Coda Octopus Group, Inc. (NASDAQ:CODA) Q4 2023 Earnings Call Transcript

Coda Octopus Group, Inc. (NASDAQ:CODA) Q4 2023 Earnings Call Transcript January 29, 2024

Coda Octopus Group, Inc. misses on earnings expectations. Reported EPS is $-0.02 EPS, expectations were $0.08. CODA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to Coda Octopus Group’s Fiscal Year 2023 Earnings Conference Call. My name is Sherry, and I will be your operator today. Before this call, Coda Octopus issued its financial results for fiscal year 2023 ended October 31, 2023, including a press release, a copy of which will be furnished in a report filed with the SEC and 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 and CEO, Annmarie Gayle, and its CFO, John Price. Following their remarks, we will open the call for questions. Before we begin, I would like to hand it over to Jackie Keshner from Gateway Group, who’ll make a brief introductory statement. Thank you. You may begin.

Jackie Keshner: Thank you, operator. Good morning, everyone, and welcome to Coda Octopus’ fiscal year 2023 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 statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings 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 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 and Forms 10-Q for the first, second, and third quarters 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?

Annmarie Gayle: Thanks, Jackie, and good morning, everyone. Thank you for joining us for our fiscal 2023 earnings call. Our results in fiscal 2023 continue to reflect the impact of various macroeconomic and marine industry headwinds. These have negatively impacted our revenue, and therefore, overall financial performance in the fiscal 2023. Notwithstanding, I believe in fiscal 2023, we continued to make progress in our overall goals of investing in our growth acceleration strategy. A quick rundown of factors affecting the marine industry and thus our business. Fiscal 2023 saw the cancellation and shelving of several major offshore renewable projects that many of our industry peers and we ourselves had anticipated. These projects are reported to be unviable due to inflation, higher interest rates and supply chain problems.

It is reported that some of these contracts oblige the developers to sell electricity at $108 per megawatt hour, but developers require this price to be $178 per megawatt hour for the development to be viable. Many of these projects were therefore either canceled or postponed while the contract majors negotiate price resets. Some of the contract majors include Ørsted, Vattenfall, Siemens and bp-Equinor. This means that many offshore developments did not go forward in fiscal year 2023, resulting in low demand for our Echoscope solution. This has impacted our rental revenues. Rentals are an important sector of our business, and revenues in this sector fell by 31.4% contrary to our business plan goals. In addition, the unleashing of the pent-up demand following the removal of COVID restrictions in China, which we and many industry peers had anticipated, did not occur in the fiscal year 2023.

This has impacted on our sales from Asia, a strategic market for us. Sales from Asia fell by 19.5% as our customers in that region were also affected by the combination of weak demand from China and higher interest rate, inflation and supply chain issues. These macro factors resulted in many underwater construction projects slowing down or being postponed. Due to the combination of these factors, revenue in fiscal 2023 in the Marine Technology Business fell by 17.7%, and was approximately $12.1 million compared to $14.7 million in the previous fiscal year. Our Engineering Services Business also did not meet its business plan goals in fiscal year 2023 because order take was impacted by the war in Ukraine. The conflict has caused our defense customers’ priorities to shift to land-based applications with less focus on naval-based solutions, the area of relevance for our business.

Despite these broader headwinds, we made good progress in advancing the DAVD untethered system customization program and also had strong business development and marketing campaign throughout fiscal year 2023 around our growth pillars. We therefore, believe we are well positioned once these macroeconomic factors are removed [Technical Difficulty]. For those who are new to Coda, at this time, I would like to provide an overview of our business. We have two discrete business operations: our Marine Technology Business, sometimes referred to as Products Business; and our Engineering Services Business. Our Marine Technology Business supplies proprietary hardware and software solutions to the underwater market. We have a global base of commercial and defense customers, including offshore majors, underwater construction companies, navies and defense bodies, port research bodies, and diving companies.

We have three key technologies that we consider critical for the acceleration of our growth and which we designate as our growth pillars. I will summarize these briefly. Echoscope imaging sonar: our series of real-time 3D imaging sonar, the Echoscope, is a single sensor for multiple underwater applications. This is the only imaging sonar that can generate a real-time 3D image of moving objects in zero-visibility conditions underwater. This sensor is protected by patents and is the tool of choice for a wide range of underwater applications relating to underwater inspection and monitoring of infrastructure, salvage, dredging, placements and landings on the seabed, and ROV navigation in zero-visibility conditions. In 2021, we launched our new generation of imaging sonar, Echoscope PIPE.

