Duluth Holdings Inc. Q4 FY2025 earnings call

• Fiscal 2025 was transformational, with OPT granted U.S. Department of Defense Facility Security Clearance at Secret level, entering fiscal '26 with $12.5 million in funded backlog. - Deployed Merrows and WAM-V platforms globally, expanded partnerships with defense, drone, and subsea leaders. - WAM-V platforms selected for U.S. Navy's Project Overmatch. - Streamlined team and leaner OpEx structure, retooled go-to-market engine, expanded internationally, and became AUVSI Trusted Operator. - Achieved ISO 9001 certification for quality management system. - Fiscal 2025 had headwinds in defense due to election-related uncertainty and administration transition, but ended with strong momentum, record backlog, growing pipeline, and increasing demand.

Fiscal 2025 was a record year for revenue, with $5.9 million generated, a 7% increase over the prior year. Operating expenses for fiscal 2025 totaled $23.4 million, down 27% from FY '24. Loss for the year improved by 22% from $27.5 million to $21.5 million. Total cash position as of April 30, 2025, stood at $6.7 million. Revenue growth was driven by expansion in Latin America. Backlog entered fiscal '26 at $12.5 million, with a healthy split between buoys, vehicles, and associated services, including an uptick in service revenues related to training.

• Focus in Q1 of FY '26 is on executing backlog deliveries, converting demonstrations into multiyear deals, and maintaining tight expense control. - Confident fiscal '26 will mark a step function in execution towards sustained growth, profitability, and long-term value creation. - Expecting an uptick in gross margin as transitioning into operational use of systems and with service revenues carrying higher gross margins.

Fiscal 2025 had headwinds in defense due to election-related uncertainty and the pending administration transition, which delayed procurement activity. Broader macroeconomic volatility also slowed pipeline conversion, resulting in revenue below expectations and a shortfall against Q4 calendar '25 profitability target.

Q: Congrats on the strong growth in backlog and pipeline. I'm curious a little bit more about the pipeline. Just can you give us some understanding and background about how you compile that number and just some background around the conversion and how well -- how mature some of that is?

A: Yes, absolutely. The way we look at our pipeline, it is everything that is an actual opportunity where we're under discussions with a customer. With the retooling of the commercial team, and we've onboarded new personnel. We've really positioned the company to now start increasing and accelerating the conversion rate as we're looking at what is a qualified opportunity or opportunity under negotiation with the customer to then focusing on the delivery portion of the pipeline and then converting that to revenues. With the key appointees in the present administration in place, we feel very confident about seeing an increase in the conversion rates. And equally, as the world starts recognizing that a hybrid fleet and unmanned operations in the ocean are a critical portion of operations, we look forward to participating in that. So I think as we stated, these are qualified opportunities, opportunities under negotiation, and we are increasing -- or we're feeling confident about increasing the conversion rate as we move through the current fiscal year.

Q: And then I guess as a follow-up, the -- you've done a great job cutting costs. Can you just talk about your capacity and ability to meet demand should it accelerate faster than you expect or...

A: Yes, absolutely. We've got the facility in New Jersey with just under 60,000 square feet and our smaller prototyping facility in the Bay Area in Northern California. And under the leadership of our operational team, we have redesigned the layout of parts of our facilities so that we can scale up more quickly. But obviously, as you pointed out on the cost cutting, we're doing so in a way that is conscious of working capital. so that we can convert as and when required without front-loading too much into inventory prior to starting the conversion.

Q: Peter from Water Tower. So congratulations to the team on your results and executing on your strategy in 2025. It's really great to see this meaningful momentum in your backlog and also the cost cuts. It looks like you're well positioned starting off in 2026. I just have a couple of questions. One on the backlog and the other is on the gross margin. Just related to the backlog, could you talk -- first of all, so thanks for the previous question on that as well. But could you please talk about the breakdown of the backlog in terms of product type? Any type of color you can give on that would be great.

A: Thanks for being on, Peter. And it is -- what we are pleased with in the backlog is the fact that it is a very healthy split between buoys, vehicles and associated services. What we're also starting to see, and as I mentioned in my remarks earlier, with becoming an AUVSI Trusted Operator, we're seeing an uptick in service revenues related to training that are sitting in -- starting to sit in backlog and certainly sitting in the pipeline. So we feel good about the fact that this is not based on one single one of our solution, but truly is part of what we set out to do, which is deliver autonomous persistent and resident ocean intelligence, whether that is buoys, vehicles, enabled software that sits at the edge across them or whether it is services that are related to getting these items deployed.

Q: Okay. And yes, just a question on the gross margin. So over the last year, your gross margin was on the decline and -- just looking out towards your backlog right now and eventually having that feed through, how should we be thinking about how your gross margin would be evolving sort of broadly going forward?

A: Yes. I think we're seeing an uptick again where gross margin is going to start heading. Some of that has been related to the fact, as Bob mentioned, we've been working on projects such as Overmatch and others, which have been revenue generating, but more focused on larger scale demonstration efforts. As we transition further into operational use of the systems, we look forward to seeing that corresponding uptick in gross margins, which are driven to some extent by the service revenues that I just mentioned as those, a, they're recurring; and b, they do carry with them a higher gross margin when we start delivering them.