DUG Technology Ltd (DUG) Earnings Call Transcript & Summary

All right. Good morning, everyone, from - morning from Western Australia. Good afternoon for those on the East Coast. Thanks for joining us today. We're kind of pleased to present FY '26 results, and you've got here Matthew Lamont, Managing Director and Founder of DUG; and then myself, Daniel Lamont, acting CFO. So without further ado, I think we've got a good cohort, so we'll get into the presentation now.

Good morning, everybody. Thanks very much for joining us. I've got to remember to look up, the camera is up there, not down there where the laptop is. We'll get into the presentation. We've had a great year. We're really, really pleased with our results. And so it's a pleasure to share them with you. And we'll touch on what things might be concerning people because we don't think they're valid. We're really happy with where we're at and where we're going. So just to remind people, we are a big compute, big data company, big algorithms, physics-based algorithms. We're now in 330 employees. We're really building a base to grow significantly. We're not in the realms of focusing on profits at the moment. We're focused on building a big company because we believe there's a great deal of growth that we can achieve. 38% is great, but we think we can do more, a lot more. Over the last couple of years, we've opened 2 new offices, Abu Dhabi and Rio de Janeiro, and both of those offices are going really well, and that's added to our offices in London, Houston, KL and Perth. Multi-Client has really kicked off very well for us this year, but that's who we are. We're basically a technology company. History according to DUG, and as you can see in the last couple of years, we've opened Abu Dhabi and now Rio. So that's the history of DUG. I'll whiz through this. You've seen these slides before. That's the world according to DUG, and now you can see the new Rio office and the new Abu Dhabi office. We've hired people -- a lot of the jump in people costs is getting those offices fitted out with people, and it's been a massive undertaking getting them up and running, but we're on top of it now. And the work is there. The work is really coming into those offices and the opportunities look great. So it's a record full year revenue. It is what the industry -- what investors expected, and we delivered. The EBITDA is perhaps slightly lower than we would have liked because we -- again, we settled on the MP2 dispute, but we also had to use a bit of third-party compute again because we just couldn't keep up with what was going on. And -- but we're now on top of compute, and we just got another month or 2 of third-party compute to move on to being back all on our own compute. So if you're wondering what happened to EBITDA, that's what it is. There's nothing fundamental there. It's just what we've been coping with internally to deliver that 38% growth. What's really, really pleasing to us is our focus on software and HPC and Multi-Client is really delivering. And the reason we love services, that's where we come from, but we really love software and HPC and Multi-Client because it's got such a great margin. It's got that -- just great margin, great business. And so that release we put out yesterday, again, is a business with really terrific margin, better margins than services. So that's really significant that release yesterday, and we're certainly expecting more of that type of release over the coming 12 months. The emerging regions have really kicked in, as I've already touched on. And again, Multi-Client has been great and really starting to find its feet, and we've been building that business, and we've got quite a few assets now, and we're looking at ways to really improve that business going forward to grow it. Again, they're the businesses we love. We love services. That's fundamental to who we are. But the businesses we really want to grow, number one is software because of the terrific margins, and that's really going well. It's HPC because of the margins and it's -- and Multi-Client because of the margins. One of the highlights of Multi-Client is Venezuela. We really got in early on Venezuela and now it's opening up and that data is looking like it's going to sell many, many times over. And so that's a real highlight there. So total revenue up 38%, which the market expected, and we delivered, and I think it's a great result. I believe we can do better this year, but it's still a bit up in the air. There's a lot going on in the pipeline. It's complicated, but there is fantastic scope out there. The normalized EBITDA is up significantly. It would have been up significantly more if we hadn't incurred the third-party compute. But it's -- again, it really shows what this business is capable of delivering. But having said that, that we're delivering this while we're growing at 38%, right? We were focused on profit, we would deliver a lot more than that. But we're not. We're focused on growing because there's such opportunity out there. And then NPAT, again, is up and could be up more. Services revenue up 23%. HPC, again, you can see this is one of our focus areas, and it's really, really starting to take off. And again, another nice release yesterday, and we certainly expect more. Software revenue up 33%, another great result. So just to remind people of who we are and currently what that makeup of our revenue is because it is changing for the better, we've got this common intellectual property, which is throughout everything we do. It's not like these things are totally independent business units. They're not. They're all different ways to capitalize and build on the same intellectual property and the same knowledge base basically. So seismic imaging is -- we've got the best seismic imaging in the market and have done. And the last we've just finished our -- I'm just back yesterday from our big U.S. conference which went super well. And again, just reinforced how we are leading the market still by a couple of years in MP-FWI. And then just 2 or 3 months ago, we had our big European conference. And again, same result and excited clients, great opportunities. It just looks fantastic. And the interesting thing that's happened that's played out now in those marketplaces is that all of our competitors now use the term MP-FWI, which is our term. We -- it's like us being Hoover now. And everyone acknowledging that, that's the future, which is not what we've had before. We've had the muddying the waters, fighting against it and now really working hard to get on top of that. And the thing that -- the difference is that we've been focused on what I term efficiency, productivity and quality, right? So efficiency, [ events ] get jobs through the machines, how quick can we do it? Productivity, how quick can we get jobs through people, right? So less people, time and quality is just getting results coming out of the algorithms looking fantastic. There's a few different interesting areas that plays out. So you can't focus on efficiency, productivity and quality if you're still scampering around adding functionality, right, which is what everyone else is doing. You need fairly stable