DUG Technology Ltd (DUG) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us for our FY '26 Half 1 Results Presentation. So we're going to get underway now. We've got a pretty good quorum in. We're going to run through the presentation first, and then we'll open up to the floor for questions at the end. Over to you, Matt.

Yes. Good morning, everybody. It's great to be with you and to present these results this morning. Let's get going. So the numbers are starting to reflect the Malaysian Software-as-a-Service and HP (sic) [ HPC ] as a Service contract that we signed last year. So that came on a little earlier than we expected. So that's terrific. We have had a record half year financial performance hitting over $40 million in revenue and a significant -- a very significant uplift in the EBITDA. And we're really seeing the service business continue to deliver and MP-FWI imaging really being at the forefront of that for us. And the pleasing thing is that a lot of that revenue is coming out of our new offices now. So just looking at some nice graphs. The revenue, as we touched on, is up 40%. And again, you can see that we've got some really nice year-on-year-on-year growth pattern coming through. And we certainly have no reason to expect that to stop anytime soon that growth pattern. EBITDA is up. The first half of '25 was not a great year. And so that is not very representative of what the business can do. And so it's a really nice result and tells us starting to show what the business can actually deliver. And super pleasing, the cash is really up. And this is -- make notice at the end of January, we're at USD 21 million. All the numbers are U.S. dollars, of course. And so it's -- we got a lot of cash in the bank relative to what we often have. And so hopefully, that puts to bed that any thought that we're going to need to raise money because we're cash generative, not -- we won't be spending money. So services revenue, which underpins everything is up 30%, which is super. And software revenue is up 16%. So again, both of these are year-on-year growth. And of course, the HPC revenue, we expect a very significant growth given the Malaysian signing. Of course, the EBITDA was normalized EBITDA because of an ongoing court case, which is still in play, and it's been sort of an interesting result with neither party really winning. This is our time line, just a quick look at it. And so in '24, we opened our Abu Dhabi office or more what we did in '24 was we put a leader into the country and we started hiring people. We actually opened that office, which is in -- which is pictured on the screen here, opened in '25. So we really -- we had an office -- temporary office there up to that point in time. And Rio de Janeiro opened last year and is really delivering really well. And so that's the latest of the new offices. And we're not seeing any reason to open any further offices at this time. So everything that we do in DUG and everything we've ever done in DUG is all related, and it's all about this key -- key offering around numeric physics, data processing. And if you're processing data, then you need software, and that's why we've written our own software and have done from day 1. And you need high-performance computers, and that's why we've been building high-performance computers from day 1. And then you need a business. And that's what we've been R&D, generating software, generating algorithms, running high-performance computing. So it's all part of doing the same thing. And including Nomad, which is just HPC in a container, which we needed ourselves for countries, where we can't take the data out of the country, and we don't want to open a traditional data center. So all of these things are related, but we're going to look at it in the terms of these 3 areas: imaging, software and the HPC backbone. So in terms of imaging, we're leading -- we lead the world in elastic MP-FWI imaging. We're significantly ahead of our competition. We started on it a lot earlier. We believed in it very early on, and we got a team on it, and we've been pursuing it for a long time now. And we're increasing our team, and we're getting after it more and more. So although others are now offering MP-FWI, they're a long way behind where we're at. And it is really delivering. And elastic is just fantastic technology because we go from field data straight to the elastic rock properties. And elastic rock properties are very important for oil companies and other companies to look at what the rocks and fluids actually are. Multi-client has been new and has been a really terrific addition to our offerings. Again, it's based on what we do. We own a lot of -- it's around our service offering. We've got partners doing it, and you would have seen that Equatorial Guinea is a new project, which is looking really well. Software is the heart and soul of everything. It's so important. It's not stuff that can be developed rapidly. It takes years and years. Everybody just as a sidetrack, everyone looks at NVIDIA, I had this discussion about NVIDIA and saying anybody is going [indiscernible] with their hardware. The main thing about NVIDIA is their software. What separates NVIDIA from AMD is their software toolkit. It isn't the hardware so much. It's the software. And software is so important and software cannot be reproduced overnight. It takes years and years of really strong team. So we're seeing this accelerate the software. We're using the software for our own services. We're selling the software on top of our HPC, and we're also selling the software for used on on-prem. It's also used for interpretation. And as well as we're selling it to competitors, if you like, that use the software to compete against us, which is really nice because they're often picking up work that we actually don't want. It's a bit smaller than we would -- than really moves the needle for us or there might be other reasons why it just doesn't quite fit us. So that model is working really well. And we've really got a strong road map ahead for software, which fits into our strategic business model. And then there's HPC, which has been exciting. You've seen the deal we did in Malaysia. And just having strong expertise in HPC is really important. And now, of course, it's very important for AI. And we should touch on our AI strategy, while we're at it because we've had a very strong AI strategy for a long time now. Machine learning was in the first ever code we wrote. So it predates DUG in terms of our expertise and what we've been working on in our own individual lives before we came into DUG. AI is part of our imaging toolkit. AI is part of our business. We've rolled out AI in our finance teams, in all our different commercial teams, and we're pursuing an active AI role as we -- as things are really moving rapidly in that space. We've also got AI toolkit coming out in -- or is out in our software, where we can help users of the software progress really much more rapidly with their interpretation and other things. So AI is extremely important to us. And of course, AI runs on the big computers and on the NVIDIA chips in particular that we've just purchased. So we're really excited about how we can transform DUG or how DUG is being transformed by our AI capabilities. And then there is all our immersion cooling, which is the backbone of how we do compute in DUG and been very important for us. We are, of course, our map now shows that we've got a really nice geographic spread from the Middle East to Asia to London, I call it Europe anymore, I guess, to the Americas, including Rio de Janeiro, which is a new office, which is really kicking goals. And of course, we've got our global fiber that varies a little bit how we do it over time, but connects all our offices, except for Abu Dhabi by the look of it. We need to update our map with Abu Dhabi [ Dan ] and Rio, they're all on that fiber, by the way, everybody, we just haven't updated the map. So now I'll hand over to Dan to -- for financial performance.

