Coda Octopus Group, Inc. Q3 FY2026 earnings call

• Strategic Focus & Resilience: Management emphasized the resilience of their diversified business model, which allowed for growth despite geopolitical headwinds in international markets. The long-term strategy centers on expanding adoption of proprietary underwater technologies (David, Ecoscope, Nano Series) within defense and autonomous underwater vehicle applications.
• Marine Technology Updates: Revenue declined due to reduced customer activity in the Middle East and parts of Asia. However, improved rental asset utilization significantly boosted rental revenue. Lower commission costs from geographic sales shifts also positively impacted gross margins.
• Defense Engineering Growth: The sector benefited from increased funding across long-standing defense programs. Key drivers included higher order intake and execution levels, particularly in the UK and US. A prime contractor customer secured a multi-year repair and sustainment contract from the U.S. government, leading to increased subcontract opportunities.
• Technology Milestones (David): The U.S. Navy completed the Authorization for Navy Use Assessment (ANU) for the David Untethered System. With ANU approval, the 16 systems delivered earlier this year can now be fully utilized by operational commands. Additional orders totaling ~$1.4 million were received for training purposes, indicating institutional acceptance.
• Nano Series Adoption: Early market response to the ultra-compact NanoGen series sonar has been positive. Coda is working with subsea robotic OEMs and research groups globally to integrate Nano into next-generation platforms, leveraging its low power consumption and real-time 3D imaging capabilities.
• Electronic Warfare Expansion: The US Defense Engineering Services segment is supporting prime contractors in developing rugged, deployable RF electronic warfare systems for unmanned systems, helicopters, airborne pods, and ground vehicles.
• Financial Discipline: The company transitioned from an accumulated deficit to positive retained earnings for the first time in its history. It remains debt-free with $31.7 million in cash and cash equivalents as of July 31, 2026.

Total consolidated revenue increased 9.2% to $7.7 million, with pre-tax income rising 16% to $1.8 million. The Marine Technology business generated $3.4 million in revenue (down 15.2% year-over-year), representing 43.8% of total consolidated revenue. This segment saw hardware sales drop 17.8% to $2.3 million due to geopolitical instability in the Middle East and Asia, but rental revenue surged 131.1% to approximately $0.7 million, improving gross margins to 78.5%. The Defense Engineering Services business delivered strong growth, with revenue increasing 68.3% to $2.7 million, driven by increased activity in UK operations and US sustainment programs, including a new multi-year repair contract. Its gross margin was 56.9%. The Acoustic Sensors and Materials business grew revenue by 10.4% to $1.6 million, though its gross margin contracted to 52.4% from 54.8% due to unfavorable product mix.

• No Specific Financial Guidance Provided: Management did not provide specific quantitative forward-looking guidance for revenue or earnings for the remainder of fiscal 2026 or fiscal 2027.
• Revenue Volatility Warning: CEO Annmarie Gayle indicated that Marine Technology quarterly revenue may remain volatile due to ongoing geopolitical uncertainty in the Middle East and Asia, noting that opportunities are being deferred rather than structurally lost.
• Defense Engineering Lumpy Nature: Management cautioned that Defense Engineering Services revenue is likely to remain 'lumpy' due to the nature of procurement cycles, although they see sustained demand for spares and repairs as warehouses are replenished.
• Long-Term Program Visibility: While short-term visibility is limited, management expressed confidence in long-term growth opportunities derived from the expansion of David, Nano, and Ecoscope into new defense platforms and international naval markets.

• Geopolitical Instability: Ongoing conflict in the Middle East and tensions in Asia have adversely affected customer activity and project execution in key international markets for the Marine Technology business, causing revenue declines.
• Operational Safety and Supply Chain: Offshore projects face significant challenges related to personnel safety, security issues, and supply chain disruptions for end customers in high-risk regions.
• Program Dependency and Timing: Revenue in the Defense Engineering Services business is subject to the lumpy nature of government procurement and sustainment contracts, potentially leading to quarter-to-quarter volatility.
• Long Sales Cycles: Defense technology adoption involves lengthy processes, including user acceptance testing and qualification hurdles (e.g., ANU approval), which delay revenue recognition and large-scale procurement.

Q: Brian Kissinger asked about the progress of a development program involving an underwater vehicle OEM testing the NanoGen series sonar, specifically regarding feedback and timeline for evaluation. / A: Annmarie Gayle and Blair Cunningham confirmed that the program is progressing well, with imminent SAT (System Acceptance Testing) trials underway. They anticipate concluding these trials in Q4, viewing a design win as a major catalyst for future procurement phases and rapid succession orders from other customers.

Q: Brian Kissinger inquired how the recent ANU approval for the David system has altered the business development and sales cycle, and requested feedback from new customers using it for training. / A: Management explained that ANU approval removes a critical hurdle, allowing the technology to move from field deployment to larger-scale procurement. Feedback from diving academies and institutions is highly positive, signaling maturity and broadening the addressable market beyond immediate tactical deployments.

Q: Brian Kissinger questioned whether the Marine Technology revenue decline was structural or temporary given the war in Iran, and asked if Defense Engineering revenue would sustain recent highs or remain lumpy. / A: Gayle stated the marine tech impact is timing-related, not structural, with opportunities deferred due to safety and supply chain risks. Regarding defense engineering, she acknowledged revenue will remain lumpy but highlighted a sustained opportunity in spares and repairs as military warehouses deplete and need replenishment.

Q: Brian Kissinger asked about the P&L strategy regarding incremental investments in R&D vs. SG&A to drive growth versus margin control. / A: Gayle emphasized an investment-focused strategy, allocating resources to R&D for next-generation technologies like Voice Hub 4 and leveraging PAL’s acoustics expertise. She noted that while SG&A was controlled, the priority is advancing defense programs through continuous innovation, accepting longer-term payback periods typical of defense contracts.

Q: Zanul Baidar asked about the European Navy’s potential broader rollout of David systems and whether their qualification could shorten procurement for other navies, and sought exposure to US Coast Guard budget cuts. / A: Management reported high engagement with the influential European Navy, expecting visibility on their procurement roadmap later this year; their adoption would likely set a trend for other European navies. On budgets, Gayle expressed confidence that reallocating funds toward next-generation warfare technologies continues to create opportunities for their electronic warfare and sustainment services.