Matrikon(TM) releases results for the second quarter of fiscal 2010 and
declares $0.03 quarterly dividend
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Highlights
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- Q2-10 revenue growth of 16% to $22.76 million compared to Q2-09; YTD
revenue growth of 23% to $48.21 million compared to the first six
months of FY-09
- Q2-10 consulting revenue growth of 50% to a record $14.79 million
compared to Q2-09; YTD consulting revenue growth of 27% to $27.98
million compared to the first six months of FY-09
- Q2-10 net income of $2.85 million or $0.09 per share compared to
$2.03 million or $0.07 per share in Q2-09; YTD net income growth of
17% to $5.61 million or $0.18 per share compared to $4.78 million or
$0.16 per share in FY-09
- Significant Well Performance Monitor contract wins, which are
evidence of Matrikon's market presence in intelligent oil field
solutions
- Board of directors declares quarterly dividend of $0.03 per common
share
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EDMONTON, April 7 /CNW/ - Matrikon Inc. (TSX:MTK), a leading provider of industrial performance monitoring solutions, today reported financial results for the second quarter of fiscal year 2010, which ended February 28, 2010.
Matrikon president and CEO Nizar J. Somji commented on the quarter: "Our second quarter continues the strong results we saw at the beginning of this fiscal year and the gradual return to spending in some of our core industries. Our large contract wins this quarter reaffirm the additional value added by our solutions-now that they are empowered by our next generation technology. These wins are also evidence of our leadership in delivering solutions that not only facilitate collaboration but also drive performance by integrating workflow and enabling action to be taken and monitored.
"We continue to make progress in line with our strategy, with infrastructure and research and development investments made in prior quarters paying off. Our cost structure is well supported by revenue growth, contributing to improved profit margins. In a quarter that is often challenging from a results perspective, everyone at Matrikon has demonstrated their commitment and focus to delivering on the strategy. The first half of this fiscal year has formed a solid foundation on which to grow in the remainder of this fiscal year and beyond."
Second quarter revenue was $22.76 million compared to $19.66 million in Q2-09 and $25.45 million in Q1-10. Net income in the second quarter was a record $2.85 million or $0.09 per share compared to $2.03 million or $0.07 per share in Q2-09 and $2.77 million or $0.09 per share in Q1-10.
Year-to-date (YTD) revenue grew 23% to $48.21 million compared to the first half of FY-09. YTD net income grew 17% to $5.61 million or $0.18 per share, compared to $4.78 million or $0.16 per share in the first half of FY-09.
Matrikon's board of directors declared a quarterly dividend of $0.03 per common share for the second quarter of fiscal year 2010. This dividend is payable on April 27, 2010 to all shareholders of record on April 16, 2010. The dividend is an eligible dividend for Canadian tax purposes.
Additional Highlights:
- We achieved record consulting revenue of $14.79 million in Q2-10.
This reflects a 50% increase compared to Q2-09 and 12% compared to
Q1-10, despite 10% fewer working days in our second quarter. With
this growth in consulting revenue, consulting headcount increased by
4% in Q2-10 compared to Q2-09.
- During the quarter, we won and announced a US$15.7 million contract
to build a remote oil field monitoring program for a Middle East oil
company based on Matrikon's Well Performance Monitor industry
application. Also during the quarter, we announced a (euro)4.2
million contract win with Statoil to deliver Well Performance Monitor
to 35 offshore assets on the Norwegian Continental Shelf. These
contract wins, along with ongoing work with other global clients, are
evidence of Matrikon's market presence in intelligent oil field
solutions.
- Products revenue (comprised of software license and support revenue)
declined by 19% compared to Q2-09 and by 10% compared to Q1-10.
Despite this decline, OPC sales experienced growth of 2% compared to
Q2-09 and increased by 30% compared to Q1-10.
- Gross margin in Q2-10 was 55%. Compared to Q2-09, gross margin
dropped 4 percentage points as a result of the reduced software
license contribution to the revenue mix. Compared to Q1-10, gross
margin increased by 1 percentage point as our revenue mix in Q2-10
included less equipment revenue, which generally carries a lower
margin. Combined overhead expenses in Q2-10 remained steady at $9.59
million compared to $9.69 million in Q2-09 and $9.58 million in Q1-
10. YTD sales and marketing expenses were up 18% compared to the
first half of FY-09, as we continued to invest in sales and marketing
to support larger project wins over the past 6 months.
MD&A and Financial Statements
The MD&A and Financial Statements for the current quarter can be found on Matrikon's website at http://www.matrikon.com/about/corporate/investors/financial/q-reports.aspx or by contacting Andrea Nwobosi at 1-877-628-7456 x4587.
Conference Call and Webcast
Matrikon President and CEO, Nizar J. Somji and CFO Jonathan Chia will hold a conference call to discuss second quarter results on Wednesday, April 7, 2010 at 5:00pm ET (3:00pm MT). To participate live, call 647-427-7450 in the Toronto area and 1-888-231-8191 in all other areas. The conference ID is 64821695.
A replay will be available until midnight ET, May 2, 2010. To access the playback service, please dial 416-849-0833 in the Toronto area or 1-800-642-1687 in all other areas. The passcode is 64821695.
The conference call will also be webcast and podcast (live and archived) at: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3004760
About Matrikon
Matrikon (www.matrikon.com) delivers industrial performance monitoring solutions that provide visibility into the global operations of oil and gas, energy, mining, power and refining companies. Matrikon products enable users to anticipate and correct problems, identify opportunities for improvement, share best practices and drive the action necessary to achieve and sustain their operational excellence objectives. Matrikon has been empowering excellence since 1988. With offices throughout North America, Australia, Europe and the Middle East and a client base that includes industry leaders in a wide range of process industries, Matrikon's reach is global. Matrikon trades on the Toronto Stock Exchange under the symbol MTK.
Matrikon is a registered trademark of Matrikon Inc.
