) and the conversion rate (net income/free cash flow), the former is 21%, the latter is 130% (because net profit is also affected by items such as depreciation and amortization, etc.).
🧮What do ROIC and ROCE metrics show?🧮
ROIC – Return on Invested Capital – shows how efficiently the company uses its total invested capital to generate profit. Read more here.
- It shows the company's fundamental value creation capability.
- It filters out the impact of the financing structure.
- If ROIC exceeds the cost of capital (WACC), the company is creating value.
ROCE – Return on Capital Employed – shows how efficiently the company uses its long-term financing sources. Read more here.
- It measures the profitability of business activities.
- It does not take into account tax effects.
- A good basis for comparison between different industry players.
The other indicators are also very good, the ROIC/ROCE is particularly high, i.e. how efficiently the company generates profit from the invested capital. ROIC is usually contrasted with the WACC, the weighted cost of capital, which in the case of CMG is somewhere between 4.1-6.9%.
Going back to revenue-enhancing acquisitions, there are two typical problems with these:
- the acquisition is financed with debt
- they overpay for the given companies, which increases the goodwill ratio in the accounting
💰The answer to the former is that the company is in a net cash position, which means that the cash and short-term investments line (i.e. where practically everything counts as cash or cash equivalents) has a larger amount than the debts, so that's okay.
As for the overpayments, we know the price of the Blueware deal - 29 million CAD -, Sharp Reflection cost 37 million USD (2024.11), the revenues from this may not be very visible yet, but the payment should already appear in the cash position, because both were paid 100% in cash, not through credit or share dilution, but we will talk about this later.
As for intellectual property, the chart below shows the increase that acquisitions have caused. Goodwill is an accounting item that arises when a company pays more to acquire another company than its identifiable net asset value. So, the excess over net asset value is what you pay extra for the company. What can be goodwill: brand value, customer relationships, market position, intellectual property, customer loyalty, etc., so that which is difficult to grasp and measure (but these can clearly have significant value).
What usually happens to these? If the company has miscalculated the value of intangible assets, they are written off in the books as an impairment charge, which is why they are recorded as a loss in the books. That is why investors do not like very high goodwill ratios, because it carries this risk. This does not necessarily mean that they will be written off, but you have to pay attention to the amount. Could it be that CMG has a lot of goodwill? It could be because all software companies create intangible assets that are written off. What is considered high? The general consensus is that it is above 30%, here it is currently 10.3% in the last quarter, so that is okay, but you still have to pay attention to this value in the future because of further acquisitions.
🧠Computer Modelling Group (TSX:CMG) Ownership Value Creation🧠
On the owner value side, I usually look at how the company uses the free cash it generates. Basically, a company does the following things with its cash:
- funnel it back into the business
- reduces debt
- pays dividends
- buys back shares
- acquires other companies (in the form of cash, shares or debt)
The downside is that the previous management did not use the cash generated very well before 2022. One of the problems of such mature businesses, such as CMG, is that they cannot reinvest the cash generated well in their business, so they sit on the mountain of cash that is forming, or pay it out in the form of dividends, or buy back shares. However, the most efficient way to use cash is to invest in developments - which in the long term will be realized in an increase in the share price - because the company does not have to pay taxes on it - the development appears as an expense -, there is no withholding tax, as with dividends, and it does not have to be used opportunistically, as with the amounts intended for share buybacks. Currently, CMG
- does not buy back shares
- but pays an annual dividend of CAD 0.2 per share, which is equivalent to 2.64% at the current price
The latter, if the internal rate of return is adequate, is an “unnecessary” payment. A company pays dividends when it can’t do anything better with them, and this was justified before 2022, but currently, in my opinion, this is a payment of 16 million CAD that could be used for something else. Since “net margin becomes cash”, the company generates approximately 25 million CAD of free cash per year. This means that the company pays 67% of this in dividends. I don’t like this and I expect management to eliminate it in the long term.
📌Update: this has since happened, in the third quarter, the company cut its dividend by 80% to be able to deploy more capital.
⚙️SUMMARY: capital light business model, the numbers are very good, BUT there is a downward trend, which I attribute to the consequences of acquisitions. They generate a lot of cash, but we have to watch to see if the trend changes. I think it will change, this is a temporary situation (we have seen many of these before, HRB, SPG, AMZN), which will be offset by revenue growth and extra cash generation. I do not see this as a particular risk.
💵Computer Modelling Group (TSX:CMG) Acquisitions💵
In this section, I examine how acquisitive the nature of the company is and what impact each acquisition had on the life of the company, if any.
💡Computer Modelling Group (TSX:CMG) was not an acquisitive company until new management. That has changed in the past 2 years, thanks to the adoption of the Constellation Software philosophy.
