Computer Modelling Group Q3 2025 Earnings Brief
Time to show us, not just tell us about M&A
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Summary
CMG.TO's third-quarter 2025 results, released February 11, 2025, disappointed investors, triggering a 14-15% stock price drop. This decline has fueled doubts about the company's pricing power and its ability to execute its acquisition plans. Despite a long history of impressive growth (25.6% CAGR since 2001), the stock has struggled in recent years, achieving only a 6.7% CAGR over the past five years and a 21% year-to-date loss in 2025, indicating a lack of confidence in management's vision.
Just to refresh everyone, our original investment thesis from the memo (linked below) was:
Investment Thesis
Oil & Gas Industry Turning to Software to Lower Costs
The decline in conventional petroleum production over the past decade has been exacerbated by the complexities of shale oil and gas extraction. To address these challenges, the industry has increasingly turned to software and automation to streamline once-simple mechanical processes. As commodity prices fluctuate, companies have focused on improving efficiency and reducing operating costs. To achieve these goals, they are relying more heavily on software simulations to optimize production. CMG, with its decades of experience in reservoir simulation software and strong market presence, is a leader in this evolving landscape.
Organic Growth Opportunities in Carbon Capture & Storage
CMG has been strategically expanding into the energy transition market, focusing on carbon capture and storage (CCS). As the CCS industry continues to grow, driven by government incentives and a global push for net carbon neutrality, CMG is well-positioned to capitalize on this opportunity. With its core competencies and expertise, we anticipate significant growth in CCS revenue, projecting a low double-digit year-over-year increase.
New M&A Strategy Bolsters Growth Potential
CMG is actively seeking to acquire companies with promising, but under-utilized, proprietary products. The recent acquisition of Bluware, a leader in cloud-based deep learning solutions for subsurface analysis & Sharp Reflections a leading high-performance computing platform for seismic data processing and interpretation serves as a model for future M&A activity. With a substantial portion of the global oil, gas, and chemicals applications market comprised of smaller vendors, there is ample opportunity for CMG to continue expanding its product offerings through strategic acquisitions.
Sidecar Investment Opportunity with Constellation Directors
Mark Miller, a prominent figure in the investment community with a proven track record in acquiring vertical market software companies, joined CMG's board in 2019 and became chairman in 2022. EdgePoint, a significant shareholder holding roughly one-third of CMG, is managed by Andrew Pastor, another Constellation Software board member.
The presence of these experienced individuals from Constellation Software's board, along with their substantial shareholdings, indicates a strong potential for future growth and success.
CMG's appointment of Pramod Jain as CEO, known for his impressive track record and insightful quarterly letters, is another positive indicator. Jain's management incentives, tied to return on invested capital and growth, align the interests of insiders with those of all shareholders.