Forward Looking Statements
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In order to provide our investors with an understanding of our current
results and future prospects, our communications often include written or
oral forward-looking statements. This new release, our MD&A, and other
materials filed with the Canadian securities regulators contain
statements that are forward-looking. These statements are made pursuant
to the "safe harbor" provisions of applicable Canadian securities
legislation. These statements represent Matrikon's intentions, plans,
expectations and beliefs and are based on our experience and our
assessment of historical and future trends and the application of key
assumptions relating to future events and circumstances. These statements
may include, but are not limited to, comments about: our objectives and
priorities for 2010 and beyond, our strategies, expectations for our
financial condition, the outlook for our operations, and external factors
that may impact results, including global economies and industry trends.
Forward-looking statements require assumptions and involve risks and
uncertainties related to our business and the general economic
environment, many beyond our control. There is significant risk that the
predictions, forecasts, conclusions or projections we make will not prove
to be accurate and that our actual results will be materially different
from the targets, expectations, estimates or intentions expressed in the
forward-looking statements. We caution readers of this news release and
our MD&A not to place undue reliance on our forward-looking statements.
The future outcomes that relate to forward-looking statements may be
influenced by many factors, including but not limited to: general
economic conditions in the countries in which we operate; currency
fluctuations; market demand for our products and services; our ability to
execute projects and deliver solutions; our ability to execute our
strategic plans and to complete and integrate acquisitions; the degree of
competition in the geographic and business areas in which we operate; our
ability to attract and retain qualified employees and contain payroll
costs; our ability to contain expenses; technological changes and
research and development; the length of the sales cycle required to close
larger solution contracts; availability of financial resources to carry
out our strategy; our ability to protect our intellectual and intangible
properties; legal claims; critical accounting estimates; the possible
effects on our business of war or terrorist activities; disease or
illness that affects local, national or international economies; and
disruptions to public infrastructure, such as transportation,
communications, power or water supply. We caution that this list is not
exhaustive of all possible factors.
Other factors could adversely affect our results. For more information,
please see the discussion on the principal risks that could affect our
results on pages 45 - 48 of Matrikon's 2009 Annual Report.
The assumptions in this news release and MD&A pertaining to: our positive
outlook for the remainder of 2010, our belief that business opportunities
remain strong, and our expected effective tax rate to be in the range of
27% to 32% include: global economic and political stability at current
levels, that certain opportunities in our pipeline will materialize as
contracts, that our clients will continue to invest in initiatives that
support efficiency and reduce costs, foreign exchange rates do not
fluctuate excessively, and that we will continue to be able to inspire,
motivate and maintain our employee base at a sufficient level to deliver
on our objectives.
When relying on forward-looking statements to make decisions with respect
to Matrikon, investors should carefully consider these factors, as well
as other uncertainties and potential events, and the inherent uncertainty
of forward-looking statements. Unless required by law, we do not
undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by the company or on its behalf.
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Management's Discussion and Analysis
April 7, 2010
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The following Management's Discussion & Analysis should be read in
conjunction with the financial statements and notes to the consolidated
financial statements for the quarter ended February 28, 2010 and the
Management's Discussion & Analysis and notes to the consolidated
financial statements appearing in the Annual Report for the fiscal year
ended August 31, 2009.
Matrikon's Board of Directors, on the recommendation of the Audit
Committee, approved the content of this MD&A on April 7, 2010.
All dollar amounts included in this MD&A are Canadian dollars unless
otherwise specified.
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Non-GAAP Measures
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We refer to terms that are not specifically defined in the CICA Handbook
and do not have any standardized meaning prescribed by GAAP. These non-
GAAP measures may not be comparable to similar measures presented by
other companies.
We believe that these non-GAAP measures are useful in assisting investors
in understanding components of our financial results. The non-GAAP terms
that we refer to in this analysis are defined below.
Gross margin is our total revenue minus the cost of sales, divided by the
total revenue, and is expressed as a percentage. This measure is used to
indicate the relative efficiency with which we earn revenue. Gross margin
is a percentage based on two GAAP measures and as such has no
quantitative reconciliation. Gross margin within our segmented reporting
includes intercompany revenue/expenses as part of total revenue.
Overhead expenses are the indirect costs of operating our business and
cannot be directly attributed to earning revenue. Overhead expenses are
divided into 6 major categories, which include consulting general and
administrative, sales and marketing, research and development, general
and administrative, amortization and stock-based compensation.
Operating income (loss) is our income or loss before foreign exchange,
other income, income taxes and non-controlling interest.
Net margin is our total net income (loss) divided by total revenue and is
expressed as a percentage. This measure is used to indicate the relative
efficiency with which we earn net income. Net margin is a percentage
based on two GAAP measures and as such has no quantitative
reconciliation.
Utilization or utilization rate measures the consulting time for each
employee against the total available time, based on a standard 260 work
days per year and is expressed as a percentage. Utilization is used to
demonstrate capacity to increase output rate in our Solutions business
without adding resources. Utilization is a measure of working capacity
and not a financial measure and therefore has no reconciliation to GAAP.
Average daily rate is consulting revenue divided by consulting people
multiplied by utilization rate divided by working days available in the
period described. This measure is used by management to monitor overall
project profitability and as an indication of progress in the transition
of our business to higher margin engagements based on Matrikon
technology. Average daily rate is based on non-financial measures and has
no reconciliation to GAAP.
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Other Information
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Additional information about Matrikon, including our annual information
form, information circular and quarterly reports, is available on SEDAR
at www.sedar.com and in the investor relations section of our website at
www.matrikon.com/investors.
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Comparative Figures
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We have reclassified certain figures for FY-09 and Q2-09 to reflect the
financial presentation adopted in the current quarter.
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Forward Looking Statements
-------------------------------------------------------------------------
In order to provide our investors with an understanding of our current
results and future prospects, our communications often include written or
oral forward-looking statements. This new release, our MD&A, and other
materials filed with the Canadian securities regulators contain
statements that are forward-looking. These statements are made pursuant
to the "safe harbor" provisions of applicable Canadian securities
legislation. These statements represent Matrikon's intentions, plans,
expectations and beliefs and are based on our experience and our
assessment of historical and future trends and the application of key
assumptions relating to future events and circumstances. These statements
may include, but are not limited to, comments about: our objectives and
priorities for 2010 and beyond, our strategies, expectations for our
financial condition, the outlook for our operations, and external factors
that may impact results, including global economies and industry trends.