- 2023.09 – 29 million CAD, Blueware (BHV): a cloud-based seismic data storage technology company, practically based on AI and big data. It seems like a logical step for them to push their old-school software to the cloud and transform their model to SaaS. What surprised me was that BHV's annual revenue in 2024 was 20.7 million CAD, so the acquisition was done at a multiple of about 1.5x. This is typical Mark Leonardo's valuation, as I recall, CSU bought companies at 1-2x sales in the past.
- 2024.11 – Sharp Reflection Gmbh: ~36 million USD, (52.5 million CAD). Sharp was also in a net cash position, with annual sales of roughly 10 million EUR (EU, so they report their revenues in EUR), so this acquisition does not seem overpriced either, at a multiple of about 3.5x. Bill Shea, the company's CEO, remained with the company and will continue to manage it until the integration takes place, so there is a strong founder-led nature here as well. This is a cloud-based seismic data analysis platform, which is tied to the German Fraunhofer Institute. This also fits the profile very well, but the acquisition is so new that I have not seen the specific numbers in CMG's metrics yet. Interestingly, the company's headquarters are in Stavanger, Norway (employing 120 people), but they also have a branch in Texas. There are very extensive oil explorations underway in both places (the oil industry plays a decisive role in Norway).
What's interesting about all this is that CMG continues to report Sharp's revenues within its own organization:
- 69% from software
- 31% of services
Historically, the company has produced double-digit annual growth, with low double-digit EBITDA. CMG's CEO also wrote a letter to investors about the acquisition, which can be found here (CEO Letter to Shareholders).
Their recurring revenue is 66%, which comes from existing customers. This is also a typical mission critical, sticky business. Sharp Reflection's products are used by 37 partners, including 9 major oil companies, 6 of which are supermajors (that's 6 of the seven sisters), and 4 other national oil companies.
I included a picture because maybe it's easier to understand what the two acquired companies do. You can't say it doesn't fit into CMG's profile. Although it's basically a complicated industry, with lots of sub-areas - drilling, geodetic measurements, flow science, oil, gas, hydrogen, geothermal energy, seismic data interpretation, etc. - what's great about it is that these are quite large markets on their own. However, since they are interconnected, CMG can also be strong in these, meaning it's not limited by the size of its own market, but can pull these services together into a single whole within an integrated platform. I'm a little bit drawn to Veeva Systems (VEEV) reminds me of people who did similar things in the Medtech sector.
Both acquired companies operate as independent elements within CMG, with their own management, but the cash is pooled together. Does this sound familiar? Of course, this is also a Constellation Software invention.
🤵Management of Computer Modelling Group (TSX:CMG)🤵
In this section, I examine who runs the company and how. What is the bonus system, how much risk – skin in the game – do the managers take on while running the company? Is there a family connection, or perhaps a special “heritage” factor?
⌛A recent major event was the management change and strategic shift underway at Computer Modelling Group (TSX:CMG). CMG’s management had long been fair but conservative. The company had a highly successful unique product but had failed to expand into other areas (they had co-developed a production system modeling software but the commercial launch was not very successful). It is likely that one of the major shareholders became impatient and pushed for change, so in 2019, Mark Miller was introduced as a new board member.
💡For those who don't know the gentleman, Mark Miller was the COO of Constellation Software (TSE:CSU), a company that acquires vertical market software companies with high internal rates of return (serial acquirer). This was followed in January 2021 by the appointment of John Billowits, another former CFO of Constellation Software, to the board. Finally, in February 2022, Mark Miller took over as chairman of the board. In May 2022, a new CEO was hired, Pramod Jain, who came from the travel software sector but has experience in integrating acquisitions, and most recently a new Corp Dev leader arrived, who was also a Constellation alumnus (in the M&A department). The best part is that Pramod Jain and Mark Miller retained their membership not only in CMG, but also in Constellation Software, which is not a weak connection between the two companies.
In short, about Constellation Software - we will publish a larger analysis of it later - CSU is a serial acquisition company, practically acquiring vertical software companies that have a very strong, unbreakable competitive advantage in their own markets. These are typically monopolistic or duopolistic mini markets, with niche software where switching costs are very high, which is why customers cannot really leave the companies. These companies have a particularly high cash flow, they print money with little cost, but they cannot grow. The "father" of CSU, Mark Leonard, came up with a solution to acquire these companies and use the free cash that such companies generate to buy new similar companies. Today, they have gone through thousands of such acquisitions and CSU has grown so much that a Canadian leg, Topicus, had to be spun off, and a European leg, Lumine, was also born.
