Good day, and welcome to the Computer Modelling Group Q2 2027 earnings conference call. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question, you will need to press star one one on your touchtone telephone. Please note, this call may be recorded. I would like to turn the call over to Kim MacEachern, Director of Investor Relations. Please go ahead.
Thank you, operator. Good morning, and welcome to Computer Modelling Group's conference call to discuss financial results for the second quarter of fiscal 2027. My name is Kim MacEachern, Director of Investor Relations, and with me today are Pramod Jain, Chief Executive Officer, and Vipin Khullar, Chief Financial Officer. I will remind everyone that today's discussion contains forward-looking statements within the meaning of applicable securities laws. These statements reflect our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please review the forward-looking information section of our MD&A and news release, both filed yesterday on SEDAR+ and available on our website. We will also reference non-IFRS measures, including adjusted EBITDA, adjusted EBITDA margin, recurring revenue, organic growth and decline, free cash flow, and free cash flow per share.
Reconciliations to the most directly comparable IFRS measures are provided in our MD&A and news release. We will begin with roughly 15 minutes of prepared remarks from Pramod and Vipin, after which the operator will open the line for questions. A replay of this call will be available on our website later today. With that, I would like to turn the call over to Pramod.
Thank you, Kim, and good morning, everyone. Welcome to our second earnings webcast and call. I am encouraged by many things within our business. The business has stabilized, and the signs of growth are starting to show. My letter yesterday covered a lot of detail, so this morning, I want to focus on three messages. First, our year-over-year comparisons for organic recurring revenue growth have normalized, and we are confident confirming our full-year outlook. Second, the second half is about execution, and most of it falls in the fourth quarter. We know what it needs to deliver, and we know where we expect it to come from. Third, our capital continues to go where the risk-adjusted returns are highest. Today, more of it is going to buy back our shares without giving up our capacity to act on the right acquisition. I will take each in turn.
For the past year, every quarter has been read through one lens, the contract we lost in fiscal 2026. That lens is now gone. When you look at organic recurring revenue today, you are looking at the business itself. What it shows is organic recurring revenue is flat compared to the same quarter last year, a significant improvement from a 12% decline in the first quarter. I am not going to call flat a victory. Our goal is growth, but we now have a clear baseline to move forward. That brings me to my second message. In the first half, organic recurring revenue was below last year. A stable year means the second half has to come in above the same period last year. A stable year can sound modest, but it is the sum of a weak start and a stronger finish.
I expect to exit fiscal 2027 with the business back on a growth footing, and that is what I am most encouraged by. The reason I expect most of our performance to come in the fourth quarter is because of how our revenue now falls across the year. More and more of our software revenue comes from contracts where most of the revenue is recognized when the contract is signed or renewed. For many of these contracts, that happens in the fourth quarter. That includes the multi-year simulation agreement we signed last November, much of our seismic business, and now Rose as well. We saw this for the first time last year, when about 55% of our recurring revenue came in the second half. It is structural. It is not a one-time effect, and we have said we expect this year to follow the same pattern.
Still, that is a lot of weight on one quarter, and I do not take it as given. Let me talk about where performance comes from. The first is contracts already in place, and they come in two forms. One is our multi-year contracts. They give us a contracted base across simulation and seismic, and many of them include annual price increases that build into recurring revenue over the life of the agreement. The other is renewals. In September, Petrobras renewed and expanded its agreement with us for five years. Petrobras is one of the most technically sophisticated operators in the world, and we have worked with them for over 40 years. When a customer like that commits for another five, it tells you how deeply our software sits in their workflow and the value we provide.
More broadly, our discussions ahead of the renewals still to come this year point to customers licensing more than they did a year ago. The second is our seismic business. For both Sharp and SeisWare, the fourth quarter is the biggest renewal quarter of the year. Sharp has performed strongly since we acquired it, and we expect it to deliver a record year. SeisWare has now been with us for just over a year. When we acquired it was operating at around breakeven. Today, its trailing 12-month adjusted EBITDA is 10%, with an expectation that it exceeds 20% for the current fiscal year. That margin expansion is expected to come from meaningful revenue growth in the fourth quarter. The third is new business. Industry activity is picking up, with customers focused on energy security and on getting more out of the assets they already have.
