Behind The Numbers – Coda Octopus (CODA)
Over the last four months, shares of Coda Octopus (CODA) had been on a stellar run, going from approximately $5 to just over $8. Unfortunately, we saw a high-volume selloff in yesterday’s session after the company reported its Q4 earnings. Was this pullback warranted or was it simply profit taking?
First off, CODA is likely a stock that you’ve never heard of before. They operate through two main segments. First up is Marine Technology, where they are a solution provider to the subsea and underwater market. It owns proprietary technology including real time volumetric imaging sonar technology and diving technology, both of which are applicable to the underwater defense and commercial markets. Its second segment is Marine Engineering, where they are suppliers of embedded solutions and sub-assemblies which they design and manufacture and sell into mission critical integrated defense systems such as the Close-In-Weapons System (CIWS) for Raytheon or Northrop Grumman’s Mine Hunting Systems Program.
From the company’s 10-K filing: “Our volumetric real time imaging sonar technology and our Diver Augmented Vision Display (“DAVD”) are our most promising products for the Group’s near-term growth. Our real time 3D/4D/5D/6D Imaging sonars are the only underwater imaging sonars which are capable of providing complex seabed mapping and real time inspection and monitoring and providing 3D/4D/5D/6D data of moving underwater objects irrespective of water conditions including in zero visibility water conditions (which is a common and costly problem in underwater operations). Competing technology can perform mapping (but not complex mapping) without the ability to perform real time inspection and monitoring of moving objects underwater.”
Reading over the company’s earnings transcript, its very clear that the two most important growth catalysts for them include the Echoscope Pipe and its Diver Augmented Vision Display.
Echoscope Pipe – The company’s sonar products are marketed under this name. It believes their Echoscope PIPE is the only technology that can generate multiple real time 3D/4D/5D/6D acoustic images using different acoustic parameters such as frequency, field of view, pulse length, and filters. Customers utilizing these solutions include service providers to major oil and gas companies, renewable companies, underwater construction companies, navies, ports, mining companies, defense bodies, diving companies, as well as research institutes and universities.
CEO Annmarie Gayle, in her prepared remarks, highlighted how the company has been successful in getting their Echoscope PIPE sensors into new defense programs. “We have the opportunity to be the sensor of choice on those platforms. And this year, we sold into four different UX programs who are working on the new generation of underwater vehicles. We also sold into one new Japanese program, again working on the new generation of underwater vehicle for the Japanese defense market.”
“In addition to that, in the commercial space, we sold four Echoscope PIPE sonars on a new underwater vehicle that is going to be used in that exciting application of offshore renewables, where we have the lead in many areas. So we’ve made really good progress around Echoscope PIPE. So this progress made by our technology over the last four years, both in expanding the available models within our sonar series and getting onto some key new underwater vehicle programs in the defense sector, paves the way for us to increase our market share of imaging sonar market over the next two to three years.”
In a post-earnings note, Alliance Global Partners analyst Brian Kinstlinger raised his price target to $10 from $8 saying that Echoscope Pipe “seems to be on the path of becoming” the sensor of choice for defense primes in the process of building new underwater vehicles.
Diver Augmented Vision Display – Also known as DAVD, this diving technology came about from a direct requirement from the U.S. Office of Naval Research. As their 10-K states, DAVD has the potential to radically change how diving operations are performed globally because it delivers real time information simultaneously to the divers underwater and their surface-based dive supervisors. It also allows diving operations to be performed in zero visibility water conditions which is a safety challenge for diving operations. The company has stated that its main focus currently is in the defense sector, including the military and commercial. On the earnings call, management said they expect to deliver the first working prototype by early February. “If trials are successful in spring, we expect to supply multiple units in rapid succession for further evaluation. And then, we expect a production order from this military command in fiscal 2023.”