Earnings call transcript: Pason Systems Q1 2025 sees revenue rise, EPS miss

Pason Systems Inc. (PSI) reported its financial results for the first quarter of 2025, revealing a revenue increase but a slight miss on expected earnings per share (EPS). The company’s EPS came in at $0.25, falling short of the forecasted $0.27. However, revenue surpassed expectations, reaching $113.2 million against a projected $108.6 million. Following the announcement, Pason Systems’ stock price rose by 3.06%, reflecting a positive market reaction despite the EPS miss. According to InvestingPro data, the company maintains a notably low P/E ratio of 3.65, suggesting potential undervaluation relative to its near-term earnings growth prospects.

Key Takeaways

• Pason Systems reported an 8% year-over-year increase in revenue for Q1 2025.
• The company’s EPS of $0.25 missed the forecasted $0.27.
• Stock price increased by 3.06% after earnings release.
• New product innovations and increased focus on automation were highlighted.
• The company maintained strong cash flow and returned $16.3 million to shareholders.

Company Performance

Pason Systems showed resilience in Q1 2025, achieving higher revenue despite challenges in the broader drilling industry. The company’s strategic focus on innovation and automation paid off, contributing to its revenue growth. Compared to Q1 2024, revenue increased by 8%, demonstrating strong performance amidst a 3% decline in North American land drilling activity. InvestingPro analysis reveals the company maintains an impressive financial health score of 3.08 (rated as "GREAT"), with more cash than debt on its balance sheet. For detailed insights into Pason’s financial strength and growth potential, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.

Financial Highlights

• Revenue: $113.2 million, up 8% year-over-year.
• Earnings per share: $0.25, down from $0.69 in Q1 2024.
• Adjusted EBITDA: $45.2 million, representing 39.9% of revenue.
• Net income: $20.0 million, compared to $69.5 million in Q1 2024.
• Free cash flow: $23.2 million, nearly double the $11.7 million from Q1 2024.

Earnings vs. Forecast

Pason Systems reported an EPS of $0.25, missing the forecast by $0.02. This represents a minor miss compared to previous quarters, where the company often met or exceeded expectations. However, revenue outperformed forecasts by $4.58 million, marking a significant positive variance.

Market Reaction

Following the earnings announcement, Pason Systems’ stock price rose by 3.06%, closing at $11.44. This increase occurred despite the EPS miss, likely driven by the revenue beat and positive outlook on new product innovations. Currently trading at $48.22, the stock has experienced a -20% year-to-date return. InvestingPro subscribers have access to additional valuable insights, including 8 key ProTips about Pason’s financial health and market position, helping investors make more informed decisions.

Outlook & Guidance

Pason Systems anticipates modest activity reductions but remains focused on maintaining capital and production investments. The company plans to continue investing in completions and drilling technology while maintaining a quarterly dividend of $0.13 per share. A flexible share repurchase strategy is also in place.

Executive Commentary

CEO John Faber highlighted the company’s ability to generate higher revenue despite lower industry activity, stating, "Pason generated higher revenue in Q1 2025 compared to Q1 2013 despite industry activity being 65% lower." He also expressed optimism about growth opportunities and the importance of reliable data access.

Risks and Challenges

• Decline in North American land drilling activity poses a challenge for revenue growth.
• Potential tariff impacts, although minimal, could affect operations.
• Competition in the completions segment could pressure market share.
• Macroeconomic pressures and fluctuating energy prices may impact future earnings.
• Regulatory changes in key markets may introduce additional compliance costs.

Q&A

During the earnings call, analysts inquired about potential tariff impacts, which the company expects to be minimal. Questions also focused on growth prospects in the completions segment and the potential for unconventional drilling in Argentina. Executives indicated no immediate plans for mergers and acquisitions, preferring to focus on share repurchases.

Full transcript - Pason Systems Inc. (PSI) Q1 2025:

Jenny, Conference Operator: Morning. My name is Jenny, and I will be your conference operator today. The contents of today’s call are protected by copyright and may not be reproduced without the prior written consent of Systems Inc. Please note the advisories located at the end of the press release issued by Payson Systems yesterday, which describe forward looking information. Certain information about the company that is discussed on today’s call may constitute forward looking information.