Thanks, Matt. Hi, everyone. So I guess starting off of the -- at the top on revenue. Services was a really great result. So just to provide context there, 30% growth on same half last year. That was really driven by good order book, good productivity and the teams really getting through projects. So that's a really exciting result for us, and it doesn't include anything from EPIC. So that number is kind of EPIC exclusive or non-inclusive rather. And so it's a really great underlying performance. When we move down into software and HPC, we had pretty good growth in both of those business lines excluding EPIC. And then what we've had through the Q2 was, I think, as we framed it, an earlier-than-anticipated ramp-up. And so what ended up happening was we were able to firstly receive some storage equipment sooner than we were expecting. And then we also managed to mobilize equipment from the U.S. And what that allowed us to do was to combine with existing equipment in [indiscernible] and get the project started earlier than we were originally anticipating. And so that's driven a lot of the growth now in what we're seeing in software and HPC and really helps the overall revenue growth. So through employee benefits, we've got a little bit of growth through there as we kind of ramp up in Brazil and we ramp up in certain regions, where we're getting that underlying services growth. And so what we're seeing is adding headcount, but not adding headcount at the same speed as we're growing the top line revenue, which is what we've been pretty consistent with over the last few years and what we expect to continue going forward. Other expenses, we had a 48% increase inclusive of the MP2. It's around 25% increase if we ignore that provision for the normalized EBITDA. And so what we're seeing in other expenses is we've got -- a big part of the step-up is related to Cegal. So for Cegal, our partner in the EPIC deal, we've got -- we've got their portion or their cost for delivery coming through other expenses. And so that's come through in this half as we've managed to kick the project off earlier. And then we've also just got a general step-up in IT facilities and some subcontracting as we got that project up and running. And so when we get down to the EBITDA line, we've got normalized EBITDA, so excluding the one-off provision, up 161%, which was a really great result for the team. And the 34% EBITDA margin, I think, is a really great stake in the ground. And so what we're seeing now is the result of EPIC and software and the growth in revenue and not the same growth in our cost base, and we're just getting really great operating leverage come through the business. So as we move a little bit below that, depreciation and amortization lowered in the quarter -- lowered in the half rather. And so what we're seeing there is some of the equipment that we purchased a few years ago starting to roll off and have been fully paid for. A lot of the EPIC equipment was delivered in late December, early January. So we'll start to see that coming through the accounts in the second half both through depreciation and finance expense. So to move on to the balance sheet, we had cash of $14.3 million at the end of the quarter. We had really good receipts through January. So as we disclosed earlier, 31 January cash balance of $20.7 million came off the back of really good receipts through January. And so what that meant was with the $14.3 million of cash at 31 December, we had net debt of $0.3 million. We'll bring those new assets online and the new asset financing online in -- we'll see it come through in the second half. So that number will shift a little bit, but it's a really great result, and it's just an indication of the kind of performance of the business. Trade and other receivables was up. That's as we started to issue our first EPIC invoices, which got paid in January. So we're seeing that number kick up at the end of the year, and that's then come through to cash. Contract assets rose. We've just got a few more milestone projects in certain regions and then also some e-invoicing timing. And so for the e-invoicing, it's just creating a balance that carries through the end of month, but it gets reversed in the first week of the following month. So it's creating a sort of temporary increase in the contract assets balance, which makes it seem a little bit overstated. Contract liabilities is up. That's a result of the EPIC contract, where we're able to invoice for the full year in advance. And so as we start to recognize that revenue from EPIC, we'll be slowly pulling that contract liability balance down each month. Trade and other payables is up, as I mentioned earlier, a lot of the new equipment was delivered right at the tail end of December. And so we've got that coming through the books here, but that will all be settled with the financings all settled, and we'll see that all kind of correct itself through the second half. And then finally, the provisions, as discussed, there's further detail on the MP2 matter in the release we made yesterday, but we've got that provision coming through our provisions in our current liabilities, and so that's driving the change there. On to cash flows, really good result once again. So $7.4 million in cash generated from operating activities, really driven by higher receipts from customers. So it was a really great result and good cash flow for the quarter. As we mentioned, cash flow from investing and general CapEx is probably a little bit lower than people expect, but it's just a timing. So what we've talked about in the past with the EPIC CapEx will come to bear in the second half. And so we'll see that full year number will kind of be in line with the expectations. And similar for financing, once we get the financing, we will come through the books as the equipment kind of goes on to financing in the second half as well. So I hand back over to Matt to wrap this up.

