Coda Octopus Group, Inc. Common stock 2026 Q3 Earnings Call

Good morning, everyone, and welcome to Coda Octopus's third quarter fiscal 2026 earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements made today may be considered forward-looking statements under U.S. securities laws. These statements are subject to 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 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 year ended October 31, 2025, and Form 10-Q for the first, second, and third quarters of our fiscal year 2026. You may get Coda Octopus's 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 through the investor relations section of Coda Octopus's website.

Finally, as a reminder, this is our third quarter fiscal 2026 reporting, and all comparisons, unless explicitly stated otherwise, are with our third quarter fiscal 2025. With that, I will now turn the call over to the company's Chair and CEO, Annmarie Gayle.

Annmarie. Thanks, Dillon, and good morning, everyone.

Thank you for joining us for our third quarter fiscal 2026 earnings call. I believe we delivered a solid set of results during the quarter with consolidated revenue increasing 9.2% and pre-tax income increasing 16%. While geopolitical instability in the Middle East adversely affected customer activity in certain international markets and resulted in lower revenue within our Marine Technology business, the strength of our Defense Engineering Services and Acoustic Sensors and Materials businesses enabled us to deliver growth in both revenue and pre-tax income. Our performance this quarter highlights the resilience of our diversified business model and the strength of our financial fundamentals. I am pleased with how the business has continued to perform despite challenging market conditions in some regions. Our company comprises three operating businesses, Marine Technology, Defense Engineering Services, and Acoustic Sensors and Materials.

Our Marine Technology business remains the strategic centerpiece of the company and generated 43.8% of consolidated revenue during the quarter. Our long-term growth strategy remains focused on expanding adoption of our proprietary underwater technologies, including Echoscope, DAVD, and the recently introduced NANO Gen Series, particularly within defense and autonomous underwater vehicle applications where we continue to see significant long-term opportunities. Turning to our third quarter business highlights. Marine Technology business. Revenue in our Marine Technology business decreased 15.2% during the quarter. The decline primarily reflected reduced customer activity in the Middle East and parts of Asia following geopolitical instability in the region. Hardware revenue decreased 17.8% to $2.3 million compared to $2.7 million in the prior year period. Partially offsetting this decline was significantly improved rental asset utilization, which increased rental revenue by 131.1% to approximately $0.7 million, compared with approximately $0.3 million in the prior year period.

The higher contributions from rentals, together with lower commission costs resulting from changes in sales geography, contributed positively to gross margins within this business. Turning to Defense Engineering Services business. Our Defense Engineering Services business delivered a strong quarter, with revenue increasing 68.3% compared with the prior year period. The business benefited from increased activity and funding across several longstanding defense programs, resulting in both higher order intake and higher execution levels during the quarter. Our U.K. defense operations experienced increased customer activity and contributed higher revenues compared with the prior year period. Within our U.S. Defense Engineering business, we continue to see strengthening demand for repairs and spares under some of the sustainment defense programs that we have supported for decades. During the quarter, one of our prime contractor customers was awarded a multi-year repair and sustainment contract by the U.S. government.

Following that award, we experienced increased repair-related activity and additional subcontract opportunities associated with the program. We continue to see encouraging demand trends in this area. 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. Defense Engineering Services segment is currently supporting several prime contractors in the development of rugged, deployable RF electronic warfare systems for a range of platforms, including unmanned systems, helicopters, airborne pods, and ground vehicles. We believe these programs represent a meaningful future opportunity, enabling us to build upon our longstanding positions on legacy defense systems while expanding into next-generation defense programs as technologies and operational requirements continue to evolve. Turning to our Acoustic Sensors and Materials business.

Our Acoustic Sensors and Materials business increased revenue by 10.4% during the quarter. While gross margins were lower due to product mix, we continue to see encouraging demand for our acoustic materials and acoustic test tank solutions across international markets. While market conditions in certain international regions remain challenging, our diversified business model enabled us to deliver growth in both revenue and pre-tax income during the quarter. We remain focused on executing our long-term growth strategy, strengthening our position across defense, marine, and acoustic markets, and expanding adoption of our proprietary technologies. With that, I will hand the call over to Blair Cunningham, our President of Technology, who will provide an update on our technology initiatives, recent milestones, and market activities.

Thank you, Annmarie, and good morning, everyone. As Annmarie noted, our strategic focus remains on expanding adoption of our proprietary underwater technologies, including DAVD, Echoscope, Nano, and our next-generation underwater communication system, Voice HUB-4. I will briefly highlight several notable developments during the quarter. A significant milestone during the year was the successful completion of the U.S. Navy's authorization for Navy Use Assessment for the DAVID Untethered System, incorporating the DAVID Gen4 HUD. As you know, we delivered 16 DAVID Untethered systems to the U.S. Navy earlier this year, bringing total deliveries to 24 systems. With ANU approval now in place, these systems can be fully evaluated and utilized by operational commands. We continue to provide training and support for the untethered system and believe the military diving market represents a significant long-term opportunity for DAVID.

Since our last earnings call, we have received approximately $1.4 million of orders from the U.S. Navy for DAVID tethered systems and related peripherals, supporting deployment to additional commands and adoption of the latest DAVID FLEX technology. We are also encouraged by indications that DAVID may be incorporated into diving school and academy training curricula. The recent orders included four DAVID FLEX systems and Echoscope sonars specifically for training purposes, which we believe reflects growing institutional acceptance of the technology within the naval diving community. Internationally, we continue to work closely with the European Navy that recently acquired DAVID systems. We remain encouraged by customer feedback and believe this deployment provides a strong foundation for further expansion within international military diving markets. We expect to gain greater visibility into that customer's procurement roadmap later this year.

In addition, we continue to make progress on a number of funded defense programs awarded during the year under separate contractual arrangements where our DAVID and Nano technologies are being integrated as key vision and mission-enabling components. These programs, spanning diver machine teaming, critical diver health state monitoring, and advanced deep saturation diving, provide further opportunities to demonstrate our technologies in operationally relevant environments and support their growing adoption across a broader range of defense applications. We are also pleased with the early market response to our NANO Gen Series sonar, our ultra-compact real-time 3D imaging sonar designed specifically for small subsea robotics and AI-enabled autonomous underwater platforms. We are actively working with a number of subsea robotic OEMs, research groups, and direct customers globally to integrate Nano into next-generation underwater platforms, enabling advanced real-time 3D perception, navigation, and autonomy capabilities that were previously impractical on vehicles of this size.

Beyond our active programs, we continue to see growing interest in Nano across both the U.S. and European defense markets, particularly for diving systems and delivery vehicles, autonomous and unmanned underwater systems. We believe Nano's combination of ultra-compact form factor, low power consumption, and real-time 3D imaging capability positions it well to address the rapidly evolving requirements of this emerging sector. This growing interest is further supported by the innovative software and hardware ecosystem we have developed around Nano, providing OEMs and integrators with multiple levels of engagement, from straightforward sensor integration through to a more comprehensive solution incorporating Nano's real-time data and processing capabilities, providing the high-quality real-time 3D data critical to delivering true AI-enabled 3D perception and autonomy solutions.