The most important metrics for these serial acquisition companies are related to return on capital, which can be measured using a number of metrics. Mark Leonard often mentions IRR – internal rate of return – but ROCE, ROIC, CROIC and the like also paint a pretty good picture of a company’s cash allocation. What’s wrong with CSU? It’s always expensive and very difficult to analyze because of the sheer volume of companies acquired.
What is the solution to this? You need to look for companies similar to CSU, where the same philosophy is followed, but they are less well-known and you can get similar quality at a better valuation, such as Computer Modelling Group (TSX:CMG). As I mentioned above, starting in 2019, CMG's management team included top executives who previously worked at CSU, thus bringing Mark Leonard's teachings with them, but this company has ONLY acquired 2 other companies, so it is easy to follow what is happening there.
In November 2024, Chris W. Mayer bought into the company, somewhere around CAD 9.4. Since I'm a big fan of his, I've been following his portfolio for years, I read "100 Baggers: Stocks That Return 100-to-1 and How To Find Them" and I largely agree with his philosophy.
Detailing the most important members of the management:
- 2019: Mark Miller became a board member at CMG (he was COO of Constellation Software), He will be the Chairman of CMG from 2022. Effective September 2025, with the retirement of Constellation Software (TSX:CSU) CEO Mark Leonard.
- 2021: Board member John Billowits, former CFO of Constellation Software, CEO of Vela Operating Group, resigned and was replaced by Birgit Troy.
- 2024: Birgit Troy, He was CFO of Lumine Group (a European spin-off of Constellation), and was involved in the acquisition of 16 companies.
- 2025.07 .: Vipin Khullar, new CFO, replacing Birgit Troy, both formerly of Constellation Software
- 2022: Pramod Jain, CEO, May 2022, comes from the travel software sector, excels in integration of acquisitions. He currently holds CMG shares worth CAD 0.88 million.
- 2022: Mohammad Khalaf, they hired a new Corp Dev lead who also worked in the Harris group at Constellation Software.
Mark Miller not only serves on the CMG Board of Directors (CMG Governance), but also retained membership on the Constellation Software Board of Directors (CSI Software Board of Directors), so there is a strong connection between the two companies.
💡Importantly, three new key executives, John Mortimer, Sandra Balic and Mohammad Khalaf, were hired while Mark Miller and Andrew Pastor were on the board of the Computer Modelling Group. It's hard not to see this as a story similar to the spin-offs of Constellation Software (TSX:CSU).
Especially since the dividend was also cut by 80% to free up more cash for acquisitions, which is a very typical CSI trait.
What's even more interesting is that EdgePoint, the fund manager, owns a significant stake, roughly 26%, in Computer Modeling Group, which is led by Andrew Pastor, who is also a board member of Constellation Software. This is a total of 5 people who are connected to CSU in some way, larger or smaller, and two of them currently hold positions at CSU and a company affiliated with CMG. Are you starting to get the picture?
💰Executive bonus for Computer Modelling Group (TSX:CMG)💰
Pramod Jain's executive compensation is largely tied to the company's ROIC and growth, just like the CSU/Lumine/Topicus trio. In other words, if the financial results are bad, Pramod also takes home less, the expression "skin in the game" is clearly true for him. Another important interesting fact: the incentives are paid in cash, but they stipulate that a part of it - 40% - must be purchased in CMG shares, there is a 3-year lock-up period, when he cannot sell them, - they are released in 3 parts, ⅓ each year - because of this, in the best case, the CEO's position in the company is constantly growing, so he will be increasingly interested in proper operation and his interests will increasingly coincide with those of the shareholders (since he himself is one).
"A portion of executive compensation previously received under share-based compensation was moved to annual incentive bonus. In fiscal 2024, 60% of the executive officers' bonus was paid in cash and 40% of the after-tax bonus was required to be used to purchase Common Shares. The Common Shares have a lock-up period of three years and are released from escrow in equal thirds on the first, second- and third-year anniversary from the bonus award date. This change encourages executive share ownership and provides an incentive to focus on the longer-term strategic objectives of the Corporation that drive shareholder returns."
One more thought to this whole thing: since the incentive is also in shares purchased with cash, it replaces the previous stock options that were granted to management, i.e. it prevents dilution (as the option dilutes the investors' positions). These stock options are replaced by PSUs and RSUs. What are these two concepts?
- ☝️PSU (Performance Share Unit): performance-based share unit. Its allocation and ultimate value depend on the achievement of certain performance targets (in this case, ROIC and revenue metrics). It usually serves as a longer-term incentive and is tied to the company's performance. This is 60% in the case of the CEO.
- ☝️RSU (Restricted Share Unit): Restricted share unit. It becomes fully vested after a specified period of time (e.g. 3 years) and cannot be sold or transferred until then. At the end of the vesting period, the employee receives the shares regardless of the company's performance. This is 40% in the case of the CEO.