I have been traveling extensively throughout the Middle East, South America, and Africa. What I hear everywhere was the same, and it is a change from a year ago. Easy oil is gone. Enhanced oil recovery is more important than ever, as assets around the world are aging. Operators want to reprocess their existing seismic data for better interpretation. While much of this new business is expected to land in the fourth quarter and into next year, some of it you can already see. Perpetual licenses. This was our strongest quarter for perpetual license sales in two years, and we see that as a sign that industry activity is picking up. On perpetuals, while recurring revenue remains our goal, some customers prefer to buy outright for practical reasons.
A perpetual license can be funded from a capital budget as a one-time purchase, which is often easier to approve than an annual subscription that sits in the operating expense year after year. Some customers simply prefer to own their own software, so it stays in-house and under their control. Next is Venezuela. During the quarter, we signed our first software contract there in many years. Since then, we have signed another two. Venezuela has some of the largest oil reserves in the world. Much of it is heavy oil, which is where CMG has built its reputation. Three contracts is just a start, and I believe we can reestablish a strong presence there. In addition to Venezuela, last quarter, I spoke about other markets, including Africa, and I am happy to say that we have some evaluations ongoing in that market with new customers. Finally, professional services.
After the last several quarters, you have come to expect professional services to decrease, but that decrease was not broad-based. It came from two specific areas: development funding for CoFlow, which is now a software licensing contract, and the non-core services at Bluware that we have been managing down. Outside those two areas, we are seeing more demand for technical consulting, and that is the work we want to do. Asset assessments, EUR studies, and data management work put our experts beside customers on their most important decisions. That deepens those relationships and leads to broader software adoption. In my view, 20% of total revenue coming from professional services is a healthy balance, as long as it is the right kind. We will be selective about what we take on. Our focus remains high-margin recurring revenue, and we will take on only the services work that strengthens it.
Execution also means putting our AI work in customers' hands. I will repeat my view on AI in the subsurface. AI does not replace physics. It needs physics. So how we choose to AI matters. We have been working on AI agents across our simulation portfolio and expect to start introducing them for clients later this fiscal year. They take on the repetitive work of building and running models, and the physics engine our customers relies on stays exactly as it is. At Bluware, AI is already at work for operators, in six projects actually so far. Bluware's experts have built custom AI workflows that retain the edge of the expert user. In the most recent project, it surfaced exploration prospects that conventional interpretation had missed entirely. That is a very powerful use of AI.
Multi-year contracts and renewals, a strong renewal quarter at Sharp and SeisWare, and new business starting to show. That is where the second half comes from, and that is what we have to execute. My final message is around capital deployment. We aim to deploy 100% of our free cash flow into opportunities that grow recurring revenue and long-term cash flow at attractive risk-adjusted returns. Acquisitions remain our first priority for our capital. I have said this in the past several quarters, that conversion from pipeline to closed transaction should improve, and that I expected you to hold us to that. It hasn't improved yet. This quarter, we walked away from a transaction late in the process. It was a good business with a strong leadership team, but we could not get to conviction on the returns. Walking away from a transaction is not stepping back.
Our pipeline remains active, and we continue to build relationships with founders who want a strong technical home for their business. Our discipline on the price we pay for acquisition requires patience. That patience paid off in the acquisitions we have made so far, and I'm confident it will pay off again. Separate from acquisitions, we believe our shares continue to trade below their intrinsic value based on the cash flow the business generates. Today, buying back our shares is an attractive use of capital in its own right. We took three actions. In September, we completed our substantial issuer bid, repurchasing about 4.4 million shares. Yesterday, we announced a renewal of our normal course issuer bid, a flexible way to keep buying when the price is right.
We increased our committed credit facility to CAD 150 million, now with two banks, so that buying back shares does not come at the expense of acting on the right acquisition. The way I view this is that buybacks and acquisitions are complementary. It isn't one or the other. Both create value for our shareholders. Where we are more active today reflects where the returns can be achieved. When we find an acquisition that clears our hurdle, we will act on it. Before I hand over to Vipin, let me recap. First, organic recurring revenue, which is a key metric for us, is no longer negative, and we are confirming our full-year outlook. Second, the second half is about execution, and most of it will fall into fourth quarter. We know what it needs to deliver, and we know where we expect it to come from.
Finally, we continue to deploy capital where we can achieve strong risk-adjusted returns. Today, more of it is going to buy back our shares, but we still have the financial flexibility to act on the right acquisitions. Vipin, over to you.