functionality in order to focus on those, right? You can't have code that's changing rapidly. And so that's where we're at compared with all our competitors are scrambling to catch up and get that functionality in the code. It is a great place to be. And that impacts everything from services to people using our software to every aspect of DUG, and we will see that coming through in that bottom line margins over the next 12 months. You've seen it coming through already over this last 6 months, but really, it's really starting to hit its straps now, and you're going to see it coming in for the next 12 months and more beyond. Again, the software, we love it. The software is at the heart of services. It's the heart of what's really driving the HPC. And then the HPC infrastructure of course, these things are so interlocked, right? You've got to have the HPC, you got to have the software and then the services rides on top as well as those other 2 being business units on their own. And you can see the different makeup now, which we're really pleased about and the software is now 13%. HPC is now 13% and seismic imaging grew by 23%, but it's dropped as a percentage of our revenue down to 74%. So this is a great outcome. And we hope to drive that further and further. And we're still hoping to grow services and believe we can grow services significantly, but we're driving to push software in HPC as a bigger percentage of our overall revenue. Seismic imaging, we talked about this. We're still really driving it. We've still got a really big team working on this with that efficiency productivity. And as you get more efficient, as you get more productive, we'll get better results coming through as well. That's the quality piece. And it really is -- endorses that we've been working on this for 14 years now, and we're well out ahead of our competitors and to have these massive companies coming out over the last couple of months and saying, yes, that is the future. And all oil companies, major oil companies saying that is the future is really quite a feather in our cap that it is us that have identified that 14 years ago. We're going straight to rock properties, which just means that we're really able to produce better outcomes for clients, and we're able to get there a lot shorter time frames, which is what everybody wants to see. And Multi-Client, again, it's just such a great business. And we see that from our other competitors, how good Multi-Client is, and it is something we probably should have done years ago, but we're really on it now, and we've got a really great Multi-Client strategy in play. And there are our assets. So, there are assets that we either own totally or we have a share of as a partnership now. And we used to have a share of revenue share and not a partnership in the underlying asset. Now we have a partnership in the underlying assets. We've been building that. We've been investing in it. We've been building it. It's brought great rewards, but the better and better rewards are going to come in the future. It's getting great momentum. It is just a terrific business. And the thing to remind everybody is that, that Multi-Client business, that total addressable market is way bigger than the underlying services business, right? And that's what we're chasing. And there is -- that market now is dominated by TGS. You've got TGS, you've got Viridien in that market, you've got WesternGeco, but it is really dominated by TGS and clients are really unhappy with that, and that's creating great opportunity for us. The software, again, we love the software business. It's a -- it's an annual pay-as-you-use business. There is consumption billing on certain HPC things. There's a lot of really lovely development work that's been done in the software around the AI space where clients can -- if you're doing AI interpretation, for example, which is all now baked into the software, you can just hit the button and you can go off and train your own models on our HPC. So, you can be sitting there wherever you are in the world, you can say, I want to train a new model or you can just hit the button and instantly goes out and runs on our HPC in the background and comes back. And you're not even aware that has done that. Well, you're aware that has done it, but you haven't had to jump through hoops to achieve that. So, there's a lot of work being done in the development back end of this to integrate AI seamlessly into all our products. The processing imaging software, which does -- it might appear to everybody to cannibalize our services business is going really well, and we're really, really happy with that. And that's in all sorts of different jurisdictions. We've got a really great company using that software and our HPC in Mexico. And Pemex is really using them a lot and really working with us now to get us integrated there, and it's a really great outcome. And other clients of that business are running in the [ stand ]. So, Turkmenistan and Pakistan and other places, they're based in Pakistan and Poland, and they're using it. RockWave is using it and they're sitting in England, just south of London, and they're doing a whole bunch of wind farm work. That business is going great. And the projects that these guys are getting by and large, are not projects that we want for our services business. They're either a bit small for what we would like or whatever, some other issues with them. And so, it's just a great business. And our goal and what we're working on and what we're thinking about strategically is how do we become a very, very significant software player. So many, many, many times bigger than what we are today. And Nomads, again, we keep talking about Nomads and DUG Cool every year and how much we love it and how important it is. But let me try to give you some clarity on what's holding it up and what's going on in these business lines and why we're still doing them. What's holding it up is that the very high-end NVIDIA equipment doesn't immerse well. We can immerse the stuff that we need for HPC, but the work that -- the stuff that companies want the training for their AI models and stuff doesn't immerse so well. Now BAC have licensed our patent and they've partnered with NVIDIA to see what they can do about getting NVIDIA's blessing on immersing their equipment, and that's underway. But that's what holds this up to give you some clarity. Meanwhile, back at [ La Ranch ], we're having to really put in place a big Nomad team because there are so many Nomad inquiries coming in. And so, it's a really strange thing where we're not selling many Nomads, but actually, the pipeline for Nomads is growing very rapidly. And so, we see great opportunity, and we do expect it to start selling. It is a bit frustrating that they aren't selling, but the pipeline is growing, and we're having to put a lot more resources into dealing with it. It's got to either start selling a great deal or we've got to shut it down. But it is actually pretty exciting at the minute, and it's all over the world. So, I'm now going to pass over to Daniel. Do you want to do questions now, Dan, on what I've talked about? Or you want to wait right to the end?

