Coda Octopus Group, Inc. (CODA) Earnings Call Transcript

Thanks, operator. Morning, everybody, and thanks for joining Coda Octopus's conference call covering earnings for the third quarter of fiscal 2026. Ahead of management's formal comments, we want to remind all of you that certain things said today might count as forward-looking statements under U.S. securities laws. A number of risks and uncertainties apply to these statements. Consequently, we caution that various factors exist, many outside our control, that could make actual results and events differ materially from what those forward-looking statements describe. For a more detailed look at the risks, uncertainties, and assumptions tied to our forward-looking statements, please review the disclosures in our earnings release and the public filings we make with the Securities and Exchange Commission. We take no responsibility for revising any forward-looking statements later on to account for situations or occurrences arising after they were originally made, unless the law demands it. For thorough information and explanations about what we do, along with the unknowns and other shifting factors — among them, though not restricted to, the risks and uncertainties spelled out in our Form 10-K covering the year that closed October 31, 2025, plus our Form 10-Q for the first, second, and third quarters of fiscal year 2026 — we direct you to the documents we file with the Securities and Exchange Commission. Coda Octopus's Securities and Exchange Commission filings are available at no charge through the SEC's website, www.sec.gov. Before we continue, please note that this session is being captured and can be replayed later via the investor relations area on Coda Octopus's site. One more item: today we're discussing results for the third quarter of fiscal 2026, and any comparisons made, unless noted specifically, are against the third quarter of fiscal 2025. I'll now pass things to the company's Chair and CEO, Annmarie Gayle. Annmarie.

Appreciate that, Dillon, and good morning to all of you. We're glad you could be on the line for the earnings call covering the third quarter of fiscal 2026. In my view, the quarter brought a solid set of results, with consolidated revenue up 9.2% and pre-tax income up 16%. Geopolitical instability in the Middle East did hurt customer activity in certain international markets and led to lower revenue in our Marine Technology business, but the strength of our Defense Engineering Services and Acoustic Sensors and Materials businesses allowed us to achieve growth in both revenue and pre-tax income. What we achieved this quarter demonstrates how resilient our diversified business model is and how strong our financial fundamentals are. I'm pleased with the way the business has kept performing even though market conditions in some regions have been challenging. Three operating businesses make up our company: Marine Technology, Defense Engineering Services, and Acoustic Sensors and Materials. Marine Technology remains the strategic centerpiece of the company and accounted for 43.8% of consolidated revenue during the quarter. Our long-term growth strategy is still centered on expanding adoption of our proprietary underwater technologies, such as Echoscope, DAVD, and the recently introduced NANO Series, especially in defense and autonomous underwater vehicle applications, where we continue to see significant long-term opportunities. Now to our third quarter business highlights. Marine Technology business. Revenue in our Marine Technology business fell 15.2% during the quarter. This drop was mostly because customers in the Middle East and certain Asian markets pulled back after the region's geopolitical situation became unstable. On the hardware side, revenue fell 17.8%, landing at $2.3 million, down from $2.7 million during the same stretch a year earlier. Helping to counterbalance that was a big gain in how well our rental assets were being used, which pushed rental revenue up 131.1% to roughly $0.7 million, versus about $0.3 million a year ago. Better rental contributions, plus reduced commission expenses tied to shifts in where sales occurred, gave a boost to gross margins for this business. Now moving to Defense Engineering Services. That business had a really strong quarter, with revenue climbing 68.3% over the prior year period. Several long-running defense programs saw more activity and funding, which lifted both the volume of orders we booked and the work we carried out this quarter. Customer activity picked up in our defense operations in the U.K., driving revenues there above the same period a year earlier. In U.S. Defense Engineering, demand keeps growing for repairs and spares tied to certain sustainment programs we have backed for many decades. This quarter, the U.S. government granted a multi-year repair and sustainment contract to one of our prime contractor customers. After that award, we saw more repair work and further subcontract chances connected to the program, and demand trends here remain encouraging. Demand for spares supporting the sustainment defense system also remains strong, with spares orders exceeding $2.4 million year- to- date; we also continue to make progress in electronic warfare, which remains an important area of defense investment. Our U.S. Right now, our Defense Engineering Services segment is helping a number of prime contractors create rugged, deployable RF electronic warfare systems meant for various platforms — unmanned systems, helicopters, airborne pods, and ground vehicles are all included. These programs, in our view, amount to a significant future opportunity, letting us strengthen the legacy defense system positions we've held for a long time while also moving into next-generation defense programs as technologies and operational requirements keep changing. Turning to Acoustic Sensors and Materials, quarterly revenue was up 10.4%. Product mix pushed gross margins down, yet interest in our acoustic materials and acoustic test tank solutions remains promising in markets outside the U.S. Even with tough conditions persisting in certain international areas, the breadth of our business model let us post gains in both revenue and pre-tax income this quarter; we remain dedicated to executing our long-term growth plan, strengthening our position in defense, marine, and acoustic sectors, and expanding adoption of our proprietary technologies. With that said, I'll now hand things over to Blair Cunningham, our President of Technology, who's going to walk us through what's happening on the technology side — the milestones we've hit lately and what's going on in the market.