"A total of 387,561 PSUs and RSUs were outstanding at March 31, 2024, which represents 0.5% of the issued and outstanding Common Shares. The implementation of the PSU & RSU Plan was intended to partially replace stock options that were granted to executives on an annual basis." – Seeking Winners, 2024 analysis; the point is, this only affects 0.5% of all stocks.
The whole story looks as if Constellation Software's model has been implemented into CMG. Based on the successes of Topicus and Lumine Group, this bodes well for the company's internal operations and share prices.
Some of Pramod Jain's statements that are promising:
"I am often asked about the expected pace of our acquisition strategy. How many acquisitions next year and what size? My response is always that "it depends". It is important to stress that patience and a long-term view will matter as we take on acquisitions."
"We are seeking businesses with strong growth potential and mission-critical software that expand our portfolio, while remaining disciplined in the prices we pay. I believe we succeeded in this objective with Bluware and we have a solid pipeline of opportunities we are evaluating. We have looked at various companies and have walked away from those that don't fit with our strategy and don't offer the financial return we are seeking."
"The cadence of our M&A strategy may feel measured from the outside, but that does not mean a lack of opportunity. We won't do M&A for the sake of doing M&A, even if it means patiently waiting for the right opportunities."
Sounds just like Mark Leonard, and by the way, Pramod also has letters to investors. The last one you can find it here.
🆚Competitors: Computer Modelling Group (TSX:CMG) opponents🆚
In this section, I examine who the competitors of the analyzed companies are, what is their market position, whether they are in a subordinate, secondary or superior role. What is their market share and what is their specialty? Are they losing or gaining market share to their competitors?
It is very important to highlight that the gas and oil industry segment is far behind in digitalization, compared to, say, e-commerce. There are slow-moving mammoths in this market, basically with legacy software, so there was not much cloud-based digitalization before the 2020s. This was made necessary by the huge amount of data that needs to be analyzed for drilling, a lot of seismic, geological and other information accumulates, from which 3D models have to be created, which is now done by supercomputers. This is very difficult to scale with non-cloud-based services.
☝️In practice, the story goes like this: they buy storage, processors, memory, and so on for huge virtual computers, which are run in a cloud-based server cluster.
If more data comes in, there is no need to stack physical hardware in the form of servers, but rather resources can be assigned to operations in the cloud of a server park using software. That is why a lot of competitors in this market segment have launched all kinds of integrated, cloud-based platforms, for easier and faster processing of data, greater data security and digital transformation. These can be roughly considered competitors of Computer Modelling Group (TSX:CMG), and not those that run their modeling software on legacy machines on local machines.
- Schlumberger – July 2024, new digital platform. The largest company in the segment, but for them this is a tiny part of the total activity. The company is also involved in physical drilling – it is not a pure-play software company, it is just a sideline -, in the reservoir modeling segment they own about 55% of the market. They have a strategic partnership with Microsoft.
- Halliburton – August 2024, this is also a reservoir management platform and fundamentally prioritizes efficiency improvements
- British Petrol – June 2024, not a direct competitor, but rather a partner, a platform created for risk management and security developments
- Total Energy – September 2024, big data analytics software
- RockFlow Dynamics – we don't know much about it because it is a private company, not a publicly traded company, but it is much smaller than CMG and Schlumberger
As you can see, most companies are developing and digitizing in this segment. How big is the risk? I see that this is a general trend and no one wants to be left out of it, it's roughly the same as what happened with marketplaces in 2020-21 during COVID, and what happened in the end? Everyone came out of it positively, everyone's revenue jumped, see e.g. Amazon. What are the trends? Machine learning, AI trained on their own data, digitalization, cyber security - everyone would be happy to take valuable data - so just the usual trends, but optimized for target tasks.
The other, and I think important, question is why money is pouring into this sector? Among other things, because the gas and energy sector is considered a strategic sector in the US, and the US Department of Energy, among others, supports and stimulates technological transition.
""The interesting thing about our market is that it is most often not exclusive. You'll find many customers who have licenses from multiple providers. This could be for various reasons, either they use certain simulators for certain types of assets, or they use one to verify output on another. Our vision would be to create a portfolio of best-in-class technologies, ultimately in an open ecosystem, where clients could choose what they want to use and have the ability to have those technologies integrate with one another. Customers don't like being held hostage to one provider. We don't have to own the entire workflow, but the more solutions we have, particularly disruptive solutions of the kind that we acquired with Bluware and Sharp, the stronger our competitive position becomes. We also believe that partnerships could play an important role in providing more functionality across the upstream workflow.” – SeekingWinners, 2024 analysis
This is interesting from two perspectives: firstly, oil companies buy licenses from multiple companies to validate data from multiple sources, and secondly, they only buy software from certain players. So the software of a narrow circle – CMG, SLB, maybe Rock Flow Dynamics – is going around because there is no other and it is very difficult to enter the industry.