Forward-looking statements require assumptions and involve risks and
uncertainties related to our business and the general economic
environment, many beyond our control. There is significant risk that the
predictions, forecasts, conclusions or projections we make will not prove
to be accurate and that our actual results will be materially different
from the targets, expectations, estimates or intentions expressed in the
forward-looking statements. We caution readers of this news release and
our MD&A not to place undue reliance on our forward-looking statements.
The future outcomes that relate to forward-looking statements may be
influenced by many factors, including but not limited to: general
economic conditions in the countries in which we operate; currency
fluctuations; market demand for our products and services; our ability to
execute projects and deliver solutions; our ability to execute our
strategic plans and to complete and integrate acquisitions; the degree of
competition in the geographic and business areas in which we operate; our
ability to attract and retain qualified employees and contain payroll
costs; our ability to contain expenses; technological changes and
research and development; the length of the sales cycle required to close
larger solution contracts; availability of financial resources to carry
out our strategy; our ability to protect our intellectual and intangible
properties; legal claims; critical accounting estimates; the possible
effects on our business of war or terrorist activities; disease or
illness that affects local, national or international economies; and
disruptions to public infrastructure, such as transportation,
communications, power or water supply. We caution that this list is not
exhaustive of all possible factors.
Other factors could adversely affect our results. For more information,
please see the discussion on the principal risks that could affect our
results on pages 45 - 48 of Matrikon's 2009 Annual Report.
The assumptions in this news release and MD&A pertaining to: our positive
outlook for the remainder of 2010, our belief that business opportunities
remain strong, and our expected effective tax rate to be in the range of
27% to 32% include: global economic and political stability at current
levels, that certain opportunities in our pipeline will materialize as
contracts, that our clients will continue to invest in initiatives that
support efficiency and reduce costs, foreign exchange rates do not
fluctuate excessively, and that we will continue to be able to inspire,
motivate and maintain our employee base at a sufficient level to deliver
on our objectives.
When relying on forward-looking statements to make decisions with respect
to Matrikon, investors should carefully consider these factors, as well
as other uncertainties and potential events, and the inherent uncertainty
of forward-looking statements. Unless required by law, we do not
undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by the company or on its behalf.
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Strategic Progress Update
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Note: This section is forward-looking by nature. It is qualified entirely
by the Forward Looking Statements disclaimer at the beginning of this
MD&A. It is also qualified by the principal risks that could affect our
business (see pages 45 - 48 of our 2009 Annual Report).
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Each year, we present a set of performance indicators to communicate our
priorities and serve as a benchmark to measure our progress against our
strategy. The following table shows our progress on the performance
indicators and objectives we set for 2010.
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2010 Objectives On Track? 6 Month Results
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Grow top line while Yes - Revenue increased by 23% to $48.21
maintaining million compared to Q2-09
profitability - Net income increased by 17% to
$5.61 million compared to Q2-09
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Continue building In Progress - We continue to build our Matrikon
Matrikon Suite Suite applications to be Empowered
applications on the by Intuition
Intuition platform
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Revenue from licenses In Progress - YTD software license and support
& support of 35-40% revenue represent 25% of total
of total revenue revenue
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Continue to sell and In Progress - Well Performance Monitor: one new
deploy industry corporate client
applications - Mobile Equipment Monitor: one new
pilot site
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Items of Note in Q2-10
- Record consulting revenue: In Q2-10, we achieved record consulting
revenue of $14.79 million compared to $9.85 million in Q2-09 and
$13.19 million in Q1-10. This reflects a 50% increase compared to Q2-
09 and an increase of 12% compared to Q1-10, despite 10% fewer
working days in our second quarter. With this growth in consulting
revenue, consulting headcount increased by 4% in Q2-10 compared to
Q2-09. We continue to build capacity, mainly in the EMEA region, to
execute the large projects won during the quarter.
- Significant contract wins: During the quarter, we won and announced a
US$15.7 million contract to build a remote oil field monitoring
program for a Middle East oil company based on Matrikon's Well
Performance Monitor industry application. Also during the quarter, we
announced a (euro)4.2 million contract win with Statoil to deliver
Well Performance Monitor to 35 offshore assets on the Norwegian
Continental Shelf. These contract wins, along with ongoing work with
other global clients, are evidence of Matrikon's market presence in
intelligent oil field solutions.
- Products revenue: Products revenue (comprised of software license and
support revenue) declined by 19% compared to Q2-09 and by 10%
compared to Q1-10. Despite this, OPC sales experienced marginal
growth of 2% compared to Q2-09 and increased by 30% compared to Q1-
10. As we continue to execute our strategy and win large industry
application contracts, consulting revenue tends to be realized sooner
than products revenue during initial project stages. We expect the
software component of the industry application contract wins
announced throughout the quarter to contribute to Products revenue
into FY-11.
- Tax rate: Our effective income tax rate has been reduced as a result
of tax recoveries realized from research and development credits in
Australia. Year-to-date, our effective tax rate is 19.7% compared to
18.4% in the first six months of FY-09.