So last slide here. So the Malaysian contract is underpinning the profitable growth in the HPC and software sectors. We're still dining out on the best-in-class seismic imaging, and we certainly don't see that changing over the next 12 months or even 24 months as we strive to get that better and better and better. It's different, a little bit different now for us. We're now really focused on efficiency, productivity and quality. And so efficiency is just making it run through the -- I mean this is an incredibly complicated code, right? And so just keep working on to get it running through the machines faster, keep working on making it faster for people to run. So efficiency in machines, productivity is people and just make sure that the results always come out looking fantastic. So just little tweaks to the algorithms here and there. So our focus is on that now as opposed to adding features to the software, adding new things that the software can do. And that's a real milestone to get to that point, whereas all of our competitors, of course, are scrambling to try to develop this from the ground up. And established regions are continuing to grow. So our London and Houston and Asia are continuing to grow, but the new emerging geographies like Abu Dhabi and Rio, especially are really looking good and will grow significantly from here. Thanks very much, everybody.

So thanks, everyone. We'll -- shifting to questions. So if you have a question please raise your hand and I'll give you the floor. So first, [indiscernible].

Can you hear me right?

Yes. Loud and clear.

Just first question for me, just around the Middle East. I'd be interested in any feedback you've received from both Aramco and ADNOC, just noting those trials that you had progressing last time we spoke.

The trials have gone super well. Aramco just last week or the week before at a conference in the Middle East stood up at a -- in the conference when one of our competitors was having a go at us and trying to muddy the waters and just said these guys are so far in front of everybody else. It's not funny. So Aramco relationship is very strong, and we're looking at, taking that to another level, and it just takes time. There's a lot of work going on in Aramco with legal and contractual and so forth. ADNOC project has really, really hit its traps and the results look great, and there's actually a paper coming out in a conference in June in Europe. And with those great results, where we -- in both of these projects, we've done things with the code, with the technology that no one has ever done before in the world. So everyone is pretty surprised and it's worked really well. So Middle East is a slow burn, but it's really, really solid momentum towards a very significant business. Rio, on the other hand, was a really fast and bang, bang big projects coming through.

No, that makes sense. And just to stay on the same topic, is this something we can expect to receive an update on in the next 6 to 12 months in terms of another contract win? I assume you want to target one of the larger contracts that are outstanding in the region.