⚡What are the risks of Computer Modelling Group (TSX:CMG)?⚡
In this section, I examine all the risks that could affect the company's long-term future. Currency, regulatory, market disruption, and so on.
Among the risks, I only list those that I believe pose a real threat to the company. For example, retaining talent with 100 universities – some sources say 200 – should not be a problem for a company that teaches its own software in so many places, and that students can access for free.
I also don't see technological disruption as a very big risk in this segment, although it cannot be ruled out that tomorrow someone will invent a much more efficient solution to the same problem that CMG covers with its own software. However, it is almost certain that if Computer Modelling Group becomes a serial acquisition company in the long term, this risk will decrease further, since several markets would have to be affected at the same time. The big question for me is, if someone invents a technology that shakes up the industry, why wouldn't the companies that deal with this kind of thing be able to do it? I think it is very unlikely that something like this will come from outside.
The third thing that came to mind was the risk of cyberattacks. This will certainly increase with the move to the cloud, since off-site solutions are safe from this point of view, but I think that stealing geological and seismic data is not the primary goal of hackers, but they can cause brutal damage to CMG, for example, with a database encryption and ransomware. Of course, in principle, competitors can also steal analytical data, but companies like Computer Modelling Group (TSX:CMG) spend quite a lot on cyber protection.
⛽Risk of oil and gas price changes⛽
CMG's primary customers are oil and gas companies whose capital and operating expenditures fluctuate with the volatility of commodity prices and economic conditions.
In the past, CMG Core's revenue has been sensitive to oil price fluctuations (there's a fairly high correlation in revenue, as seen in the chart below, but not much in the price), as companies in the industry often cut back on exploration and production spending during times of demand decline. However, a broader revenue spectrum (diversification into more software, more industries), and investments in carbon capture, as well as an increasing proportion of recurring revenue, are expected to mitigate the impact of future volatility on Computer Modelling Group's (TSX:CMG) revenue. Additionally, market volatility tends to encourage oil producers to adopt a more disciplined capital allocation strategy – something we’ve seen during COVID from major oil companies like Exxon and Chevron – which could increase demand for software solutions like CMG’s that can reduce drilling risks and operating costs.
🏦Credit and liquidity risk🏦
The majority of the Company’s receivables are from customers in the oil and gas industry, both domestically and internationally. As the Company does business in approximately 60 countries, a portion of its customer base is located in jurisdictions with higher economic and political risk than in North America. To mitigate this risk, the Company bills the majority of its software licenses in advance for the full license term, while consulting and contract research services are billed as frequently as possible in accordance with the contractual terms. If the collectability of a receivable is considered uncertain, revenue recognition is deferred until cash is received, provided that all other criteria are met.
The company has no historical experience of significant losses from individual customers or groups of customers in any given geographic region. In March 2024, the company assessed the credit risk of its receivables and recorded a $0.5 million allowance for doubtful accounts. Benchmark: Prior year revenue of $128 million. A large portion of this amount relates to customers operating in geopolitically unstable countries.
🌎Geopolitical risks🌎
CMG operates in approximately 60 countries, with offices in North America, the United Kingdom, the United Arab Emirates, Colombia, and Malaysia. Some of these countries carry greater economic, political, and social risks than North America. In the second quarter of fiscal 2025, 39% of software license revenues came from North America, 11% from South America, and 49% from the Eastern Hemisphere (Europe, Asia, Australia, and Africa). In the long term, it would be better for investors to have a higher proportion of revenues coming from North America, as this would reduce the risks associated with the current geographic exposure, but it is still not bad.
This is almost a question of how the US government will interact with other countries, what tariffs or other regulations it will introduce. Since the energy industry is a particularly important area for the US, I can easily imagine that it will subsidize those involved, and these state funds could also trickle down to the CMG level (because it is a Canadian company, but American oil companies buy their software). Especially since Trump is not exactly climate-friendly, to put it mildly, since he withdrew from climate agreements, but he strongly supports the American industry, which is traditionally strong in oil and gas, being the largest exporter of the former in the world. This is of course 100% speculation, but the trend is pointing in this direction.
💰Foreign exchange risk💰
The company operates internationally and prices its products primarily in Canadian or U.S. dollars. Exposure to exchange rate fluctuations between the U.S. and Canadian dollars represents market risk.