Thanks, Pramod, and good morning, everyone. With our financial results having been released yesterday afternoon, I will not go through line by line, assuming you have all had a chance to review. Rather, I will start with a couple of highlights and then speak about the quarter, how the quarter compared with what we told you on our last call. Then I will touch on cash, the balance sheet, and finish with the outlook. There were a number of positives in the quarter. First, as Pramod mentioned, we had the highest level of perpetual license revenue in two years. While recurring revenue remains our focus, perpetual licenses also bring an annual maintenance contract that adds to our recurring revenue base, and it is a positive proof point of industry activity levels picking up. We also saw higher demand for professional services, which I will touch on again in a moment.
Last quarter, we gave you three directional expectations for Q2. First, we said recurring revenue would increase sequentially on a heavier renewal cycle, which it did, to CAD 22.1 million from CAD 20.3 million in the first quarter. Year-over-year, recurring revenue was up 7%, all from acquisitions, and organic recurring revenue was flat. Second, we said professional services revenue would decrease sequentially and year-over-year, and it did. Professional services revenue decreased 31% to CAD 5.9 million, mainly reflecting the end of CoFlow-related development funding at the end of calendar 2025 and the completion of the wind-down of non-core professional services at Bluware. However, customer demand was stronger than expected in the quarter, and we took on more consulting than we had anticipated. So, the decrease in professional services was smaller than we had forecasted.
As a result, we now expect third-quarter professional services revenue to be similar to the second quarter. We previously expected the second quarter to be the lowest quarter of the fiscal year. Third, we said adjusted EBITDA would decrease sequentially and year-over-year. Sequentially, adjusted EBITDA outperformed our expectation. This was due to higher perpetual license sales and higher professional services. Year-over-year, adjusted EBITDA decreased 16% to CAD 6.4 million, and adjusted EBITDA margin was 22% compared to 25%, reflecting lower professional services revenue, partially offset by growth in software license revenue. Turning to cash. Free cash flow increased 33% to CAD 2.6 million, driven by lower capital expenditures. Free cash flow per share was CAD 0.03 versus CAD 0.02 in the prior period due to higher cash flow and shares repurchased and canceled over the past 12 months.
Year-to-date, free cash flow was CAD 6.1 million, down 5%. On the balance sheet, we funded the substantial issuer bid, or SIB, from our credit facility. At September 30th, we had CAD 9.3 million in cash and CAD 29.9 million drawn. Our net debt-to-EBITDA ratio sits at 0.6x , well within our comfortable range of approximately 2x . On October 9th, we increased the committed funds under our credit facility from CAD 100 million- CAD 150 million and added a second lender. We continue to expect to repay the SIB-related draw from this year's expected free cash flow. The decision to expand the committed facility was made to ensure that we have the continued financial flexibility to allow us to continue to pursue acquisitions in our pipeline. We also renewed our normal course issuer bid.
This gives us flexibility to continue buying shares when prices reflect a discount to our view of intrinsic value. The maximum repurchases eligible under the NCIB is just over 3.8 million shares, or 10% of the public float. Now, to the outlook. For fiscal 2027, we continue to expect a decline in professional services of CAD 6 million-CAD 7 million relative to fiscal 2026. For fiscal 2027, relative to the prior year, and excluding the impact of future acquisitions, we continue to expect organic recurring revenue to be stable, no decline in adjusted EBITDA, and improved free cash flow. In the third quarter, recurring revenue is again expected to increase sequentially, driven by a higher renewal cycle. Professional services revenue in the third quarter is expected to be similar to the second quarter.
Adjusted EBITDA and adjusted EBITDA margin are expected to increase sequentially, but decrease compared with the third quarter of fiscal 2026, primarily due to lower professional services revenue year-to-year. I will take a minute on how the year is shaping up. With this outlook for the third quarter, adjusted EBITDA will be behind last year through the first three quarters. That doesn't change our full year outlook. It reflects how our year is weighted. As Pramod mentioned, more of our revenue now comes from contracts where much of it is recognized when the contract is signed or renewed, and many of those land in the fourth quarter. It's also our largest renewal quarter and where we expect much of our new business to land. Our costs, on the other hand, are fairly steady through the year.
When revenue is concentrated in one quarter, adjusted EBITDA is too. We saw that last year when the fourth quarter delivered CAD 11.8 million of our CAD 36.1 million in adjusted EBITDA. Based on our expectations, the fourth quarter will be our highest revenue quarter, and I expect it to deliver the revenue growth and adjusted EBITDA to achieve our full year outlook. With that, I'll turn it back to the operator for questions.
