Coda Octopus Group, Inc. (NASDAQ:CODA) Q2 2024 Earnings Call Transcript June 12, 2024

Coda Octopus Group, Inc. beats earnings expectations. Reported EPS is $0.13, expectations were $0.05.

Operator: Good morning. Welcome to Coda Octopus' Group Second Quarter 2024 Earnings Call. My name is Sheri and I will be your operator today. Before this call, Coda Octopus issued its financial results for the second quarter 2024, ended April 30, 2024, including a press release, a copy of which will be furnished in a report filed with the SEC. It will be available in the investor relations section of the company's website. Joining us on today's call from Coda Octopus are its Chair -- its CEO, Annmarie Gayle; its Interim CFO, Gayle Jardine. Following their remarks, we will open up the call for questions. Before we begin, Geoff Turner will make a brief introductory statement. Mr. Turner, please proceed.

Geoff Turner: Thank you, operator. Good morning, everyone. Welcome to Coda Octopus second quarter of fiscal 2024 earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we're making today may be considered forward-looking statements under Securities Law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statement. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filing made with the Securities and Exchange Commission.

We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as may be required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified in our Form 10-K for the year ended October 31, 2023 and Form 10-Q for the first and second quarter of this fiscal year. You may get Coda Octopus' Securities and Exchange Commission filings free by visiting the SEC website at www.sec.gov. I would also like to remind everyone that this call is being recorded, and will be made available for replay via a link in the Investor Relations section of Coda Octopus' website.

Now, I will turn the call over to the company's Chair and CEO, Annmarie Gayle. Annmarie?

A crowded Wall Street plaza, bustling with people carrying briefcases.

Annmarie Gayle : Thanks, Geoff, and good morning, everyone. Thank you for joining us for our second quarter 2024 earnings call. Our revenue in the second quarter 2024 was in line with our second quarter 2023 revenue. Despite various challenges in the second quarter, we delivered a solid set of results, including increasing our operating income, net income, and earnings per share. During the second quarter, we observed a slowdown in the pace of placing orders relating to U.S. defense sectors programs caused by the funding gaps created by the use of continuing resolutions to fund defense programs instead of a fully funded federal budget. This is not unusual where there is an upcoming presidential election. Notwithstanding these temporary constraints, I am very pleased that we were able to increase our revenue generation outside of the USA, which shows the diversity and resilience in our revenue stream.

The marine technology business revenue in the second quarter 2024 was broadly in alignment with the second quarter 2023 revenue. I am particularly pleased with the increased utilization of our rental assets during the second quarter and therefore the improved gross profit margins of 80.2% in the second quarter 2024 compared to 75.3% in the second quarter 2023. We are also very pleased to see better traction in sales emanating from Asia, which was 15.9% higher in the quarter. Sales for this segment from the USA fell from $1.8 million to $0.6 million as a result of funding gaps created by the use of continuing resolutions to fund defense programs. This means that without a federal budget, there is limited funding for these programs and many of these are currently only partially funded.

Our engineering business saw an increase in revenue and is making good progress in key areas. This business was also impacted by a reduction in order intake relating to their ongoing defense programs and sales from USA defense programs for this segment fell from $1.1 million to $0.8 million. This is due to the funding gaps I touched on earlier. Moving to our second quarter 2024 overview. During the second quarter of 2024, we continued to make progress against our key growth drivers. As I mentioned, we saw increased traction for our Echoscope rental services. This resulted in an increase in gross profit margins. Although sales in the USA were significantly down due to the funding gaps relating to defense programs, our team was able to recover some sales in other geographies.

I'm particularly pleased with this as it shows the diversification and resilience within our revenue streams. Of great importance, we also provided extensive support to the ongoing operations relating to the Francis Scott Key Bridge collapse. The circumstances surrounding the collapse were tragic and we are pleased that we could have assisted in some small way. This high-profile engagement has reinforced the importance of our technology for these sorts of applications and has marketed the Echoscope to other customers around the world, including in North America. The Echoscope technology has been the primary sensor used for a broad scope of activities relating to recovery, salvage, and real-time inspection. This high-profile project again highlighted the importance of the capability of the Echoscope technology, a single sensor for multiple real-time 3D imaging applications, including in disaster recovery programs.