In the fiscal year ended March 2024, approximately 79% of the Company's revenues were denominated in U.S. dollars, and approximately 53.3 million of the Company's working capital was denominated in U.S. dollars. The Company does not currently use derivative instruments to hedge these risks. However, approximately 46% of the Company's total expenses are also denominated in U.S. dollars, which provides a partial natural hedge against exchange rate fluctuations. A weakening of the U.S. dollar against the Canadian dollar would have a negative impact, while a strengthening of the U.S. dollar would have a positive impact on the Company's financial performance.
I would add to the above that in the case of Phillip Morris (PM), we have been watching them work in FX headwinds for years because they do not collect most of their revenues in US dollars (in return, they pay less tax on dividends), and the trend is that the US economy is stronger compared to other economies, yet PM is soaring.
I made a kind of self-check list that confirms my thesis about the company:
- low or zero debt: YES/PARTLY/NO
- significant economic benefit that can be protected in the long term: YES/PART/NOT
- excellent management: YES/PARTLY/NO
- excellent indicators, significant owner value creation: YES/PARTLY/NO
- The majority of the total return comes from reinvesting the cash generated, not from dividends: YES/PARTLY/NO
- appropriate company valuation: YES/PARTLY/NO
Everything is fulfilled, except for the significant economic advantage, which I partially fulfilled because Schlumberger is a larger player in the duopolistic market, but based on the above data, I believe that this will change.
👛Computer Modelling Group (TSX:CMG) Valuation👛
In this section, I will examine the company's current valuation compared to historical values and consensus fair values.
Rating metrics
In the two rows below you can see valuation metrics. The first row shows the current valuation, the second row shows the historical valuation. Although I don't think these metrics are particularly good - they hide a lot - they can be used as a basis for comparison.
- Share price (2025-04-08) 7,09 CAD; P/E: 23,63; EV/EBITDA: 12,98; P/FCF: 17,12 (Based on Finchat.io)
- Historical median valuation (10-year average): P/E: 28,33; EV/EBITDA: 17,52; P/FCF: 23,64 (Based on Gurufocus)
Why don't you see a DCF model in this segment? Because each input data produces a huge variance in the output, and most of the data is an estimated value. Therefore, the valuation will never actually be a single exact number, but rather a range can be defined where the current valuation falls.
You should apply a margin of safety to this price range, according to your risk appetite.
So don't expect an exact price, no one can determine this for a stock. However, there are fair value prediction services, almost every major stock search site has one, I've aggregated them below. However, if you want a good stock support service, you should subscribe to The Falcon Method (The Falcon Method), they provide entry prices for the stocks analyzed there (Computer Modelling Group (TSX:CMG) has not appeared among them yet, but you never know). I rounded the values below to the first whole number according to the rounding rules.
Rating
- Peter Lynch: 8.8 (roughly 9, but I didn't take it into account because I don't have a specific value)
- Morningstar: 9.44 CAD (quantitative only, but 5 stars)
- Gurufocus: 12.37 CAD
- AlphaSpread: 9.02 CAD (21% undervaluation compared to the base case, standard deviation range: 7.12-10.76 CAD)
- SimplyWallst: 11.10 CAD
- Substack: 10.27 CAD
Average price (based on 6 ratings): 10.1 CAD (30% undervalued compared to average, at current price of CAD 7.09)
How to interpret the numbers? The above "margin of safety" rule should be applied according to your convictions, so if you really believe in the company, you can buy it at a fair value, but if you move in 10% increments (whose convictions are strong), the math would look like this:
- 10% margin of safety: 581*0.9=523 USD
- 20% margin of safety: 581*0.8=465 USD
- 30% margin of safety: 581*0.7=407 USD (we are somewhere below this now)
- 40% margin of safety: 581*0.6=349 USD
- 50% margin of safety: 581*0.5=290 USD
Of course, the list could go on and on. Chris Mayer bought the stock for somewhere around 9.7 CAD (his purchase price is not included in the average above), which shouldn't be a guide, but people like to read such data, so I'll share it too.
Based on this, the stock is not extremely cheap, but the current P/E (28.5) is below the median P/E (29.9) and it can be seen that it has already fallen below the red line on the Peter Lynch chart. We are light years away from the traditional P/E:15, but in fact this is a very bad parameter, moreover, acquisitions cause cash outflow, which negatively affects the P/E value (although in this case not only the EPS but also the P value fell nicely). The EV/EBITDA and P/FCF are also below average, it is rather cheap.
🌗Significant news and the last quarter🌗
In this section, I will examine what happened in the last quarter, whether there were any significant news/events. If the company reports semi-annually, we examined this period.
The third quarter report for 2025 is currently available (Q4 closed at the end of March 2025, their numbering is not the usual one).