Well, we hope so. We certainly -- the pipeline is very significant in that region. So we're certainly working hard towards that end.

I appreciate that. And the final question for me was just on the services awards. It did seem that they slowed in that second quarter, about $8 million to $9 million. But I was just interested in, I guess, the pipeline of work you are seeing not in that revenue line for the services division keeps growing, which is nice to see.

The pipeline is the biggest it's ever been. I know we keep saying that quarter after quarter, but it really is. It's -- we have thought about how we could wrap it up just for our internal use because it's lumpy and it's all over the place, but it's huge, which is why we don't let it out because it's sort of very difficult to understand, but it is huge, and it is growing. It has been disappointing. But it just -- it just happens in our business, where you have a couple of months, where your wins are a little lighter than what you would hope, the pipeline keeps growing. And suddenly, it's a down pour and you win a whole much. And you will remember that from July wins of $18 million a couple of years ago and suddenly you had been quite, quite [ nimble ]. And so everybody is feeling good about what's happening in the industry. So we're confident.

Caleb, over to you.

Matt and Dan, just on the revenue and order book, maybe some color on the split between production and exploration revenue and whether you're still seeing that growth in the 4D seismic?

Yes. We've just won another big 4D seismic project, and we're talking to the super majors now about 4D projects. So we're solidly entering that production space with a significant amount of our revenue now. I don't know I actually know what it would be. When I say significant, I'm talking maybe 20%, not more, but it's growing. And it's -- so we're solidly in that production window, and we expect to win more and more of that work.

Yes. And that will be more sort of recurring revenues type of style compared to exploration -- the exploration work we do?

Yes, classically, the 4D projects are repeated every 12 months. Just for everyone's -- make sure everyone's in on the picture here, if you've got a reservoir like Gorgon in the North West Shelf here and you can see the fluids, then you [ shoot the ] baseline seismic before you start producing the fluids. And then you -- every 12 months, you shoot seismic again. And you can see the fluid movement, where you've produced oil, where you haven't produced oil and you can shape how you do your drilling campaigns to maximize getting the oil and gas out of the ground with minimum cost. The wells cost all the money, seismic is less -- much less expensive. So that's what 4D is for, and that's why 4D is very important to us to get into that space. But it's only the top companies do 4D because you've got to have the best technology and you've got to be very reliable.

Thanks, Matt. And on the EPIC contracts, so the PETRONAS CapEx and compute doesn't really arrive until this quarter. And so can we kind of interpret that as you still have some headroom in sort of your compute in the U.S. before you say [indiscernible] say, 20%, 30% revenue growth before you need to order another large chunk or --

We've actually put in more compute into the U.S. over the last quarter. And we're just enjoying that for the moment, and we'll see how we go. There are some very, very significant projects in the pipeline. And so yes, it's an interesting time where we're watching utilization very carefully.

And I think just to clarify on that point, that compute that's gone in is the compute we've talked to previously, which we purchased simultaneously with purchasing the -- that EPIC equipment. [ Lachlan ]?

Congrats on a strong second quarter. Just one of the things was you obviously had some significant growth in the U.S. Can you just clarify, so is that growth -- is that based on work done in the region? Just because I know previously, you had, I guess, a customer relationship in the Middle East that was, I guess, based in the U.S. So like is that revenue coming for work done in the U.S.? Or is it just based on like where the customer is? And just what are you seeing specifically in the U.S.?

So that big Middle East customer -- the work from them has dwindled a little. There is still work from them, but that -- a new project from them is actually being done in the Middle East now in Abu Dhabi. So there's not a lot of revenue in the last 12 months from that client. And not -- they're very happy with the work. They just ran out of seismic data. We processed it all. They're actually acquiring a new survey that we expect to process over the next 12 months, 18 months. So a lot of that work in the Middle East is from -- sorry, work in Houston is from the Americas. A little bit is from Asia. But as you said, it's about where clients want the processing to be done based on where they live, where their head office is, where their technical people is, for example. But Houston is more and more Americas focused just at this point in time.

And can you also just talk us through what you're seeing in terms of like the multi-client sales? Because I know you came out with the announcement and when I scrub the wording of the Sarawak deal. So just kind of any insights you're seeing in terms of your multi-client business that you're developing?