I think we wait right till the end. So, for those with your hands up, thank you. We'll get to you after. So, I think Matt's already talked on the revenue piece. So, I won't dive into that. I think I'll go through the cost bit and then hand over to Matt to touch on the order book as well.

Well, yes, I need to talk about order book. It's not something that concerns us, by the way, everybody.

Do you want to just take it away?

Order book. Okay. Sorry. Sorry, Dan. Look, the order book is down. Now the order book is only -- the order book doesn't cover a lot of what we do. It's services only and a little bit of Multi-Client in a particular way. It doesn't cover the big pipeline of Multi-Client. It doesn't cover the big pipeline we have. It's a funny time at the moment, and everybody is seeing the same thing. Order book means a little bit different to different companies, right? The sentiment in the industry, having just gone through our big 2 conferences, is the same. The industry is up and about. There's a great deal of energy. There's great opportunities. The pipeline is going really well. We are winning work, but it's just not -- it's more replaceable work at the moment. But the dam wall is going to break because of the energy we see growing. And it's exactly the same sentiment that we're seeing in our competitors is that they're saying to us exactly the same thing, large pipeline projects are just not dropping at the minute. And a part of it is probably to do with the uncertainty in the Middle East. It's always bad for people getting on and doing stuff. But it doesn't worry us because again, the large margin areas of software and HPC are going really well, and we see great opportunities there. And we see services sort of keeping its head up, and we just see so much opportunity out there. It just feels totally different than it has in other years when the service book dropped and we're sort of -- we're concerned about what was happening. That isn't where we're at internally. And it's mostly around Houston services as well. The other business units are doing really well. We've also swapped some service work in Malaysia into other business as well. So, as we grow HPC and software around the world, we're turning a little bit of service revenue into that sort of revenue, and that's a better way. It's a higher-margin business. So, I'm sure we'll get more questions, and we can play with that more as we get questions later. But I'll let Daniel finish off the talk first.