- I looked at the CEO's letter, I love the stuff he's pushing, it really reinforces my thesis:
"A colleague recently challenged me with the question "what is that one word that you stand for?" It was an easy answer or me because it is a deeply held and long-standing belief. That one word is "compounding." Compounding is said to be the 8th wonder of the world and in both my personal and professional life, I believe "bring a 1% improved version of yourself every day and you'll be 37 times better in a year." Our employees know this well as I've repeated it often since joining CMG. It is something I strive to do every day.” - "As we adjust the focus to recurring software revenue and expanding the margins, we expect to start growing our free cash flow which can be redeployed into further acquisitions." - 2025Q3 Investor letters, Pramod Jain
📖Computer Modelling Group 2025 Q3 Report📖
In the report written to investors, prices are shown in USD, so I also used USD (1 USD=1.42 CAD)
- Revenue: 35.8 million USD revenue (was 33 million USD in 2023),
- -1% R&P, (reservoir and production solutions)
- +9% seismic segment, +6% through acquisitions
- Operating profit: 11.2 million USD (+37%)
- EBITDA margin: 39% (+2%)
- Net income: 9.6 million USD (+71%)
- EPS: $0.12, +71%
- FCF: $0.11, +22%
Excellent financial results. Transcript here.
Year-End report: 2025.05.21
Annual General meeting: 2025.09.xx?
An interesting fact from the CEO from 2025Q2:
- "Each quarter I aim to share with you the most recent developments and progress. This quarter marks one full year of Bluware under CMG's ownership and to keep the big picture in mind, I want to comment on how our acquisition strategy has contributed to the overall performance of CMG Group. In the trailing twelve-month period (ended September 30, 2024), we have significantly bolstered our financial performance. Our revenue has increased by $42.3 million, or 51% and even though we are still early in the commercial transformation of Bluware, Adjusted EBITDA has increased by $3.1 million, or 8%.”
+42 million USD in one year, for a company with total revenue of 88 million. Brutal.
- "That particular contract had a moderate impact on the quarter. While it is not unusual to have small fluctuation in renewals, I committed to being fully transparent with our shareholders and to presenting a balanced view of wins and losses when I call them out."
- "Now importantly, I want to reassure our shareholders that I believe in maintaining a strong balance sheet and that financial leverage should be used carefully and opportunistically to enhance shareholder value without taking on undue risk." - 2025 Q2 Investor letters, Pramod Jain
Other interesting facts about Computer Modelling Group (TSX:CMG)
Everything that was left out of the previous ones, or if there is any special KPI - key performance indicator - or concept that needs to be explained, it is also included here.
KPIs: key performance indicators, these are shown in the table below. Since management compensation is determined by organic net revenue growth and ROIC, the two are consistent in this case: if it's good for the company, it's good for management and vice versa.
FCFA2S: FCFA2S is an abbreviation for “Free Cash Flow Available to Shareholders.” It is a non-IFRS financial ratio that measures how much of a company’s cash flow from operating activities is available to shareholders after deducting capital investments and liabilities to other providers of capital. As you can see, the values have turned nicely positive.
Another interesting thing is the net promoter score, which measures how satisfied customers are when they use a service/product. In the case of CMG, this is 68% on a scale of 100, the industry average is 41%. This is not bad, considering that Microsoft has 38%, Apple has 61%, but Starbucks has 77%, which is outstanding. Okay, everyone hates Microsoft, but it is such a gigantic giant that no one cares about the NPS score, and I think that sums up the “essence of monopoly”.
Summary of the Computer Modelling Group
Summary of the analysis, drawing lessons.
What I don't like so much is that I don't know how much of the expectation in the models is that CMG will enter the CSS market, where CO2 is pumped in to replace the materials used – gas, oil, geothermal energy – and this is modeled using software. I wouldn't be happy to pay for something that is factored into the price up front and then never grows in the right way afterwards. Whether or not this will happen is also, in my opinion, a matter of strong political narrative, which I wouldn't be happy to bet my money on. It's very fortunate that CMG's customer base is sufficiently diversified, the company is not only dependent on the US. Of course, this has nothing to do with the basic business, but I wouldn't mind if the price falls further and such risks are eliminated.
I also don't like that 67% of the cash generated is paid out as dividends. In the long term, I expect that they will completely eliminate the dividend and reinvest the remaining money into acquisitions, or if they don't eliminate the dividend and the company's revenue increases, they won't increase the payout ratio.