The PIPE series is far superior to our previous generation of sonars as it brings much more capability to the subsea market, including the ability to image multiple 3D images concurrently using different acoustic parameters, such as frequency, field of view, range and filters. This allows customers to consolidate their sensor requirements and reduce costs. Completing technologies such as the multibeam is designed as a seabed mapping tool and not for real-time inspection, monitoring, and placement of objects underwater, including in zero-visibility conditions. Our technology allows customers to make real-time decisions on the spot, thus reducing overhead associated with their underwater projects. Our next key technology is a Diver Augmented Vision Display system or DAVD.

The DAVD was developed by us in conjunction with the U.S. Navy and Naval Warfare Center Panama City, who remain active in the program of certification of the DAVD, the roadmap for the evolution of the DAVD technology and future requirements. But DAVD has the potential to radically change how diving is performed globally, both in the defense and commercial space. Conventional diving operations are run by voice instructions on the topside to the diver underwater without the ability to provide the diver with real-time information for the execution of its diving task. The DAVD brings a new level of capability to the diving market by providing a real-time information platform, which is fully available to the diver underwater. The DAVD allows the diver and the dive supervisor to visualize the same underwater scene and provides the diver on demand with a range of real-time information such as drawings, photographs, imaging, information on remaining bottom time and depth.

Furthermore, by pairing the DAVD system with our Echoscope technology, it enables diving to be performed in zero-visibility water condition, a condition which prevents many diving operations from taking place. Based on the requirements of the U.S. Navy, in the fiscal year 2023, we have completed the development of a digital audio communication system, Voice HUB 4, which offers the market a digital audio communication system incorporating AI features such as pitch correction, voice signatures, and noise removal. This technology moves the market from analog audio communication to a much higher-quality digital audio solution. We believe the addressable market for this digital audio communication solution is sizable, and we are excited to be the first movers in this space.

Within our group, we also have our Engineering Business segment. This business operates as subcontractor to prime defense contractors, and designs and supplies sub-assemblies for integration into broader mission-critical programs, which are led by these primes. This gives the Engineering Services Business the opportunity to have repeat, sole source orders from these sub-assemblies for the life of these programs. The Engineering Business is important for our group as it has a strong pedigree in defense engineering with stellar relationships with prime defense contractors spanning decades, and it is a critical partner for the group’s underwater innovation. Despite the disappointing fiscal 2023, caused by macroeconomic factors, which affected key strategic sectors for our business, we continue to believe in our strategy for accelerating growth.

We also believe we made key operational progress around our growth pillars in fiscal year 2023. To succinctly recap some of these, we had good mission results from a number of underwater vehicle programs, which are ongoing with prime defense contractors. These customers are evaluating the Echoscope PIPE for inclusion in their new generation of underwater vehicle. This is a key part of our strategy to grow our revenue and realize a multiple recurring sales profile from these programs. Moreover, based on the success with the Echoscope PIPE, a number of these customers are expanding its use into other adjacent programs. This type of cross selling is another important access point into multiple programs for our technology. We also had good mission results from two successive trials with Naval Information Warfare Center, [NIWIC] (ph), on the VideoRay Defender as they seek to finalize their sensor package for this class of vehicle.

We’re continuing to work with NIWIC as they progress the selection of their sensor package. We continued to showcase the DAVD and made progress towards adoption of the tethered variant outside of the U.S. Navy into both the commercial diving sector and foreign navies. In fiscal 2023, we had a number of trials and evaluation of the DAVD solution, which advanced to discussions on adoption with a number of customers, including offshore service providers and two foreign navies. We continue to anticipate decisions on these in fiscal year 2024. We continued to advance the DAVD untethered customization program with our customers and have delivered eight evaluation modified untethered DAVD system, which our end customers are currently evaluating. This evaluation includes a number of stages which extend to certification, [wet] (ph) testing, and suitability assessment for defense application.

During fiscal 2023, we received $750,000 under this program and expect a further $1.25 million in fiscal year 2024. This variant, which addresses the defense and military market such as special forces, is the biggest market opportunity for the DAVD, and we continue to support the evaluation effort. We completed the development of a new digital audio communication system, Voice HUB 4, which moves the market from analog audio communication system to a higher-quality digital audio capability. This is now in evaluation by the U.S. Navy and a number of other customers. Furthermore, although the marine industry continues to be affected by macroeconomic factors discussed earlier, in our first quarter of fiscal 2024, we’re seeing signs of increased demand for our rental solution.

Finally, before we discuss our fiscal year 2023 financial performance in greater detail, I want to welcome our new CFO, John Price, who joined Coda on November 27. John recently served as CFO of NASDAQ-listed Assure Holdings Corporation, brings the seasoned background in corporate finance and accounting, M&A skills, and technology experience. Let me now turn the call over to John to take you through our financials before I provide my closing remarks.