Thanks, Annmarie, and good morning to all of you. As Annmarie mentioned, we're still strategically centered on driving wider uptake of our proprietary subsea technologies — DAVD, Echoscope, Nano, and the next-generation underwater communication system we call Voice HUB-4. Let me take a moment to walk through a few noteworthy items from the quarter. One major milestone this year was wrapping up the U.S. Navy's authorization process for Navy Use Assessment covering the DAVD Untethered System, which includes the DAVD Gen4 HUD. As you're aware, we shipped 16 DAVD Untethered systems to the U.S. Navy earlier in the year, which brought cumulative deliveries to 24 systems. Now that ANU approval has been secured, operational commands can fully evaluate and deploy these systems. We're still delivering training and support for the untethered system, and we see the military diving market as a substantial long-term opportunity for DAVD. Since the last time we held an earnings call, we've booked roughly $1.4 million in orders from the U.S. Navy covering DAVD tethered systems and related peripherals, which will help support deployment to additional commands and drive uptake of the newest DAVD FLEX technology. We're also encouraged by signals that DAVD could find its way into diving school and academy training curricula. Those recent orders featured four DAVD FLEX systems along with Echoscope sonars earmarked for training use, which in our view points to widening institutional acceptance of the technology among naval diving forces. On the international side, we remain in close collaboration with the European Navy that recently bought DAVD Systems; customer feedback continues to encourage us, and we believe this deployment lays a strong foundation for additional expansion across international military diving markets. We anticipate getting better visibility into that customer's procurement roadmap later in the year; on top of that, we keep making headway on several funded defense programs granted during the year through separate contractual arrangements, where our DAVD and Nano technologies serve as key vision and mission-enabling components. Those programs — covering diver machine teaming, critical diver health state monitoring, and advanced deep saturation diving — give us more chances to showcase our technologies in operationally relevant settings and to support their widening adoption across a broader array of defense applications. We're also happy with how the market has initially responded to our NANO Gen Series sonar, our ultra-compact real-time 3D imaging sonar built specifically for small subsea robotics and AI-enabled autonomous underwater platforms. We're actively engaged with a number of subsea robotic OEMs, research groups, and direct customers around the world to integrate Nano into next-generation underwater platforms, enabling advanced real-time 3D perception, navigation, and autonomy capabilities that previously weren't practical on vehicles of this size. Beyond our active programs, we continue to see growing interest in Nano across both the U.S. Turning to the European defense sector, especially diving systems and delivery vehicles, along with autonomous and unmanned underwater systems: we feel Nano is well positioned, thanks to its ultra-compact form factor, low power consumption, and real-time 3D imaging capability, to meet the fast-changing requirements of this emerging sector. That rising interest gets further support from the innovative software and hardware ecosystem we've built around Nano, which gives OEMs and integrators multiple levels of engagement — from simple sensor integration all the way to a more complete solution that incorporates Nano's real-time data and processing capabilities, delivering the high-quality real-time 3D data that's essential for true AI-enabled 3D perception and autonomy solutions. As Annmarie said regarding our Defense Engineering Services businesses, we're seeing renewed demand across the U.S. defense market, driven both by higher spending on spares, repairs, and sustainment of established defense systems, and by investment in next-generation capabilities, including electronic warfare, unmanned systems, and increasingly autonomous platforms. We believe this broader rise in defense spending, together with growing demand for more capable and autonomous systems, opens additional opportunities for our Nano technology. Our established defense relationships and engineering capabilities offer a strong pathway for bringing Nano into these programs and expanding its long-term growth potential. Overall, I believe we're making steady progress in expanding adoption of our technologies and advancing opportunities that support long-term growth. With that, I'll turn the call back to Annmarie and look forward to answering your questions during the Q&A session.

Appreciate that, Blair. Ahead of getting into the numbers, I want to officially extend a welcome to Mark Kelly, who came aboard the company not long ago in the role of Chief Financial Officer. Mark carries a wealth of leadership background in both finance and operations, and having him on the executive team makes us very happy as we keep carrying out our growth strategy. At this point Mark is going to walk you through the financial results for our third quarter of 2026. Once he finishes his comments, I will come back with a few closing thoughts, and then we will open up the lines for questions.