Summary of Results
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3 Months 28-Feb-10 28-Feb-09 30-Nov-09 Q2-10 Q2-10
Ended % % % vs vs
(CAD $000s) (Q2-10) revenue (Q2-09) revenue (Q1-10) revenue Q2-09 Q1-10
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Total
Revenue $22,757 100% $19,661 100% $25,450 100% 16% (11%)
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Consulting
fees 14,791 65% 9,852 50% 13,190 52% 50% 12%
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Margin on
consulting
fees 44% 42% 44%
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Equipment
sales 2,095 9% 2,345 12% 5,632 22% (11%) (63%)
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Margin on
equipment
sales 28% 27% 31%
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Total
Solutions
revenue 16,886 74% 12,197 62% 18,822 74% 38% (10%)
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Software
license
fees 3,214 14% 4,695 24% 3,738 14% (32%) (14%)
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Margin on
software
license
fees 99% 99% 99%
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Support 2,597 11% 2,498 13% 2,729 11% 4% (5%)
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Margin on
support 86% 93% 89%
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Total
Products
revenue 5,811 25% 7,193 37% 6,467 25% (19%) (10%)
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Interest
income 60 1% 271 1% 161 1% (78%) (63%)
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Consulting
headcount 290 280 295 4% (2%)
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Gross
margin 55% 59% 54%
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Total
Expenses 9,585 42% 9,692 49% 9,579 38% (1%) 0%
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Consulting 1,032 5% 1,474 7% 1,299 5% (30%) (21%)
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Sales &
marketing 2,065 9% 1,902 10% 2,329 9% 9% (11%)
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Research &
develop-
ment 1,463 6% 1,754 9% 1,560 6% (17%) (6%)
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General &
adminis-
trative 4,393 19% 3,919 20% 3,822 15% 12% 15%
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Operations
headcount 298 262 275 14% 8%
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Stock-based
compensation 125 1% 352 2% 92 1% (64%) 36%
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Amortization 507 2% 291 1% 477 2% 74% 6%
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Foreign
exchange
translation
gain (loss) 3 0% 468 2% (208) -1% (99%) (101%)
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Net income 2,845 13% 2,027 10% 2,768 11% 40% 3%
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Earnings per
share -
basic 0.09 0.07 0.09 29% 0%
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Earnings per
share -
diluted 0.09 0.06 0.09 50% 0%
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Weighted
average
shares
outstanding
(000s) 31,311 30,968 31,298 1% 0%
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Total
assets 68,808 66,040 67,269 4% 2%
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Total long
term
liabilities 520 203 500 156% 4%
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Deferred
revenue 9,160 9,114 6,670 1% 37%
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Contracts
in
progress 6,214 8,375 7,049 (26%) (12%)
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6 Months Ended 28-Feb-10 28-Feb-09 2010 vs
(CAD $000s) (YTD) % revenue (YTD) % revenue 2009
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Total Revenue $48,207 100% $39,240 100% 23%
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Consulting fees 27,981 58% 22,004 56% 27%
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Margin on consulting fees 44% 43%
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Equipment sales 7,727 16% 3,361 9% 130%
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Margin on equipment sales 30% 27%
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Total Solutions revenue 35,708 74% 25,365 65% 41%
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Software license fees 6,952 14% 8,388 21% (17%)
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Margin on software
license fees 99% 97%
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Support 5,326 11% 5,019 13% 6%
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Margin on support 88% 93%
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Total Products revenue 12,278 25% 13,407 34% (8%)
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Interest income 221 1% 468 1% (53%)
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Consulting headcount (average) 285 274 4%
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Gross margin 55% 60%
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Total Expenses 19,164 40% 19,016 49% 1%
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Consulting 2,331 5% 3,142 8% (26%)
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Sales & marketing 4,394 9% 3,738 10% 18%
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Research & development 3,023 6% 3,164 8% (4%)
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General & administrative 8,215 17% 7,635 19% 8%
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Operations headcount
(average) 276 262 5%
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Stock-based compensation 217 1% 670 2% (68%)
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Amortization 984 2% 667 2% 48%
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Foreign exchange translation
gain (loss) (205) 0% 1,612 4% (113%)
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Net income (loss) 5,613 12% 4,784 12% 17%
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Earnings per share - basic 0.18 0.16 13%
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Earnings per share - diluted 0.18 0.15 20%
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Weighted average shares
outstanding (000s) 31,305 30,958 1%
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Total Assets 68,808 66,040 4%
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Total Long Term Liabilities 520 203 156%
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Deferred revenue 9,160 9,114 1%
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Contracts in progress 6,214 8,375 (26%)
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Note: This section is forward-looking by nature. It is qualified entirely
by the Forward Looking Statements disclaimer at the beginning of this
MD&A. It is also qualified by the principal risks that could affect our
business (see page 45 - 48 of our 2009 Annual Report).
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Revenue
We achieved record consulting revenue as we earned $14.79 million in Q2-10. This reflects a 50% increase compared to Q2-09 and an increase of 12% compared to Q1-10, despite 10% fewer working days in our second quarter. We continue to build capacity, mainly in the EMEA region, to execute the large projects won during the quarter as consulting headcount increased by 4% compared to Q2-09.
Our equipment revenues declined by 63% compared to Q1-10 as a result of the majority of third party hardware and software being delivered for our cyber security project during the first quarter. Equipment revenues are ancillary to our business and will continue to fluctuate period-by-period.
Year-to-date consulting and equipment revenues have increased by 41% as a result of higher utilization and average daily rates driven from executing the significant contracts we have won over the past 6 months.
Our total Products revenue (comprised of Software License and Support revenue) declined by 19% compared to Q2-09 and by 10% compared to Q1-10. Despite this, OPC sales experienced marginal growth of 2% compared to Q2-09 and increased by 30% compared to Q1-10. As we continue to execute our strategy and win enterprise-wide industry application contracts, consulting revenue tends to be realized sooner than products revenue during initial project stages. Software license revenues related to our industry applications continue to be lumpy. We expect the software component of the industry application contract wins announced throughout the quarter to contribute to Products revenue into FY-11.
Year-to-date Products revenue declined by 8% compared to FY-09. The economic slowdown caused our sales cycle to lengthen as many of our clients required additional time and due diligence to obtain approval for contracts. With the gradual return to spending in some of our core industries, we expect to see a recovery in Products revenue.
Gross Margin
Gross margin in Q2-10 was 55%. Compared to Q2-09, gross margin dropped 4 percentage points as a result of the reduced software license contribution to the revenue mix. Compared to Q1-10, gross margin increased by 1 percentage point as our revenue mix in Q2-10 included less equipment revenue, which generally carries a lower margin.
Year-to-date gross margin was 55% compared to 60% in the first six months of FY-09. The decrease in gross margin is due to significantly higher consulting and equipment revenue contributions to the revenue mix, which represented 74% of overall revenue, compared to 65% in Q2-09.