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John Price: Thank you, Annmarie, and good morning, everyone. Before I take you through the fiscal year 2023 results, I just wanted to say that I’m very pleased to have joined the company and excited to be on board to work with you and the company to drive our management goals and prospects forward to the next level of performance. Let me take you through our full year 2023 financial results. Starting with revenue, in fiscal year 2023, we recorded total revenue of $19.4 million compared to $22.2 million in the fiscal year 2022, a reduction of 12.9%. The Marine Technology Business generated revenue of $12.1 million compared to $14.7 million, a 17.7% decrease from the prior fiscal year 2022. As reported earlier by Annmarie, this decline in our consolidated revenue was a result of weak demand from strategic markets and geographies such as Asia for outright sale and Europe for rentals, particularly in the offshore renewable sector.

Our UK service arm was also affected by delays in receiving key orders due to our customers’ focus being on land-based defense applications to support the Ukraine efforts and not the naval-based applications that apply to our business. Moving on to gross profit and margin, in fiscal year 2023, we generated gross profit of $13.0 million compared to $15.2 million in fiscal year 2022. Gross margin was 67.3% versus 68.3% in the fiscal year 2022. In our Marine Technology Business, or Products Business, gross margin fell to 76.7% in fiscal year 2023 compared to 80% in 2022, reflecting changes in the mix of sales and higher commission costs in the period. Our Marine Engineering Business gross margin increased to 51.6% in fiscal year 2023 versus 45.4% in 2022, again reflecting the mix in sales.

Now, moving on to operating expenses. Total operating expenses for fiscal 2023 rose slightly to $10.3 million compared to $10.2 million in fiscal year 2022. SG&A remained below our targeted internal budget, largely related to reduction in staff headcounts and targeted new hire positions remaining unfilled. Our selling, general and administrative costs in fiscal year 2023 totaled $8.2 million, an increase of 3.1% over fiscal 2022 of $7.9 million. As a percentage of revenue, our selling, general and administrative costs for the fiscal year 2023 was 42.3% of total revenue compared to 35.8% in the fiscal year 2022. Looking forward on our cost structure, given the significant progress we have made in R&D in the last four years, we remain focused on aligning a significant portion of our resources and strategy from research and development to global business development, brand building, and investor relations.

We expect SG&A to increase on a full-year basis as we hire new staff and expand our management team. We believe that we’ve developed world-class products and solutions that provide market-leading positions for Coda, and that we can make meaningful progress in our markets through these investments to create shareholder value. Operating income in fiscal year 2023 was $2.7 million compared to $5.0 million in fiscal year 2022, a reduction of 45.3%. Operating margin was 14.2% compared to 22.5% in fiscal year 2022, driven by the change in revenues as explained previously. Net income before taxes in fiscal year 2023 was $3.4 million compared to $5.1 million in fiscal year 2022. Net income after taxes in our fiscal year 2023 was $3.1 million or $0.28 per diluted share compared to $4.3 million or $0.38 per diluted share in the fiscal year 2022.

Moving now to our balance sheet. As of October 31, 2023, we had $24.4 million in cash and cash equivalents on hand and no debt. This represents an increase of $1.5 million over fiscal year 2022, where the comparable figure was $22.9 million. That completes my financial summary, and I look forward to working with our management team to accelerate our growth plans. In addition to my core financial duties, I will be looking at acquisitions and investor relations as a priority for us. Now, I will turn the call back over to Annmarie for closing remarks.

Annmarie Gayle: Thank you, John. In closing, I would like to reiterate that we have a demonstrated track record over many years of running a solid profitable business with a strong balance sheet. We continue to believe in our growth strategy, and although our results were disappointing for the factors discussed, we are confident that we are making progress to accelerate growth through increased adoption of our technology in pivotal markets. We’re pleased with the progress we’re making in increasing the number of underwater vehicle programs, which are including: the Echoscope PIPE, the progress in making a comprehensive solution for ship hull’s scanning and mapping, a sizable global market opportunity if our solution is effective for the problem to be solved; the progress in achieving adoption of the DAVD tethered system outside of the U.S. Navy and we believe we will have adopted in fiscal year 2024; the progress in advancing at the various stages of the DAVD untethered system customization program, the biggest market opportunity for the DAVD solution; the progress in adding a new exciting growth pillar, our digital audio communication system.

We continue to build our growth strategy around our Echoscope PIPE imaging sonar series, our DAVD and derivative of our DAVD technology. In addition, in fiscal year 2024, we will expand our growth strategy to include M&A activities with the goal of acquiring complementary value-accretive technologies into our portfolio. In relation to our growth pillars, the markets that are pivotal for the Marine Technology Business growth acceleration program are underwater imaging sensor market, defense underwater vehicles market, offshore renewables, underwater construction, ship hull scanning and mapping, diving solutions market, including the diving sensor market. We will focus our efforts on business development in these areas in fiscal year 2024. To conclude, we would like to thank our shareholders for their continued support and reassure them that management understands that its business imperatives are the acceleration of growth and we remain steadfast on achieving this for our shareholders.