Thank you, Annmarie, and good morning to all of you. Since this marks my first earnings call after coming aboard the company, I'm glad to have this chance to present myself to our shareholders and investors. Getting to know the team and learning about the business has been a pleasure, and I'm eager to help drive the company's ongoing growth and its execution of the long-term strategy. Now let me walk you through the financial results for our third quarter of fiscal 2026. Revenue totaled $7.7 million for the third quarter of 2026, up against $7.1 million in the third quarter of 2025, which works out to a 9.2% increase. As Annmarie pointed out earlier, these results show what our diversified business model delivers. Revenue in our Marine Technology business took a hit from lower customer activity in certain international markets, but that was more than made up for by strong performance in Defense Engineering Services and ongoing growth in Acoustic Sensors and Materials. Marine Technology revenue came in at $3.4 million, versus $4 million in the same period last year, a decline of 15.2%. Acoustic Sensors and Materials revenue reached $1.6 million, versus $1.5 million in the comparable prior year period, an increase of 10.4%. Defense Engineering Services revenue hit $2.7 million, versus $1.6 million a year earlier, a rise of 68.3%. Gross profit for the third quarter of 2026 came to $5.1 million, versus $4.8 million in the third quarter of 2025. Consolidated gross margin stood at 65.4%, versus 68.3% in the prior year period. That gross margin movement mainly reflects shifts in revenue composition during the quarter, among them the contribution from higher margin rental activity in our Marine Technology business, changes in sales geography, and the mix of projects and products delivered across the group. Marine Technology gross margin was 78.5%, versus 77% a year earlier. Acoustic Sensors and Materials gross margin was 52.4%, versus 54.8% in the prior year period, reflecting product mix during the quarter. Defense Engineering Services gross margin was 56.9%, versus 58.9% in the prior year period, reflecting the mix of contracts and program activity during the reporting period. Now moving to operating expenses. Total operating expenses for the third quarter of 2026 were $3.5 million, versus $3.4 million in the third quarter of 2025. Selling, general and administrative expenses came to $2.8 million, versus $2.9 million in the prior year period. That SG&A movement was mainly driven by lower payroll-related costs and favorable foreign exchange movements, partly offset by higher contingent consideration expense tied to the PAL earn-out. SGA accounted for 36.1% of consolidated revenue during the quarter, versus 40.6% in the third quarter of 2025. Operating income for the third quarter of 2026 was $1.5 million, versus $1.4 million in the third quarter of 2025. Operating margin was 19.9%, versus 19.5% in the prior year period. Pre-tax income for the third quarter of 2026 was $1.8 million, versus $1.5 million in the third quarter of 2025. After tax, net income came to $1.4 million, which works out to $0.12 per diluted share. That compares with $1.3 million, or $0.11 per diluted share, in the third quarter of 2025. Income taxes set aside during the quarter totaled $0.4 million, versus $0.3 million a year earlier. Now let's move on to the balance sheet. On July 31st, 2026, cash and cash equivalents stood at $31.7 million, and the company carried no debt. We keep a robust balance sheet along with solid liquidity, which gives us financial flexibility to back both organic growth efforts and possible strategic opportunities. At the close of the quarter, total assets reached $68.9 million, up from $64.5 million on October 31st, 2025. All in all, we feel the company is in a strong financial position, with a healthy balance sheet, positive earnings, and considerable cash resources. That wraps up my financial review. I'll hand the call back to Annmarie now for her closing remarks.

Thanks, Mark. I'm happy with how we did in the third quarter. Even though the geopolitical landscape was difficult and that hurt customer activity in some markets overseas, we still grew revenue and pre-tax income, and we kept our balance sheet strong and remained debt-free. Once again, this quarter showed what our diversified business model can do. Revenue at our Marine Technology business came in lower because of what's happening in the Middle East and parts of Asia, but our Defense Engineering Services business and our Acoustic Sensors and Materials businesses were strong enough that we still achieved growth overall and solid profitability. I'm also encouraged by how we keep making progress in driving adoption of our core technologies. In the quarter and the period after it, we hit several important milestones with DAVD, Echoscope, and Nano, and we think those milestones bolster our standing in key defense and underwater technology markets and help our long-term growth goals. We're especially encouraged by the ongoing traction we see in defense-related applications, where more investment in underwater capabilities, autonomous systems, and force modernization programs keeps opening up significant long-term opportunities for our technologies. I'm also pleased by the opportunities our U.S. Defense Engineering Services business is finding in backing sustainment programs through repair and spare parts for defense systems that have been around a long time. Meanwhile, that business is growing its work with prime defense contractors on next-generation defense technologies, which puts it in position to take part in changing defense requirements and programs down the road. On the financial side, I'm also glad that during the quarter the company reached an important milestone, moving from an accumulated deficit to positive retained earnings for the first time ever. That's mostly an accounting milestone, but it shows the sustained profitability, financial discipline, and progress the company has delivered in recent years. At the same time, we keep moving our M&A strategy forward and stay actively involved in assessing and advancing acquisition opportunities that fit our strategic objectives. We stay disciplined in how we go about it, but we keep chasing opportunities that could make our business stronger and help our long-term growth strategy. All in all, we remain confident in our strategy, encouraged by the progress we're making across the business, and well-positioned to seize opportunities in our core markets. Operator, we're ready now to open the line for questions.

