Computer Modelling Group Q4 2025 Earnings Brief
Weak Quarter Organically & No M&A News
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Summary
Computer Modelling Groups fiscal fourth quarter of 2025 saw the stock react with an ~18% drop following the earnings release, as the market digested some poor organic growth due to customer churn in the core business as well as a not so rosy outlook for 2026 organically. After two years of significant growth in the reservoir and production solutions, CMG has encountered a setback this year. Growth historically was fueled by acquiring new customers, expanding services with existing clients, and making strides in Energy Transition, especially in Carbon Capture & Storage (CCS).
However, two key factors have shifted the landscape:
Declining oil prices have impacted the industry. Customers, particularly smaller and medium-sized operators, are tightening budgets and scrutinizing technology spending more closely, which led to churn in Q4.
Many companies are re-evaluating their energy transition and renewable strategies. Carbon Capture & Storage (CCS), which saw a surge in momentum due to U.S. Inflation Reduction Act tax incentives, has now slowed down considerably, leading to a noticeable pullback in U.S. activity (14% decline in US geographic revenue).
The fourth quarter of 2025 saw total revenue rise by 4% to $33.7 million, primarily driven by a 17% increase from acquisitions, which helped offset a 13% organic decline. Recurring revenue also grew by 16% to $24.2 million, with acquisitions contributing 23% growth despite a 7% organic decline. Adjusted EBITDA increased by 2% to $10.5 million, though the adjusted EBITDA margin slightly decreased to 31% from 32% in the prior year. However, earnings per share fell by 33% to $0.06, and free cash flow decreased by 26% to $7.0 million, resulting in a per-share decline to $0.08 from $0.12.
For the full fiscal year 2025, total revenue saw a significant 19% increase to $129.4 million, largely due to a 20% growth from acquisitions, which compensated for a 1% organic decline. Recurring revenue also increased by 13% to $86.8 million, with 12% of that growth stemming from acquisitions and a modest 1% organic growth. Adjusted EBITDA rose by 2% to $44.0 million, though the adjusted EBITDA margin decreased to 34% from 40% in the comparative period. Earnings per share for the fiscal year decreased by 16% to $0.27, and free cash flow declined by 22% to $27.6 million, with free cash flow per share dropping to $0.33 from $0.44.
Looking ahead to fiscal year 2026, management is anticipating a decrease of $6 to $7 million in professional services revenue compared to fiscal 2025, assuming no new acquisitions. Additionally, investors should expect to see limited growth in Adjusted EBITDA and Adjusted EBITDA Margin.
On a more positive note CMG's two most recent acquisitions are performing well in terms of revenue and profit margins. Having successfully integrated two acquisitions and deployed 95% of free cash flow over the past two years, CMG appears more ready to accelerate the acquisition strategy. The company has expanded its acquisition focus beyond its traditional market to include midstream, downstream, and related sectors like utilities and mining and from our research could be exploring new verticals such as automotive and aerospace.
Moving forward, our investment depends entirely on management's ability to execute successful mergers and acquisitions. If these M&A activities expand the company into new sectors, it will stabilize organic growth through diversification and align with our initial investment expectations below.
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.