Ken Dedeluk, President and CEO of Computer Modelling GroupIt\u2019s been a rough year in the market for Computer Modelling Group (Computer Modelling Group Stock Quote, Chart, News TSX:CMG) but Industrial Alliance Securities analyst Elias Foscolos thinks there\u2019s upside from here. Foscolos reviewed CMG\u2019s latest quarterly results in an update to clients on Monday, saying that the company\u2019s fiscal Q2 earnings were a beat of his estimates. Calgary-headquartered CMG is a software and consulting company with dynamic reservoir modelling and simulation software for customers in the oil and gas industry, with the majority of its clients outside of Canada. The company reported fiscal second quarter 2021 (ended September 30) results on November 13, coming in with revenue of $17.9 million, made up of $15.9 million in software licenses and $1.9 million in professional services. The topline compared to $16.7 million last quarter and $19.9 million for the year ago quarter. Net income was $6.8 million compared to $6.9 million a year earlier. CMG reported total software license revenue down across all geographic areas except for South America, with annuity\/maintenance license revenue dropping by 14 per cent year-over-year. The Canadian region (representing 21 per cent of the total) saw a 20-per-cent decrease and the US region (representing 26 per cent of the total) saw a 28 per cent drop. The company said that COVID-19, consolidation in the oil and gas industry and reduced activity in unconventional shale plays were contributing factors. As a result of the downturn, CMG said it has taken a number of steps including reducing executive salaries and directors\u2019 compensation and graduated salary reductions to staff, with these steps to continue throughout the current fiscal year. As well, CMG\u2019s board approved last week a reduced dividend of $0.05 per quarter, down from $0.10 per quarter. At the same time, CMG management said it would continue to invest in R&D, sales and marketing at historically similar levels. The company ended the quarter with $44.0 million in cash and no debt, with a free cash flow per share of $0.09 compared to the same a year earlier. \u201cThe COVID-19 pandemic and the related economic uncertainty negatively impacted our financial results for the three and six months ended September 30, 2020, as some of our customers, faced with the economic uncertainly and decreasing commodity prices, curtailed spending and chose not to renew their licensing agreements or to renew them at reduced levels. These factors continue to contribute to a decrease in software license revenue during the three and six months ended September 30, 2020,\u201d read the company\u2019s press release. CMG\u2019s share price started the calendar 2020 in the low-$8.00 range but after the market drop in February and March the stock has lingered in and around the $5.00 mark. CMG is down 45 per cent year-to-date. On the fiscal Q2, Foscolos had estimated total revenue of $16.2 million compared to CMG\u2019s $17.9 million, with the main difference coming from Perpetual sales where the analyst had called for $0.5 million compared to the realized $1.8 million. The company\u2019s Operating Income Before Interest, Depreciation and Amortization (a replacement for EBITDA for CMG, according to Foscolos) was $10.9 million compared to the analyst\u2019s $7.5-million estimate, with the difference in large part coming from a $2.5-million CEWS benefit, better-than-expected software sales and lower costs. \u201cWhen we adjust for one-time items, at their core, CMG\u2019s Q2\/F21 financial results constitute a beat,\u201d Foscolos said. \u201cWhile the results were skewed because of one-time CEWS costs and Perpetual sales, we see a beat in Maintenance and Annuity sales, and it appears that the revenue decline in those categories is behind us. We believe CMG\u2019s dividend is sustainable. Our upwardly revised forecasts are tempered by lower valuation metrics. Therefore, we are reducing our target price to $6.00 (previously $6.25) while retaining our Speculative Buy rating.\u201d Foscolos said deferred revenue fell by 18 per cent year-over-year but cautioned that the litmus test for CMG will come with deferred revenue on March 31, saying, \u201cAs many of CMG\u2019s customers will renew licences by January 1, 2021, investors need to focus on deferred revenue at March 31, 2021, as the best gauge of CMG\u2019s health and future revenue outlook.\u201d By the numbers, Foscolos is projecting fiscal 2021 revenue and OIBDA of $68 million and $34 million, respectively, and fiscal 2022 revenue and OIBDA of $71 million and $35 million, respectively. The analyst\u2019s new $6.00 target represented at press time a projected 12-month return of 35 per cent. Foscolos called the outlook for CMG a tale of many markets. \u201cWhile it is true that there is negativity surrounding the future of the oil and gas industry in North America, we believe it is important to highlight that CMG\u2019s software sales (US$) year-over-year in the Eastern Hemisphere remained flat despite the pandemic,\u201d Foscolos wrote.