Overhead Expenses
The returns on our infrastructure investments are beginning to materialize as combined overhead expenses have remained steady in Q2-10, despite the significant increase in revenue compared to Q2-09. Expenses in Q2-10 were $9.59 million (42% of revenue), compared to $9.69 million (49% of revenue) in Q2-09 and $9.58 million (38% of revenue) in Q1-10.
Consulting G&A expenses have declined by 30% compared to Q2-09 and 21% compared to Q1-10. The decline is primarily attributed to decreased third-party consulting costs and employee expenses.
We continue to invest in sales and marketing functions to drive top-line growth and to support the large project wins over the past 6 months. Sales and marketing expenses have increased by 9% compared to Q2-09, and by 18% year-to-date, primarily due to increased headcount of 9% and 12%, respectively.
Research and development (R&D) costs decreased by 17% compared to Q2-09 and by 6% compared to Q1-10. Excluding the Canadian Scientific Research and Experimental Development (SR&ED) tax credits, R&D costs in Q2-10 are $1.95 million, which is a decrease of 7% compared to Q2-09 and an increase of 4% compared to Q1-10. The reduction in expenses compared to Q2-09 is a result of buying out the Indian joint venture company and leveraging our talent pool in India. Headcount in the R&D function increased compared to Q2-09 and Q1-10 as we continue the development of our next generation technology.
General and administrative expenses have increased by 12% compared to Q2-09 and by 15% compared to Q1-10, primarily due to incentive payments accrued for performance in Q2-10.
Net Income
We achieved record net income of $2.85 million and a corresponding net margin of 13% in Q2-10. Compared to Q2-09, this is an increase of 40%, and 3% compared to Q1-10 when we achieved net income of $2.77 million. Year-to-date net income increased by 17% to $5.61 million with a net margin of 12%, compared to $4.78 million and net margin of 12% in the first six months of FY-09.
The following factors positively impacted our net margins in both the quarter and year-to-date periods:
- The makeup of our consulting revenue is shifting as a result of our
focus on high value consulting engagements, resulting in improvements
to average daily rate and improved gross margins, with a strong
consulting gross margin of 44% in Q2-10.
- Our overhead expenses are in line with expectations and we are
beginning to realize efficiencies following infrastructure and R&D
investments made in prior quarters.
- We experienced a recovery of AUD$0.68 million in income tax
associated with research and development incentive tax programs in
Australia.
- There was a decrease in stock-based compensation expenses compared to
Q2-09 as the majority of outstanding Restricted Share Units (RSUs)
have vested.
These positive influences to net margin were offset by the strengthening of the Canadian dollar compared to the US dollar. In addition, other income including interest income relating to cash and cash equivalents and gains relating to the sale of assets decreased by $0.08 million compared to Q2-09 and by $0.23 million compared to FY-09. We earned less interest on cash and cash equivalents than in prior quarters due to lower cash balances throughout the period.
The following tables show the percentage of revenue by the various currencies in which we do business, and the period-end exchange rates.
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Period End
% Billings by Currency Exchange Rate
(3 Months Ended) for $1.00 CAN
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Q2-10 Q2-09 Q1-10 Q2-10 Q2-09 Q1-10
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Australian Dollar 28% 15% 31% 0.9428 0.8104 0.9638
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British Pound 8% 12% 10% 1.6038 1.7969 1.7538
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Canadian Dollar 12% 12% 7% 1.0000 1.0000 1.0000
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Euro 13% 10% 5% 1.4346 1.5997 1.5926
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United States Dollar 36% 50% 46% 1.0523 1.2600 1.0620
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Other Currencies 3% 1% 1% - - -
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Comprehensive Income
In FY-08, we began to report other comprehensive income. Other comprehensive income accounts for currency translation related to our self-sustaining foreign operations and resulted in a foreign currency translation loss of $0.77 million in the quarter and a loss of $0.52 million year-to-date as the Canadian dollar gained strength against the Australian dollar, British pound and Euro.
Segment Results
We report four strategic business segments based on how we monitor and assess performance internally: North America; Asia-Pacific; Europe, Middle East & Africa (EMEA); and Products. A fifth segment, Corporate, captures corporate expenses. External revenue represents sales derived from arms-length customers. Intercompany revenues and expenses represent the product commissions that are payable to the region that owns the intellectual property and fees for borrowed consulting labor.