Thank you. If you would like to ask a question, please press star one one. If your question has been answered and you'd like to remove yourself from the queue, press star one one again. Our first question comes from Erin Kyle with CIBC. Your line is open.
Hi, guys. Good morning. Thanks for taking the questions. Maybe just starting on the guidance, to your last point there, Vipin, and in your comments as well, Pramod, achieving the full year guide there does rest fairly heavily on Q4. Just in terms of the visibility you'd say you'd have both on new pipeline closing by year end, as I know you mentioned some of that you expect to close in Q4 or early next year, as well as the expected renewals that you're anticipating in the next two quarters here. What's your level of confidence and total visibility in terms of both of those buckets?
Yeah. Thank you, Erin, and good morning. So yeah, I think as we said, that from a full year outlook perspective, we feel very confident because of all the pipeline that we see, the renewals that we have secured. So, we feel very good about making sure that we deliver to what we said. Can I ask Vipin to add some more commentary?
Yeah, and just given how the business sort of has become more seasonal in Q4. So yeah, like Pramod said, just good visibility into the renewal cycle. And then, as sort of January and the fourth quarter rolls around, our fourth quarter, it's also the start of a new budget year for our customers. So, I think that also positions us to capture more growth, which is sort of reflected in our outlook.
Okay, that's helpful. Maybe just as a follow-up to it, if you do see any deal slippage in Q4, just in terms of magnitude, like if one or two deals are slipping, do you still believe you can achieve that guidance for the full year?
Yeah, so we have good visibility into our renewal cycle, so we are expecting everything kind of to close in Q4. If there is any slippage, it would just be timing and recoverable in the following quarter. But yeah, based on what we see right now and our active engagement with customers on the renewal cycles, that is why we reconfirmed our guidance for the full year.
Okay, thank you. Then maybe just switching gears a bit, can you expand, Pramod, a bit on that reentry into Venezuela? One contract closed in the quarter, two signed post-quarter. Sounds like fairly fast progress so far, so maybe comment a bit on the pipeline there, what is helping you win, and maybe you can try to size the opportunity of that end market for us.
Yeah, sure. Look, Venezuela has been a big market for CMG in the past. It is a heavy oil market, which is CMG's forte. Now, what is happening with Venezuela, not only the state operator, which is PDVSA, there are other international operators who are now going into Venezuela. You are talking about Chevron, you are talking about Exxon, you are talking about M&P. A bunch of customers are now operating, ConocoPhillips. So, they are now starting to look at Venezuela more seriously. When they are looking at the models, they of course are coming back to CMG and then saying, "Well, CMG has been there before, so CMG now should be used compared to anybody else." So, I think that is what is exciting about Venezuela, is that the activity is picking up.
Yeah, we signed three contracts, couple of meaty ones, but also more of them are coming. And I cannot speak yet on the magnitude of the contracts, but I am excited about what I am seeing in terms of what this business can become.
That's helpful. Thanks. Maybe just last one for me. The renewed five-year Petrobras agreement, that appears encouraging as well. If you can just give us a bit more color there on what that expansion represents in terms of any additional products, users, end use cases for Petrobras, and anything that relates to incremental revenue for the year.
Yeah. Look, Petrobras has been working with us for the last 40 years, and they now signed for another five years, and hopefully they will keep on signing. I think that's we have such a strong partnership with them. The contract did come up with a price increase, which allowed us to get more share of wallet with that customer, and that's great for us. In terms of new products, we are continuing to work on new products. That's going to be outside of the contract, so that's an upside opportunity in the future for us as well. Broadly, it has been a very successful partnership for us and looking forward for that to continue.
Thanks. I'll pass the line.
Thanks, Erin.
Thanks.
Thank you. As a reminder, to ask a question, please press star one one. I am showing no further questions at this time. I would like to turn the call over to Pramod Jain for closing remarks.
Okay. Thank you all for joining, and Erin, thank you for your question. Questions, actually. The second half is really about execution, converting the remaining renewals, building on new markets, putting our AI work in customers' hands, and directing capital to where the returns are. That progress needs to show up in our financial results, and that is how I expect it to be measured. I want to thank our employees, our customers, and our partners, and to our shareholders for your continued support. We look forward to speaking with you again in February. Thank you.
Thank you for your participation. This does conclude the program. You may now disconnect. Good day.