Over the years, the Echoscope has been used globally in many disaster recovery programs, including in South Korea, Japan, and Europe. We made further progress with Naval Information Warfare Center, NIWC, and supplied under a lease agreement two of our compact Echoscope sonars for their ongoing evaluation of our technology for the VideoRay Defender platform. We also continue to work with an allied foreign Navy which has selected the VideoRay platform on integrating our Echoscope on their vehicles and we have begun to provide training on the Echoscope to their personnel. This is a good indication that the Echoscope technology is included in their sensor selection program. We also made progress on the ship hull's scanning program, which we have been pursuing with our Navy customers and in the second quarter we completed successful trials.

This ship hull scanning platform which we delivered to the Navy in our third quarter of 2023 includes both the Echoscope and DAVD capabilities. This is an important step forward under this program, which has been executed over a three-year period and for which we received $1 million in funding over this period. We're not aware of any effective solutions in the market for ship hull scanning, and if the company's developed solution is accepted by the Navy as meeting the requirements of this program, this could be significant for our business. Furthermore, there are many different Navy commands that are interested in the solution we have put forward. We also continue to make progress in the adoption of the DAVD tethered system and in the second quarter we partnered with a US service provider to complete a tunnel inspection project using the DAVD system and our Echoscope.

We believe this was a resounding success as we were able to show the effectiveness of the DAVD and Echoscope solution to these applications, particularly the return on investment for customers and the superior deliverables achievable with this solution. We're discussing adoption of the technology with this US commercial service provider. We also made good progress in advancing the DAVD untethered system customization and hardening program and received partial funding of $250,000. We anticipate the remaining $1 million will be released as the budgetary constraints mentioned earlier are removed. Despite this, the program of hardening the DAVD untethered system is proceeding and we are doing everything within our remit to move this program to a successful conclusion for the company and its shareholders.

We continue to believe that this is the biggest opportunity for the DAVD technology. Our newly launched AI-based digital audio underwater communication system has been undergoing Navy evaluation. We have now received overridingly positive feedback on the technology. From a survey conducted by the Navy of its divers involved in this evaluation, 100% of those involved believe that this product increased their diving capability and level of safety by providing clearer and crisper communications. They all said they would use the product on a mission if available and thought that it was superior to existing analog communication systems. We continue to make good progress with our goal of creating the conditions for returning the engineering business to its pre-COVID $10 million revenue profile.

To achieve this, we will need to increase the number of new defense programs that we're supplying proprietary sub-assemblies into. We have now seen some new programs materializing and I'm excited about this. In the second quarter we received a partial award of $771,000 for production units for a new sub-assembly for an existing program of record which is being upgraded due to obsolescence of some of the components. We had anticipated an initial award of $1.5 million under this program, but due to the funding gaps mentioned earlier, we received a partial award and expect the remainder when funding becomes available. We are excited about this program of upgrade as there are many existing systems in the field that will need to be upgraded with a new part which we have designed and this will generate meaningful revenue on this program over time.

We also received a new order for Thermite mission computers, which relates to a new Navy program. This is for an initial pre-production quantity of eight systems for a contract value of $280,000. We expect the larger production orders for this program in early 2025. Finally, we also continue to perform quality business development activities, including working with our newly appointed business development focus group in the US, we can already see the promise of the success of this engagement. Let me now turn the call over to our Interim CFO, Gayle Jardine, to take you through our financials before I provide my closing remarks.

Gayle Jardine: Thank you, Annmarie, and good morning, everyone. Let me take you through our second quarter 2024 financial results. Starting with revenue. In the second quarter of 2024 we recorded total revenue of $5.32 million compared to $5.30 million in the second quarter of 2023, an increase of 0.4%. The marine technology business or products business, generated revenue of $3.52 million compared to $3.58 million, a 1.6% decrease from the second quarter of 2023. Our marine engineering business or services business generated revenue of $1.8 million compared to $1.7 million, an increase of 4.7% from the second quarter of 2023. As discussed earlier, our total consolidated revenue increased in the second quarter by 0.4%. Our engineering segment revenue increased in the second quarter and the product segment saw an increase in rentals, rental-related support services and an increase in sales outside of the US region, including in our strategic market area of Asia where outright sales increased by 15.9%.