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3 Months Ended
28-Feb-10 North Asia- Corp-
CAN$ (000s) America Pacific EMEA Products orate Total
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External revenue 10,378 5,303 5,337 1,739 - 22,757
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Intercompany revenue
(cost of sales) (810) (155) (682) 1,647 - -
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% of external revenue 46% 23% 23% 8% - 100%
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Gross profit 4,749 2,314 2,746 2,753 - 12,562
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Gross margin 50% 45% 59% 81% - 55%
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Expenses (1,957) (1,692) (1,371) (2,247) (2,318) (9,585)
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Other income (loss) &
foreign exchange
gain (loss) (9) 28 20 - (13) 26
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Income (loss) before
taxes 2,783 650 1,395 506 (2,331) 3,003
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External revenue change %
(Q2-10 vs Q2-09) 62% 26% 17% (61%) - 16%
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Employees at 28-Feb-10 141 121 86 165 75 588
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3 Months Ended
28-Feb-09 North Asia- Corp-
CAN$ (000s) America Pacific EMEA Products orate Total
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External revenue 6,417 4,196 4,580 4,468 - 19,661
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Intercompany revenue
(cost of sales) 129 (287) (874) 1,032 - -
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% of external revenue 33% 21% 23% 23% - 100%
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Gross profit 3,038 1,495 2,235 5,142 (275) 11,635
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Gross margin 46% 38% 60% 93% - 59%
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Expenses (1,040) (1,510) (1,379) (2,691) (3,072) (9,692)
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Other income (loss) &
foreign exchange
gain (loss) 162 (59) (41) - 509 571
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Income (loss)
before taxes 2,160 (74) 815 2,451 (2,838) 2,514
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Employees at 28-Feb-09 133 133 83 132 61 542
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6 Months Ended
28-Feb-10 North Asia- Corp-
CAN$ (000s) America Pacific EMEA Products orate Total
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External revenue 22,998 10,680 10,737 3,792 - 48,207
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Intercompany revenue
(cost of sales) (1,283) (332) (1,814) 3,429 - -
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% of external revenue 48% 22% 22% 8% - 100%
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Gross profit 10,431 4,502 5,445 5,977 - 26,355
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Gross margin 48% 44% 61% 83% - 55%
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Expenses (3,707) (3,525) (2,823) (4,392) (4,717)(19,164)
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Other income (loss) &
foreign exchange
gain (loss) (11) 16 34 - (232) (193)
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Income (loss)
before taxes 6,713 993 2,656 1,585 (4,949) 6,998
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External revenue change %
(YTD-10 vs YTD-09) 58% 17% 18% (41%) - 23%
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Average employees at
28-Feb-10 142 123 84 143 69 561
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6 Months Ended
28-Feb-09 North Asia- Corp-
CAN$ (000s) America Pacific EMEA Products orate Total
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External revenue 14,520 9,114 9,132 6,474 - 39,240
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Intercompany revenue
(cost of sales) (748) (481) (1,370) 2,599 - -
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% of external revenue 37% 23% 23% 16% - 100%
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Gross profit 6,998 3,692 4,878 8,209 (275) 23,502
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Gross margin 51% 43% 63% 90% - 60%
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Expenses (2,810) (3,143) (2,994) (4,613) (5,456)(19,016)
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Other income (loss) &
foreign exchange
gain (loss) - 66 120 - 1,664 1,850
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Income (loss)
before taxes 4,188 615 2,004 3,596 (4,067) 6,336
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Average employees at
28-Feb-09 139 133 80 119 65 536
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North America: External revenues in North America made up 46% of the global revenue mix, compared to 33% in Q2-09. This increase is a result of a 146% increase in consulting revenue as we continue to execute and complete the large cyber security project won in Q4-09. This strong consulting revenue is offset by lower software license revenue, which decreased by 34% compared to Q2-09.
Compared to Q1-10, external revenue declined by 17%, a direct result of the record equipment revenue earned in the first quarter. Excluding equipment revenue, external revenue increased by 23% despite 10% fewer working days in the second quarter. This decrease was offset with higher software license revenue recognized in the quarter.
Overhead costs increased by $0.92 million compared to Q2-09 and by $0.30 million compared to Q1-10. The increase compared to Q2-09 is a result of a 6% increase in headcount as we decentralized certain corporate functions by allocating resources directly into this region. Compared to Q1-10, expenses increased due to an increase in office expenses, travel and marketing costs.
Asia-Pacific: Asia-Pacific results were positively impacted by foreign exchange rates as the Canadian dollar weakened relative to the Australian dollar, the primary currency in which we transact business in Asia-Pacific (0.9428 at February 28, 2010 compared to 0.8104 at February 28, 2009). External revenue increased by 26% compared to Q2-09 and decreased slightly by 2% compared to Q1-10, despite the company-wide holiday closure that spans the summer months in the Asia-Pacific region. In natural currency, revenue increased by 14% compared to Q2-09 and decreased by 1% compared to Q1-10.
The increase in external revenue compared to Q2-09 is attributed to higher consulting revenue, which increased by 14%. The acquisition of Integration Automation and Control Pty Ltd. (IAC) in Q1-10 increased consulting headcount by 8%. We start to observe a slow recovery in the mining industry - the primary market we serve in the region - with an improvement of 24% in utilization. Equipment revenue also positively impacted the Asia-Pacific revenue, increasing by 21% compared to Q2-09 and by 24% compared to Q1-10.
Gross margin increased by 7 percentage points compared to Q2-09 and 2 percentage points compared to Q1-10. The increase in gross margin compared to Q2-09 is a result of equipment revenue being a smaller component of the revenue mix (15% in Q2-10 compared to 17% in Q2-09).
As a result of the acquisition of IAC, year-to-date overhead expenses increased in line with our expectations compared to FY-09.
EMEA: External revenue in the EMEA region increased by 17% compared to Q2-09 and decreased by 2% compared to Q1-10. EMEA revenue was significantly impacted by the strengthening of the Canadian dollar relative to the British pound, Euro and US dollar. In natural currency, external revenue increased by 32% compared to Q2-09 and by 6% compared to Q1-10.
During Q2-10, we began execution of the project won with the Middle East oil company that was announced earlier in the quarter. In natural currencies, consulting revenue for the Middle East region increased by 53% compared to Q2-09 and by 45% compared to Q1-10. Offsetting this increase is a decrease in software license revenue of 26% compared to Q2-09 and 50% compared to Q1-10.
Expenses have remained consistent in natural currency, and any fluctuations are primarily due to fluctuations in foreign exchange rates.
Year-to-date, external revenue increased by 18% due to increased consulting revenue. The overall number of consulting employees in the region has increased by 40% primarily in the Middle East, as we continue to build our resource base in this region.
Products: External revenue in the Products segment represents software license and support sales and implementation services executed by our direct product sales group. Intercompany revenue represents the software license and support fees paid by the other segments.
While we saw growth in off-the-shelf software license sales over the past year, total Products revenue in Q2-10 has decreased by 38% compared to Q2-09 and by 15% compared to Q1-10. OPC license sales continue to make positive contributions, growing by 2% compared to Q2-09 and by 30% compared to Q1-10.
Overhead expenses have decreased compared to Q2-09 as a result of lower costs associated with acquiring operations in India.
Corporate: The Corporate segment includes all shared corporate services (including executive management, finance, information technology and human resources) that are not allocated to other segments. In addition, the Corporate segment includes stock-based compensation, other income or expenses, foreign exchange translation gains and losses, and amortization. Expenses in this segment fluctuate period-by-period based on corporate activity and foreign exchange rate fluctuations.
Corporate expenses decreased by 25% compared to Q2-09 as employee expenses, administration costs and expenses associated with the start-up of the joint entity operation in India were included in the prior period. We also incurred contractor costs of $0.35 million to support the transition to a new enterprise resource planning (ERP) system that was introduced in Q2-09.
