Business Overview and History
Coda Octopus Group, Inc. (NASDAQ:CODA) is a leading provider of real-time 3D/4D/5D/6D imaging sonar technology and cutting-edge diving technology. The company’s innovative products and solutions cater to a diverse array of industries, including offshore construction, renewable energy, defense, and marine sciences. With a rich history spanning over three decades, Coda Octopus has established itself as a pioneer in the field of underwater imaging and navigation technology.
Coda Octopus Group, Inc. was founded in 1994 as Coda Technologies Limited in the United Kingdom, with the initial focus on developing underwater imaging sonar technology. The company’s breakthrough came with the development of its proprietary Echoscope real-time 3D/4D/5D/6D imaging sonar, which revolutionized underwater operations. Over the next two decades, Coda Octopus expanded its technology portfolio and global footprint through organic growth and strategic acquisitions.
In 2007, the company made a significant move by acquiring Colmek Systems Engineering, a defense engineering services company based in the United States. This acquisition allowed Coda Octopus to diversify its business model and expand into the lucrative defense contracting market, providing specialized engineering services to prime defense contractors.
The early 2010s presented some challenges for Coda Octopus as it navigated the complexities of government contracting and the variability in defense budgets. However, the company demonstrated resilience by leveraging its diverse product and service offerings, as well as its strong relationships with key defense industry players.
In 2017, Coda Octopus further strengthened its position in the market with the acquisition of Martech Limited, a UK-based engineering services firm. This strategic move added complementary capabilities to the company’s defense business and enhanced its status as a provider of specialized engineering solutions.
Today, Coda Octopus operates two main business segments: the Marine Technology Business, which focuses on its proprietary sonar and diving technologies, and the Marine Engineering Business, which provides engineering services to prime defense contractors. The company has established a global presence with operations in the United States, United Kingdom, and Denmark, serving customers across the defense, offshore energy, and commercial diving industries.
Financial Performance and Ratios
Coda Octopus’ financial performance has been mixed in recent years, with the company navigating a challenging operating environment. In the fiscal year ended October 31, 2023, the company reported revenue of $19.35 million and net income of $3.12 million. This represents a decline from the previous year’s revenue of $22.23 million and net income of $4.30 million.
The company’s gross profit margin in fiscal 2023 was 67.3%, compared to 68.3% in the prior year. The decreasing trend in profitability is reflected in the company’s return on assets (ROA) and return on equity (ROE), which stood at 5.36% and 5.93%, respectively, in fiscal 2023, down from 8.89% and 9.80% in the previous year.
Liquidity
Coda Octopus’ liquidity position remains strong, with a current ratio of 15.14 and a quick ratio of 10.82 as of the third quarter of fiscal 2024. The company’s debt-to-equity ratio is 0.0, indicating a conservative capital structure and a low level of financial risk. As of Q3 2024, Coda Octopus reported cash and cash equivalents of $25.22 million and has access to a $4 million revolving credit line with HSBC NA, which currently has no outstanding balance.
Quarterly Performance and Outlook
In the most recent quarter ended July 31, 2024 (Q3 2024), Coda Octopus reported revenue of $5.48 million, up 12% from the same period in the prior year. The company’s gross profit margin in the quarter improved to 73.9%, compared to 68.8% in the third quarter of 2023. Operating income increased by 61.2% to $1.4 million, driven by the higher revenue and improved gross margins. Net income after taxes was $1.3 million or $0.11 per diluted share, compared to $1 million or $0.09 per diluted share in Q3 2023.
The company’s Marine Technology Business, or Products Segment, saw a 6.5% increase in revenue in the third quarter of 2024, generating $3.05 million or 55.7% of the company’s consolidated revenue. The segment’s gross profit margin increased to 82.9% from 82.1% in the previous quarter. The Marine Engineering Business, or Services Segment, experienced a 19.8% revenue growth, contributing $2.43 million or 44.3% of consolidated revenue. This segment’s gross profit margin significantly improved to 62.6% from 50.0% in the previous quarter.
Looking ahead, Coda Octopus remains cautiously optimistic about its prospects but is navigating ongoing challenges, including supply chain disruptions, geopolitical tensions, and the impact of the U.S. presidential election on defense spending. The company noted a slowdown in order intake from US Defense Programs in the second and third quarters due to funding gaps created by the upcoming elections. However, Coda Octopus is actively pursuing growth opportunities, such as the continued adoption of its DAVD technology in the defense market and expanding the commercial applications of its Echoscope sonar systems.
The company plans to use a portion of its $25.2 million cash reserves to fund an acquisition in fiscal year 2024, for which it is currently in the due diligence process. Coda Octopus is also aiming to advance the DAVD untethered system program for adoption by special forces in early 2025, support the rollout of the DAVD technology, return the Engineering Business to its pre-COVID $10 million revenue profile, and continue developing its pipeline of acquisition candidates.
Risks and Challenges
Coda Octopus faces several risks and challenges that could impact its future performance. The company’s reliance on government and defense contracts, particularly in the U.S., exposes it to the volatility of defense spending and the political landscape. Delays in the procurement process and budget uncertainties can disrupt the company’s revenue and order intake, as evidenced by the recent slowdown in US Defense Programs due to the upcoming elections.
Additionally, Coda Octopus operates in a highly competitive market, with the need to continually innovate and maintain its technological edge. The company’s success is dependent on its ability to develop and commercialize new products and solutions that meet the evolving needs of its diverse customer base.
Geopolitical tensions and trade disputes, such as the ongoing tensions between the U.S. and China, also pose a risk to Coda Octopus, as they can limit the company’s access to certain markets and disrupt its supply chain.
Industry Trends and Market Position
Coda Octopus is well-positioned to capitalize on the growing global underwater acoustic camera market, which is expected to grow at a CAGR of around 8% from 2023 to 2028. This growth is driven by increasing demand for real-time subsea monitoring and inspection solutions in industries like offshore oil & gas, renewable energy, and defense. The company’s proprietary Echoscope technology and DAVD system give it a competitive edge in this expanding market.
The Marine Technology Business, which accounts for approximately 66.3% of the company’s revenue in the current 9-month period, sells its products globally. These products, including the Echoscope and Echoscope PIPE brands, are used in various underwater applications such as construction, renewables, oil and gas, obstacle avoidance, mapping, salvage operations, dredging, bridge inspection, and port security. The versatility of the Echoscope technology allows it to serve multiple underwater applications across various market verticals.
The Marine Engineering Business, contributing 33.7% of revenue, focuses on the US defense market. As a subcontractor to prime defense contractors, this segment designs and manufactures sub-assemblies for incorporation into larger defense mission-critical integrated systems.
Conclusion
Coda Octopus Group, Inc. (NASDAQ:CODA) is a pioneer in the field of real-time 3D/4D/5D/6D imaging sonar technology and cutting-edge diving solutions. The company’s innovative products and strong market position have enabled it to serve a wide range of industries. While Coda Octopus is navigating a challenging operating environment, with headwinds such as fluctuating defense spending, supply chain disruptions, and geopolitical tensions, it has shown resilience and adaptability.
The company’s recent financial performance demonstrates its ability to grow revenue and improve profitability despite these challenges. With a strong liquidity position, no debt, and strategic growth initiatives in place, Coda Octopus is well-positioned to capitalize on the expanding underwater technology market. However, investors should closely monitor the company’s performance, particularly its ability to navigate the cyclical nature of defense spending and its success in commercializing new technologies like the DAVD system. The company’s future success will depend on its continued innovation, strategic acquisitions, and ability to address the various risks and challenges it faces in the dynamic underwater technology sector.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.