CMG is very similar to the much larger CSU – or its spin-offs – in many ways. Same management mentality, acquisition of mission critical software companies, incentives depend on internal rate of return, the company is very cash generative, their revenue is growing, they have no debt. A big bonus is that CSU executives are specifically in the management of both companies, so there is a lot available from CSU. They have a monopoly in their own niche market, and the company is even undervalued. There is only one investor that I follow very closely, Chris W. Mayer, who bought into the company in November 2024 at somewhere around 9.7 CAD, which is a very strong indicator for me, even though I never tend to copy other investors. Obviously, I can never give investment advice, but I think anyone who can read between the lines will get the gist.
Frequently Asked Questions (FAQ)
Which broker should I choose to buy shares?
There are several aspects to consider when choosing a broker - we will write a complete article about this - but I would like to highlight a few that are worth considering:
- size, reliability: The bigger a broker, the safer it is. Those with a banking background – Erste, K&H, Charles Schwab, etc. – are even better, and well-known brokers are typically more reliable.
- expenditures: Brokers operate with various costs, such as the account management fee, the portfolio fee - which is the worst cost -, the purchase/sale fee and the currency exchange cost (if USD is not deposited in the brokerage account)
- Availability of instruments: It doesn't matter which broker has which market available, or whether they add the given instrument upon request and how quickly.
- account type: cash or margin account, the latter can only be used for options. For Hungarian tax residents, having a TBSZ account is important, but citizens of other countries also have special options – such as the American 401K retirement savings account – which are either supported by the broker or not.
- surface: is one of the most underrated aspects, and it can be a real pain. Anyone who had an account with Random Capital, a now-defunct Hungarian broker, knows what it's like to work on a platform left over from the 90s. Erste's system is lousy slow, Interactive Brokers requires a flight test, and LightYear believes in simple but modern solutions.
Based on the above, I recommend the Interactive Brokers account because:
- the world's largest broker with a strong background
- a few million instruments are available on it, and shares listed on multiple markets – e.g. both the original and the ADR – of a single share are often available
- az Interactive Brokers a discount broker, they have the lowest prices on the market
- you can link your Wise account to them, from which you can quickly transfer money
- Morningstar's analyses are available for free under the fundamental explorer (good for analysis)
- EVA framework data is available under fundamental explorer (useful for analysis)
- they have both cash and margin accounts, Hungarian citizens can open a TBSZ
- you can use three types of interfaces: there is a web and PC client and a phone application
What data sources did you use to analyze stocks?
For quantitative analysis, we primarily use various stock screening sites, and for qualitative analysis, we use company reports and other analyses, such as the Substack channel, podcasts - Business Breakdowns - and similar sources.
What matters: value or quality?
The answer is both, but quality is more important. It is much better to buy a very high-quality company at a fair price than to buy shares of a cheap but poor-quality company.
What is the best time frame to buy shares?
The minimum is 5 years, but you should consider the time horizon from 10 years to infinity. Our approach is typical "buy and hold", the emphasis is on selection, then we try to hold the shares for as long as possible, which requires conviction. We rarely sell, mainly if we feel that the thesis we set up has been broken or if we have made a mistake.
Which is better: individual stocks or ETFs?
There is no truth to this question. It is very easy to track the market with an S&P 500 ETF, and it is worth doing for beginners, because it can be done with a little knowledge and practice. Analyzing individual stocks requires 30-50 hours per company, so we do not recommend it to those who do not like it.
Do you hold the shares in a TBSZ account?
Yes. As a Hungarian citizen, the tax advantage over a traditional cash-based account is so great that it is worth opening a new TBSZ account every year, and then the withdrawal of money is also solved (but if you do not want to withdraw anything from it, you can extend these)
Why don't you specify a specific purchase price for the shares in your analyses?
We do not set purchase prices for several reasons: firstly, because it is impossible to calculate the exact value of a company. Secondly, because we cannot give investment advice, these analyses are only made to support the decisions of others. That is why we use fair value estimates from other services, as well as a certain margin of safety. Ultimately, your conviction will decide how much a company is worth to you.
Which stock price will rise or fall?
Nobody knows, because there is no magic bullet that can tell. It can be based on mathematical probabilities. The prices of high-quality companies that have growing sales, are able to reinvest the cash generated into the business, and have high intrinsic value creation tend to rise in the long term. But in the short term – a few years – the market and the price can move anywhere.
Legal and liability statement (aka. disclaimer): My articles contain personal opinions and are written solely for my own entertainment and that of my readers. iO ChartsThe articles appearing on this website do NOT in any way exhaust the scope of investment advice. I have never intended, do not intend, and am unlikely to provide such advice in the future. The information provided here is for informational purposes only and should NOT be construed as an offer. The expression of opinion is NOT a guarantee to buy or sell financial instruments. You are SOLELY responsible for the decisions you make, and no one else, including me, assumes the risk.