Compared to Q1-10, Corporate expenses declined by 7% as a result of lower consulting costs for marketing and information technology services. Year-to-date, Corporate expenses decreased by 14% as a result of lower employee expenses and third party consultancy fees.
Quarterly Results
The following table presents a summary of our unaudited consolidated operating results for the past eight quarters. This information should be read in conjunction with the applicable interim financial statements, notes to the financial statements and management's discussion and analysis.
Management has not noted any change to the seasonality of our business as reported in the 2009 annual MD&A.
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CAN $000s
except per
share FY 08 FY 09 FY 10
amounts Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
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Revenue 20,536 20,162 19,579 19,661 16,376 17,622 25,450 22,757
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Gross
profit 11,533 11,903 11,867 11,635 8,107 9,446 13,793 12,562
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Gross
margin 56% 59% 61% 59% 50% 54% 54% 55%
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Operating
income
(loss) 3,103 2,842 2,543 1,943 (1,770) 528 4,214 2,977
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Net income
(loss) 2,467 2,583 2,757 2,027 (2,959) 489 2,768 2,845
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Net margin 12% 13% 14% 10% -18% 3% 11% 13%
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Shares
outstanding
(000s) 30,548 30,636 30,949 30,968 30,932 30,936 31,298 31,311
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Diluted
shares
outstanding
(000s) 31,467 31,494 31,649 31,622 30,932 31,302 31,524 31,478
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EPS (loss)
- basic 0.08 0.09 0.09 0.07 (0.10) 0.02 0.09 0.09
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EPS (loss)
- diluted 0.08 0.08 0.09 0.06 (0.10) 0.02 0.09 0.09
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Headcount 506 521 545 542 559 523 570 588
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Liquidity & Capital Resources
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At Q2-10 Q2-10
(CAN $000s except vs Q1-10 vs Q2-09
ratios) 28-Feb-10 29-Feb-09 30-Nov-09 % Change % Change
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Cash & equivalents 9,378 8,793 5,165 82% 7%
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Accounts receivable 28,955 25,848 29,287 (1%) 12%
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Trade receivables 21,609 19,326 22,133 (2%) 12%
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Average collection
period
(trade receivables) 87 days 82 days 88 days -1 day 5 days
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Contracts in progress 6,214 8,375 7,049 (12%) (26%)
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Deferred revenue 9,160 9,114 6,670 37% 1%
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Current liabilities 21,622 20,056 21,417 1% 8%
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Cash flow from
operations (YTD) 5,882 (1,792) (932) 731% 428%
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Note: This section is forward-looking by nature. It is qualified entirely
by the Forward Looking Statements disclaimer at the beginning of this
MD&A. It is also qualified by the principal risks that could affect our
business (see pages 45 - 48 of our 2009 Annual Report).
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The rolling 12-month average collection period (on trade receivables) was 87 days at the end of Q2-10, an increase of 5 days compared to the end of Q2-09 and a decrease of 1 day compared to Q1-10. This is a result of increased revenues in the first six months of FY-10 and the timing of invoicing milestones on our large projects. Our aged receivables over 90 days, as a percentage of our overall aged receivables, remains consistent with Q1-10.
Current liabilities increased to $21.62 million at the end of Q2-10, compared to $21.42 million at the end of Q1-10 and $20.06 million at the end of Q2-09. Compared to Q2-09, this increase is a result of higher deferred revenue balances. Deferred revenue at the end of the Q2-10 includes $5.69 million in deferred support revenue and $3.47 million in unearned software license, services and equipment revenue, compared to $5.32 million in deferred support revenue and $1.21 million in unearned software license, services and equipment revenue in Q1-10.
Cash provided by operating activities was $6.81 million in Q2-10, compared to cash used by operations of $0.93 million in Q1-10 and cash used by operations of $1.24 million in Q2-09. The increase over Q1-10 is a result of an increase in accounts payable, accrued liabilities, deferred revenue and an increase in net income.
Our overall cash position increased by $4.21 million compared to Q1-10. Two business acquisitions reduced our cash balance by $2.28 million.
In Q2-10, we paid two quarterly dividends each in the amount of $0.03 per common share, respectively related to Q4-09 and Q1-10.
Our effective income tax rate was 5.2% for Q2-10. Our effective income tax rate during Q2-10 has been reduced as a result of tax recoveries realized of AUD$0.68 million realized from research and development tax credits in Australia. Excluding the research and development credits from Australia, our effective income tax rate is 22.5% for Q2-10. Year-to-date, our effective tax rate is 19.7% (and 26.79%, excluding tax credits from Australia) compared to 18.4% in the first six months of FY-09. Our expected range for FY-10 of 27% to 32%, excluding tax credits, remains unchanged.
We believe that we have the capital resources and liquidity necessary to meet our commitments, support our operations and finance our current growth strategies. Please refer to pages 45 - 48 of Matrikon's 2009 Annual Report covering Risks Related to our Business, which address the risks associated with our company's capital resources and liquidity.
Acquisitions
Acquisitions completed subsequent to August 31, 2009 are accounted for under the acquisition method of accounting, unless otherwise stated, and the results of earnings since the respective dates of acquisition are included in the consolidated statements of income.
On September 1, 2009, we acquired all of the issued and outstanding shares of Integration Automation and Control Pty Ltd. (IAC), an automation and information systems service company located in Newcastle, Australia, for consideration of $1.81 million in cash. The acquisition of IAC further establishes Matrikon's automation and information systems expertise within Hunter Valley's coal industry.
On November 11, 2009, we acquired the remaining 51% of the issued and outstanding shares of Matrikon-SoftDEL India Pvt Ltd. (MSPL), a joint entity based in Pune, India, for consideration of $0.58 million in cash.
Off Balance Sheet Arrangements
Matrikon is a lessee under several operating type leases for office space, office equipment and motor vehicles and is also a party to research funding arrangements with educational institutions in Canada and Australia. The future cash flow impacts of these arrangements are summarized in the table below. Matrikon is not party to any undisclosed off balance sheet arrangements.