We’re now happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Brian Kinstlinger with Alliance Global Partners. Please proceed.

Brian Kinstlinger: Great, thanks. Hi, Annmarie. So, interest rates, inflation and supply chain have been challenges for a good long time to all markets. Revenue for marine products during the fourth quarter, your core business, was abnormally low compared to the last several quarters. So, I guess I’m curious what you think was different about this quarter than the previous several quarters that caused such a shortfall.

Annmarie Gayle: Thank you, Brian. Well, it’s all the things that we’ve said really. Our revenues are predicated on certain projects going forward. So, underwater construction, really key markets for us. Offshore renewables, key markets for us. What we saw is either projects being really postponed or being shelved in key markets. So, overall, order take was down in the fourth quarter, and that continued throughout the year. Either we were having significant delays because the projects are still under discussion, Brian, but then eventually get postponed, and it’s all because of these factors. I mean, if you look at the key numbers coming out of offshore renewables, when the contract price is negotiated, the contractors were offering $108 for the electricity. Now, for that to be viable, they need $178. And this is all because of inflation and higher interest rates. So, those factors are likely to impact on the business and have impacted on our business in the period.

Brian Kinstlinger: A quick follow-up on that. Is it getting worse? Because if you look at the trend, your peak was the January quarter, then it went down a little bit in the April quarter, then it went down precipitously in the July and even much more so in October. So, is it that you had projects at the beginning of the year and, when they complete, you don’t have a replacement, or is it actually getting worse, the order intake?

Annmarie Gayle: Well, as I said, in the fourth quarter what we saw a lot of projects stalling, literally stalling, and didn’t go forward for the reasons we have discussed. So, I think this year was exceptional and I really think that offshore renewables and energy market generally were impacted by four factors we discussed earlier. So, order take was much lower for the Marine Technology Business.

Brian Kinstlinger: So, based on the conversations you’re having with your customers, how are renegotiations of economics going? And do you see a rebound in demand in sight, or is there too much uncertainty in the near term?

Annmarie Gayle: Well, what we’re seeing in the first quarter, we’re seeing sort of increased inquiries for rentals and contracting for rentals. We have a number of rental projects that are ongoing, several projects in the Middle East around on the sea cables and breakwater. Also, in Taiwan, where we’re involved in offshore renewables in three different projects there. And again, in Europe, involved in a number of projects, rental projects, around cable repair and offshore cable placement in the Baltic Sea. So, we’re certainly seeing much more inquiries, for example, and also getting some orders around rentals, which is crucial for our business. So, there are positive signs. But I think, for example, offshore renewable sector, they’re still renegotiating price resets, and I have no visibility on when those contracts will be completed, but those are critical projects for our business.

Brian Kinstlinger: Right. Lastly, you highlighted your M&A strategy. Where are you in the evaluation of targets? Is it the very early stages? With your — you just hired, obviously, your new CFO, congratulations. Are you in advanced stages? Just maybe take us through where you are in this journey.

Annmarie Gayle: No, we’re really just at the really outset of our strategy. Of course, we always have targets in mind, but we have no ongoing discussions with targets.

Brian Kinstlinger: Okay. Thank you very much.

Annmarie Gayle: Thank you, Brian. Thank you.

Operator: Our next question is from Walter Ramsley with Walrus Partners. Please proceed.

Walter Ramsley: Thank you. Excuse me. This question is for John. In the October quarter, the equity on the books declined by $1.4 million. Was that due to some write-offs or some adjustment [Technical Difficulty].

Annmarie Gayle: John?

John Price: Annmarie, can you hear me? Sorry.

Annmarie Gayle: I can hear you.

John Price: Walter, I didn’t hear your question. Could you repeat that?

Walter Ramsley: Sure. The shareholder equity declined by $1.4 million in the October quarter. Was that caused at least in part by some write-offs or adjustments to the reserve accounts?

John Price: No, that’s not, no. It’s primarily going to be related to the impact from the P&L. We also have stock-based compensation that rolls through our equity statement on a quarter-to-quarter basis.

Walter Ramsley: Okay. Thank you. And then just one other question. The R&D, I think you indicated that that amount of money of spending is going to decline. So, I get that part. Is the R&D tax credit, is that going to be affected in the upcoming year? I’m not sure what the situation is with the federal tax code there.

Annmarie Gayle: Walter, just on the R&D, just to be careful about decline, I think that what we’re saying, we’re keeping a lid on R&D expenses, so they’ll probably be in-line with our previous year, meaning we’re not investing more over and above our run rate on R&D. R&D is a permanent feature of our business because we are a solutions business. So, in order to maintain our lead, also support our customers using our technology in the field, it’s an ongoing. So, we think R&D will be in-line with previous years. And that’s the biggest statement we’re making about R&D, not that we expect it to fall. I just want to clarify that.