Thank you. So, we saw employee benefits rise through the year. And part of that is just to deliver on the higher revenue. We also, as Matt touched on, had really the build-out of our Brazil office, which has gone really well and delivered just a little bit shy of USD 6 million in revenue this year, which was a great result from going from 0 in July to $6 million for the full year with a really great run rate entering this FY '27. We also had some start-through in kind of the software HPC and just helping us deliver through on some of those big contracts that we won this year. In other expenses, we had a few items which caused the 38% growth. So, the first one, which we've excluded for our normalized EBITDA is the MP2 settlement. So, what we're excluding there is the $1.5 million that was paid out in the fourth quarter of this year. And then otherwise, the normalized EBITDA doesn't have anything else carved out of it. Now in the expenses there, we do still have some of the legal fees relating to that case. And then we're also through that line, seeing the partner costs come through for some of those big contracts that we won earlier this year as well. The final bit that sat on that EBITDA margin a little bit in Q4 then as well is we had, as Matt alluded to earlier, some third-party compute costs. So, in June, we had a few projects where they kind of peak compute usage aligned. And so, we had to make the decision to utilize some third-party compute, so we didn't impact on the timelines of those projects. So that cost came through in June and sat on that fourth quarter EBITDA margin. The other bit that we had come through in June was some conference expenses as we entered into our big conference period. And that money ended up also kind of having an impact on that fourth quarter margin, but there's nothing there that's -- as Matt touched on earlier, nothing there that's systemic and a lot of those costs are truly one-off, and we're back in a position now where we might need to incur them moving forward. So, on normalized EBITDA margin, 32% was a great result for the year, up 7 percentage points from last year. And as Matt's already talked through, we're seeing the benefit of that changing sales mix and the increased software and HPC revenue really helping us kind of shift into a better quality, higher-margin kind of business. And we saw that really come through with the operating leverage in particular. And so, what I'm referring to there being the fact that we were able to grow revenue at 38%, which was a great result, but simultaneously grow EBITDA -- normalized EBITDA at 78%. And I think that really shows the quality that we're bringing into the business and finally capping it off with a $7 million improvement to NPAT and getting back into being profitable again, which was a great result for -- and a great way to cap off a great year. So, moving into balance sheet, we finished the year with net debt of $13 million. So, there's a few little items here that came through. And so, some of the asset financing relating to the equipment that was purchased in December didn't end up getting finalized until April. And so that's where we saw some of that additional financing come through in Q4. We had contract assets increased during the year. We had some big invoices go out in the last couple of months. So that balance has come down, but we just had a big balance at 30 June due to just timing of those projects and when those milestones were ultimately achieved. One shift that we've made in our balance sheet this year from previous years is shifting HPC right-of-use assets from PPE into the right-of-use asset category. And so previously, this is HPC infrastructure that we buy and then asset finance. Previously, we've been putting that through PPE. But with that balance being significant, we worked through with the auditor and made the decision to shift that through to right of use. So same balances, we've restated that through the accounts, so we get the appropriate comparables. PPE, we had a big step-up then, and we had the equipment purchased earlier in the year to kind of service those big contracts. And then we also had some equipment that was delivered on the 30th of June. Now part of that equipment is to kind of give us a bit of headroom for all these exciting HPC and services opportunities we're seeing coming, but it also helps us deliver on the contract that we announced yesterday, which was the $9.3 million software and HPC contract, which will -- with a 2-year term, which will commence straight away. So that $12.9 million then we see come through trade and other payables. This is just a timing element where financing is arranged after the equipment is delivered. And due to the equipment being delivered on the 30th of June, we have that appear through in trade and other payables, albeit now the financing has come through. On cash flow then, really great receipts from customers and a big step-up on last year, which really helped us drive that improvement in net cash from operating activities. Net cash investing, we saw the $11.6 million, which was, as we've talked about, HPC infrastructure and data storage infrastructure that was added during the year to deliver on those contracts that we won and the heightened increase in revenue through this year. And then net cash flow -- outflows from financing is fairly straightforward for us, and it's just repayments on our asset financing facilities. The nice thing for us as we enter FY '27 is we're starting -- this will be the final year of the equipment that we purchased in mid-calendar year 2024. And so, this will be the last year of those financing repayments. And so, we're going to start to see some of these financing facilities wrap up at the end of the year, which then places us really well from a cash flow and free cash flow perspective as we generate income and revenue from those units, which are fully paid for. I'll hand back over to Matt for the outlook, and then we'll jump into questions.