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Payment Due
Less than After
At February 28, 2010 Total 1 year 2-3 years 4-5 years 5 years
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Operating lease
obligations
(CAN $000s) 5,635 1,871 3,330 415 19
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Other long term
obligations
(CAN $000s) 100 100 - - -
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Total contractual
obligations 5,735 1,971 3,330 415 19
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Normal Course Issuer Bid
Matrikon announced a normal course issuer bid on January 14, 2009. Under the bid, Matrikon may acquire up to 1,547,595 common shares, representing 5% of current issued and outstanding shares as at January 14, 2009. The bid commenced January 16, 2009 and ended January 15, 2010. No shares were purchased for the first half of FY-10.
Share Data
Matrikon is listed on the Toronto Stock Exchange under the trading symbol "MTK." As at April 1, 2010 there were 31,328,736 common shares of the corporation issued and outstanding and 166,550 options and 491,425 restricted share units outstanding, each convertible into one common share upon exercise or exchange.
Critical Accounting Estimates
These interim financial statements were prepared with the same critical accounting estimates and methods as fiscal year 2009 (please see pages 42 - 44 of Matrikon's annual MD&A for the fiscal year ended August 31, 2009 dated November 6, 2009 for a discussion of these estimates), along with the adoption of the CICA Handbook sections:
- 1582 - Business Combinations
- 1601 - Consolidated Financial Statements
- 1602 - Non-Controlling Interests
- 3251 - Equity
- 1506 - Accounting Changes
- 3855 - Financial Instruments - Recognition and Measurement
Basis of Presentation
During the quarter we commenced operations with Matrikon Kuwait (MKU) in which we own a 49% equity interest. As a result of our equity interest and operational agreements, we have determined that we are the primary beneficiary as defined by the Canadian Institute of Chartered Accountants (CICA) Handbook's Accounting Guideline 15 (AcG-15), "Consolidation of Variable Interest Entities." Pursuant to AcG-15, we have consolidated the results of MKU.
Recent Accounting Pronouncements Issued and Not Applied
Comprehensive Revaluation of Assets and Liabilities
In August 2009, the CICA amended Handbook Section 1625, "Comprehensive Revaluation of Assets and Liabilities" as a result of issuing Section 1582, "Business Combinations," Section 1601, "Consolidated Financial Statements," and Section 1602, "Non-Controlling Interests" in January 2009. The amendments apply prospectively to comprehensive revaluations of assets and liabilities occurring in fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted provided that section 1582 is also adopted. We are currently evaluating the impact of the amendments to the standard.
Financial Instruments - Disclosure
In June 2009, the CICA amended Handbook Section 3862, "Financial Instruments - Disclosures," to include additional disclosure requirements about fair value measurements of financial instruments and to enhance liquidity risk disclosure requirements. The amendments apply to annual financial statements relating to the fiscal years ending after September 30, 2009. We are currently evaluating the impact of the amendments to the standard.
Convergence with International Financial Reporting Standards
In February 2008, CICA's Accounting Standards Board ("AcSB") confirmed that Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") as promulgated by the International Accounting Standards Board ("IASB"), replacing Canadian GAAP effective January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable for our Company for the first quarter of fiscal 2012, that being November 30, 2011, when our Company will prepare both the current and comparative financial information using IFRS.
In addressing the impact and implementation of IFRS, we have completed preliminary planning and scoping and are currently working with external consultants to establish a detailed assessment of the conversion process. As at February 28, 2010, we have performed a preliminary assessment of the accounting and reporting differences under IFRS compared to Canadian GAAP, and have established various alternatives relating to our Enterprise Resource Planning (ERP) system on which we will commence testing.
We expect the implementation process and solutions development to be finalized before the end of fiscal 2010. At this time, we are not able to quantify the full financial reporting impact of the differences between Canadian GAAP and IFRS on our operations, except for the adoption of CICA Handbook section 1582, which is disclosed in Note 2(a(ii)). We will continue to assess the impact of the proposed standards on the consolidated financial statements and disclosure as additional information becomes available.
Risks Related to Our Business
There has been no significant change to our risk factors from those described in our 2009 Annual Report. Please see pages 45 - 48 of Matrikon's 2009 Annual Report.
Internal Control over Financial Reporting and Disclosure Controls
Management has evaluated whether there were changes in our Internal Controls over Financial Reporting (ICFR) during the three month period ended November 30, 2009 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
At August 31, 2009, we reported that we did not sufficiently design and maintain effective controls over the identification of projects that should be accounted for using Contract Accounting as defined by FASB 605-35 (formerly SOP 81-1).
During Q1-10, we began to implement procedures that require certain contracts to be reviewed, prior to commencement, to identify projects that require contract accounting treatment. In Q2-10, we have taken steps to remediate this process by having the appropriate processes and checklists in place to review significant contracts and assess the terms as defined by FASB 605-35 (formerly SOP 81-1).
Please see page 49 of Matrikon's 2009 Annual Report for a discussion of internal controls over financial reporting and disclosure controls.
Subsequent Event
Subsequent to the quarter, our Board of Directors declared a quarterly dividend of $0.03 per common share for the second quarter of fiscal year 2010. This dividend is payable on April 27, 2010 to all shareholders of record on April 16, 2010. The dividend is an eligible dividend for Canadian tax purposes.
About Matrikon
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Matrikon delivers industrial performance monitoring solutions that
provide visibility into the global operations of oil and gas, energy,
mining, power and refining companies. Matrikon products enable users to
anticipate and correct problems, identify opportunities for improvement,
share best practices and drive the action necessary to achieve and
sustain their operational excellence objectives. Matrikon has been
empowering excellence since 1988. With offices throughout North America,
Australia, Europe and the Middle East and a client base that includes
industry leaders in a wide range of process industries, Matrikon's reach
is global.
At February 28, 2010, Matrikon had 588 employees, including 104 in
corporate and administrative services, 73 in sales and marketing, 116 in
product development and support and 295 in professional services
(Solutions).
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For further information: Nicole Sayler, Corporate Communications Director, (780) 945-4010, 1-877-628-7456 x4010, [email protected]
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