It's going really well. I think this -- this financial year is going to be a very breakthrough time for multi-client from what we're seeing. And the Equatorial Guinea project is very exciting. And the thing I would point out about it is that it is fully underwritten. So we're not risking anything with that project. It's a very good project. And the assets we have in Australia are still selling. So we've still got sales going through on these multi-client assets in Australia, which is quite amazing.

Jack, over to you.

Great set of numbers. Obviously, a great expansion in the EBITDA margin. How do you see that run rate going forward on a full year basis? Are we sitting in the mid-30s or potentially even higher than that?

No, I would be very happy if we finished the year with a 34% EBITDA. It could slide higher. It may well, but yes, I don't really know what to say about it, Jack at the minute.

Allan?

Just one -- sorry if I missed it before. But on CapEx, can we just frame how you think about the maintenance CapEx on our look forward and just for the full year '26, noting CapEx shift to the second half, broadly speaking, how we should frame CapEx for the second half?

Yes. So typically, maintenance CapEx for us it falls in the range of $1 million to $3 million, often falls around that $2 million mark for us. And so that's just money going to maintaining the data center, replacing little broken parts here and there. But we're pretty maintenance CapEx light. as a general rule. And so we don't see a step change in that going forward. One of the nice things is that new equipment is more powerful and the cost per performance we're seeing is really, really good and really competitive. And so that lens the load as well on a maintenance CapEx perspective as equipment starts to age.

And I think this is noted CapEx for the EPIC project and a couple of others, and we're sort of looking sort of $14 million, $15 million, $16 million of CapEx in aggregate. Is that correct?

Yes, that's correct, Allan. Yes. [ Edward? ].

Just a quick question. You did have on the radar a few years ago to build a data center in Western Australia. You're going to build carbon-neutral data center. Is that still on the cards? Or has that been completely shelved or --

It's still in the -- looking for -- which really we've moved on from it because we didn't see the enterprise part of our HPC business accelerate like we thought it could. It's -- we're still -- we've let the option to lease that land lapse now. We're still talking to the West Australian government because they're still very keen on it. We've been asked a lot of questions from the federal government about what's going on, and we just keep saying until you change the manner in which HPC is funded in Australia, then really the HPC industry is dead. And so that's what's ongoing there.

So we have a few questions then through the chat. So an update on DUG Nomad? It's progressing. It's going well. We're still working on the strategy and how we approach it there. And so one of the big areas of focus for us and the big opportunities that we're seeing are making the most of, as Matt talked about, the HPC expertise we have and the software. And so we're working on a lot of opportunities, and there's a lot of exciting stuff happening, where we're looking at providing a kind of bundled solution. So we're providing the container itself, the computer that goes in it, the software that runs the computers as well as our process and imaging software on top. And so there's a lot of exciting opportunities there, and that's what we're kind of working through at the moment.

And we had a number of -- we have a number of proposals out for that.

And then on the -- on the DUG Cool side, I was over in the U.S. at the end of last year visiting with BAC and attending a few conferences, and we're really happy with how they're going about it. It's just a long sales cycle. And the industry is pointed towards direct to chip. And so there's a bit of -- there's leg work that needs to be done there, but we're really happy with how they're going about it and the work that they're putting in. We think they're pursuing it. So we still think there's a big opportunity there because of all the benefits that come from immersion. But there is some headwinds with the industry just being predominantly direct to chip at the moment, and we need to -- they need to put in a lot of work to kind of shift it. [indiscernible].

I wouldn't comment on that one. It's a great margin on that project, but we don't want to talk about individual margins on individual projects.

What we've talked about in the past is it's margin accretive to our existing business. And I think we've seen that come through this quarter, this quarter, this half as we get the revenue down. So I can't get -- get more specific than that, but we're seeing it as margin accretive, and that's coming through the financials.

There are no cool royalties or they're very minor. The -- it is a tough sell for them at the moment. It is a lot slower, but there are significant headwinds with the direct-to chip and the NVIDIA chips and so forth. NVIDIA are not -- I've said this before, NVIDIA are not that keen at the moment on the chips being immersed, although we've immersed all the chips, and we point that out to them that they run fine. And so that's an ongoing discussion and one BAC are picking up on as well.

Great. Well, thanks for attending, everyone. If you have any further questions, feel free to send through to investor at DUG. And otherwise, thanks for your support, and thanks for attending.

Thanks, everybody.