So yes, thanks, Dan. Software and HPC, we are set for continued growth. And so, we're hoping that we can bring out some more releases and you can follow along our journey there. The compute capacity is now in place to support growth. There's a bit of new compute that's just being installed at the minute, and we're in really good shape now. We don't -- we've got another couple of months to go on the third-party compute, but we'll be off it, and we've now got the capacity to drive that business without the third-party compute. And the industry is really up and about, right? There's a lot of excitement out there. There's a lot of projects. There's a lot happening. The sentiment amongst us and our competitors at the moment is that we're all sitting on these pipelines, and we're waiting for things to drop. And I think it's an uncertainty, an uncertainty issue because of the Middle East is what the obvious thing to us that we think it probably is, but we're not seeing clients bury their heads in sand or anything. It's quite the opposite. Everyone is up and about. And that's why you see Multi-Client going so well across the board for everybody. And so, we're really excited for the following year. We don't quite know -- there's some really big projects we've got. If they drop, then we're going to see very significant growth, but we believe we'll grow regardless.

Great. Thank you, everyone. We'll shift into questions first. So, Milo?

I think we have the Caleb question first.

So maybe just on the order book and the pipeline. I think you mentioned a lot of your sort of peers are also seeing strong pipeline growth. Do you kind of see that converting into order book over the next 6 months? Or it's too hard to tell.

I think that there's -- yes, I do think it will convert, Caleb. I think that we're not going to see the order book drop from here. Well, it's my expectation. We're seeing it maintain. We also eat through the order book a bit quicker now because projects go through the system a bit quicker. The MP-FWI projects now we complete on a shorter time frame. But the -- I do see it dropping. We -- we're waiting for the dam wall to break to be perfectly honest. And there's some projects where -- very large projects where we're up to our sort of seventh clarification, which is sort of -- it just -- it goes to the uncertainty. Normally, if you -- in clarifications, it's a really good time for winning project. So yes, I do see it converting. I see it changing any -- it's very akin to -- I see it changing rapidly. It's very akin to what we had in -- was it '24 or '25, '24?

December '24 into January '24.

Where we won like $20 million or $18 million worth of work in 1 month. It feels like that. It feels like the dam wall needs to burst. Whether it does or not in a hurry, I don't know, but there are some very large projects in the pipeline as well.

Yes. Helpful. And just on the U.S., I think second half, that fell -- went backwards a bit, interesting you said also Houston contributed a lot to sort of the order book falling. Is that just weakness in the Gulf of America? Or is that sort of you guys becoming [ competitive ]? Or how should we interpret that?

It isn't us becoming competitive, Caleb. I think our competitors would love that. We're extremely competitive. We are fighting a battle every day, right? We're fighting against very large companies, and I've said this to you before. And every now and again, they get the upper hand. But having said that, their sentiment is -- what we're hearing is no better than ours. It's just this uncertainty. And yes, a lot of stuff happens in Houston, and we're seeing London maintain its order book quite nicely. We're seeing Malaysian office being a little bit different. We're seeing lots of opportunities in the Middle East and Brazil. There are -- Houston is in an interesting place at the moment. And Houston is also where our competitors are at their strongest and they're really fighting hard at the minute because we've got such a lead on MP-FWI. But having said that, it's good. I'm rambling now, I'm sorry, but it's -- we're not seeing anything that's -- we are extremely competitive. That isn't an issue. We're not losing projects, right? We're not losing projects. That's the point I would make to you. They're just tending to be sitting around. Our percentage of win versus lost projects haven't changed.

That's very good color. And just lastly on Multi-Client. So, you mentioned TGS and Viridien, they sort of do large CapEx programs to sort of buy the rights to that multi-client data. How do you guys -- and you guys mostly do, I think, partnerships at the moment. How do you plan to sort of develop that segment over time?

Through opportunity, Caleb. We just see what opportunity comes along. If -- the thing about Multi-Client is it delivers quickly, right? And so, if we could even buy a Multi-Client business that is cash generative in the short term, then we would certainly consider that. We're considering all avenues to growing that business. But yes, it's -- but we're not interested in growing something that just to grow it for long-term strategic reasons. It has to be cash generative in the short term. But we're looking at all sorts of opportunities for growing Multi-Client. Is that Milo next?

Milo next.

[ Declan ]?

So, another good contract win in the HPC software part of the business yesterday. How are you viewing that pipeline going forward?

Yes, really good. We think we'll manage to win other work in that space. There's other opportunities in the pipeline, significant opportunities that we're working on, and we expect to be able to convert them. But there's no guarantees, but that's what we expect to be able to do, yes.