Great, thanks. Hi, Annmarie. During the prior quarter, you pointed out that an underwater vehicle OEM had bought multiple Echoscopes, the NANO Gen Series, for testing purposes. Could you share whatever feedback has come out of that testing? Now that some time has gone by, do you have a clearer sense yet of how long test and evaluation might take for this program or others like it?

Good morning, Brian. I appreciate the question very much. Yes, that specific program is moving along quite well for us. The important thing to grasp about these programs is that they are development programs. What that essentially means is that every participant in the program has to put in some level of integration effort. I'm happy to report that we've gotten to a genuinely strong point under that particular program. Blair, I believe that program is heading into SAT trials shortly. Is that right?

Right, Annmarie, that's accurate. Morning to you, Brian. The SAT trials are going to be happening very soon. In fact, at this very moment I'm sitting with the customer. Yes, we're in the water, working with the vehicles, and everything is progressing extremely well. Our expectation is to wrap that up. My hope would be to share that news during the fourth quarter.

Since we're still in the development stage, would a design win be the next major catalyst for a program like this? And would that be something you'd put out in a press release?

The key point I'd make, Brian, is being on the vehicle. Obviously, that matters a great deal. That's where it all begins for us to be able to say, in effect, that we're ready to move into a procurement phase. We believe this will be a significant win for us, because while the first orders amounted to three systems on the vehicle, there are additional opportunities tied to that vehicle about which we have a certain level of visibility. Of course, the precondition is that the SAT trials go well, but should they go well, we could see a number of other customers signing up for that specific solution in quick succession.

Good. I appreciate the DAVD updates, covering the training applications and a few of the orders that came in after the quarter closed. Regarding the ANU's approval for the DAVD, you've had that in hand for 2 months now. What I'd like to know is how business development has shifted because of it, especially the sales cycle.

Thank you as well, Brian. Let's keep in mind that ANU represents one of the gates that brings us nearer to a procurement cycle. For any defense technologies, the very first step is genuinely getting the technology out into the field. That makes deployment essential, along with user acceptance test; after that we can proceed to what you might call procurement at a larger scale. So it's a pleasure to report that we have cleared the single most significant gate — getting the technology, first and foremost, into the customer's hands, and then advancing toward, if you will, deployment plus user acceptance testing. All of these count as essential activities for wider adoption of any defense technology, DAVD included.

Could you tell us what those customers have said — the ones who are new and still learning the system — because it sounds like quite a few possible new clients are currently running trials.

Yes. Honestly, the response to the DAVD program has been quite encouraging. We noted this during the quarter, and to me it confirms how mature the technology has become, since there's a chance DAVD could be adopted by a range of institutions for training purposes — diving academies, for instance. That gives us a lot of encouragement, and it truly serves as proof that the technology keeps advancing. On top of that, as Blair said earlier, we hold a number of separate contracts in which DAVD and Nano are genuinely being folded into various programs, where we're performing integration work to include DAVD and Nano as vision components deemed mission-critical within those programs; so my sense is that the signals we're receiving are entirely favorable, and what I observe is the technology progressing. Still, I believe we ought to recognize that these represent longer-term possibilities for our company.

All right. I've got a few additional ones, and at this point they're largely coming from the financial angle. Given the conflict in Iran, with no resolution appearing on the horizon, and factoring that in, what's the right way to frame Marine Technology's revenue on a quarterly basis? Could anything move it up or down meaningfully relative to the past several quarters? I suppose what I'm after is: what are the positive and negative factors that might introduce volatility compared with where we stood not long ago over the last several quarters?

As we've consistently disclosed, Asia along with the Middle East represent strategically vital markets for what we do. Naturally, the geopolitical backdrop has proven extremely disruptive to our business. Even so, our view is that this isn't truly structural in nature. These amount to timing matters. Consequently we keep identifying opportunities, we keep maintaining visibility into what customers are up to; yet the reality remains that operating a project offshore is genuinely very difficult, precisely because of the market disruption. There are security concerns, plus safety for personnel. A portion of these are supply chain problems affecting end customers; so my sense is that no structural shifts in the market are apparent to us, though what we definitely are observing is opportunities being deferred as a result of the persistent uncertainty.