Sales from North America were down due to the reduction in the defense program funding for the reasons Annmarie explained earlier. Moving on to gross profit margin. In the second quarter of 2024, we generated gross profit of $3.7 million compared to $3.6 million in the second quarter of 2023. Consolidated gross margin was 70.2% versus 68.3% in the second quarter of last year. In our marine technology business, gross margin increased to 80.2% in the second quarter of 2024 compared to 75.3% in 2023 reflecting changes in the mix of sales, primarily due to the increase in rental and the associated support service sales which have a higher gross margin. Our marine engineering business gross margin decreased to 50.7% in the second quarter of 2024 versus 53.9% in the second quarter of 2023.

Again reflecting the mix of engineering projects during the second quarter of 2024. Now moving to our operating expenses. Total operating expenses for the second quarter of 2024 decreased to $2.4 million compared to $2.8 million in the second quarter of 2023, which is largely due to the reduction in our stock compensation charges in the period. Our selling, general and administrative costs in the second quarter of 2024 totaled $1.8 million, a decrease of 17.7% from $2.2 million in the second quarter of 2023. As a percentage of revenue, our selling, general and administrative costs for the second quarter of 2024 were 34.7% compared to 42.3% in second quarter of 2023. The reduction is mainly due to a decrease in stock compensation charges. In accordance with our strategy, we continue to recalibrate our working capital towards business development and marketing activities.

Accordingly, in our second quarter, marketing expenses increased by approximately 52%. This included the fees relating to the appointment of a business development focus group we have hired in the US to assist in this area. Operating income in the second quarter of 2024 was $1.4 million compared to $0.9 million in the second quarter of 2023, an increase of 57.9%. Operating margin was 25.4% compared to 16.1% in the second quarter of 2023, primarily due to the increase in gross profit margin combined with the reduction in total operating expenses. Income before taxes in the second quarter of 2024 was $1.6 million compared to $1 million in the second quarter of 2023. Net income after taxes in the second quarter of 2024 was $1.4 million or $0.13 per diluted share compared to $1.0 million or $0.09 cents per diluted share in the second quarter of 2023.

Moving now to our balance sheet. As of April 30th, 2024, we had $23.7 million in cash and cash equivalents on hand and no debt. This represents a decrease of $0.7 million from October 31st 2023 with a comparable figure was $24.4 million. This is mostly due to the purchase of long lead time items into inventory. So you will see that line item has increased accordingly. Our working capital increased to $41.0 million from $37.6 million at October 31, 2023. Now, I will turn the call back over to Annmarie for closing remarks. Thank you.

Annmarie Gayle: Thank you, Gayle. I want to close by emphasizing that we continue to work to create stable long-term shareholder value. I want to remind everyone that growth is a process and not an event. Think of it like a puzzle and we're putting the pieces together. In the meantime, we're running a profitable business. Our team is doing an outstanding job in maintaining superior margins and profits for our shareholders, while all the time seeking to grow sustainably without compromising our track record of a tightly run profitable business. In the 2024 fiscal year, there are a number of key management goals for business to achieve with a focus on growth. We have a compelling calendar of prestigious business development activities in 2024 with a focus on the defense applications.

Some of our goals include continuing to seek to increase the number of programs that our Echoscope technology is embedded in, further prioritize and engage in the DAVD untethered system customization and hardening program with a goal of securing the technology's adoption by the special forces community in early 2025. Supporting the rollout and adoption of the DAVD tethered system to the market, both in the defense and commercial space. Supporting the rollout and adoption of the digital audio communication solutions, rebuild the engineering business to its pre-COVID $10 million dollar revenue profile and we're seeing traction with new programs which will assist in achieving this goal. Expanding the group's management team and capabilities, this is ongoing.

Continuing to develop our pipeline of candidates under our M&A strategy with the goal of acquiring complementary value-accretive technologies into our portfolio. We continue to believe in the growth prospects and strategy built around our disruptive technologies. By adopting this strategy it pivots the revenue model of the marine technology business to a multi-year and multiple sale model as we have started to see with the DAVD product line. Though it could take several years for these programs to mature, we continue to believe this is the best strategy for our business's growth prospects. Therefore, we believe that our near-term growth will be incremental but solid. To conclude, we would like to thank our shareholders for their continued support.

We're now happy to answer your questions. Operator?

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