Additional information about Payson Systems, including the risk factors relevant to the company, can be found in its annual information form. Thank you. At this time, I would like to welcome everyone to the Payson Systems Inc. First Quarter twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question and answer session. Thank you. Celine Boston, CFO, you may begin your conference.

Celine Boston, CFO, Pason Systems: Thank you, Jenny. Good morning, everyone. Thank you for attending Pason’s twenty twenty five first quarter conference call. I’m joined on today’s call by John Faber, our President and CEO. I’ll start today’s call with an overview of our financial performance in the first quarter, and then John will provide a brief perspective on the outlook for the industry and for Pason, and we’ll be happy to take questions.

I’m pleased to report on Pason’s first quarter twenty twenty five results, which demonstrates the resilience in our business through challenging industry conditions with continued growth in most segments and significant outperformance of industry conditions. Pason generated consolidated revenue of $113,200,000 in the first quarter of twenty twenty five, an 8% increase from the $104,800,000 in the first quarter of twenty twenty four. With this revenue, Pason generated $45,200,000 in adjusted EBITDA or 39.9% of revenue, up 7% from the $42,400,000 generated in the first quarter of twenty twenty four. I’ll now provide an overview of the first quarter by business unit. While U.

S. Drilling activity has remained relatively flat in recent months, compared to the first quarter of twenty twenty four, average rig counts in North America were down 3% year over year. During this time, though, Pason’s North American drilling business unit grew revenue per industry day by 7% to $10.67 dollars in the first quarter of twenty twenty five compared to $1,000 in the first quarter of twenty twenty four. As a result, outpacing the 3% reduction in industry drilling activity, the North American Drilling segment generated revenue of $75,800,000 in the first quarter of twenty twenty five, which was 3% higher than the first quarter of twenty twenty four. The segment’s cost base remains mostly fixed in nature and saw lower repair expenses in the first quarter, while depreciation and amortization expenses grew year over year with increased capital expenditures recently.

Further, strength in the U. S. Dollar versus the Canadian dollar in the first quarter of twenty twenty five impacted U. S. Dollar sourced revenue and expenses for the segment.

Resulting segment gross profit of $46,800,000 in the first quarter of twenty twenty five was 5% higher than the $44,400,000 generated in the first quarter of last year, highlighting the segment’s operating leverage. Our International Drilling segment faced headwinds in the first quarter with customer in Argentina reducing activity levels through a pending shift in operational focus away from conventional wells towards more unconventional drilling. The segment generated $14,000,000 in quarterly revenue and $5,800,000 in segment gross profit in the first quarter. Operating expenses for the segment are mostly fixed and were impacted by inflationary effects and changes in foreign exchange year over year. In our Completions segment, IWS had 32 active jobs, up from 26 in the fourth quarter and 28 in the first quarter of twenty twenty four, while industry activity levels fell during those times.

Further, revenue per IWS Day of $5,486 in the first quarter of twenty twenty five grew by 9% from the levels seen in the first quarter of twenty twenty four. I’ll remind listeners that revenue per IWS Day will fluctuate depending on the mix of technology adopted amongst existing customers and further will be impacted by foreign exchange fluctuations with The U. S. And Canadian dollar. Reported revenue for the segment was $16,000,000 up from $12,800,000 in the first quarter of twenty twenty four and a new quarterly record for the segment.

Gross profit for the segment of $1,600,000 represents operating expense investments made for the segment’s current stage of growth, along with $5,600,000 in depreciation and amortization expense associated with the property and equipment and intangible assets acquired on 01/01/2024. Energy Toolbase, which is reported within our Solar and Energy Storage segment, generated $7,400,000 in quarterly revenue, also a new quarterly record and an increase of 98% from the 2024 comparative period, with the timing on deliveries of Control Systems sales driving the difference year over year. The segment’s revenue will continue to fluctuate with timing of these deliveries going forward. Sequentially, Pason benefited from strong Canadian winter drilling activity in its North American drilling segment and also saw growth in the company’s completions and solar and energy storage segments. Revenue grew by 5% quarter over quarter as a result.

Adjusted EBITDA of $45,200,000 in the first quarter also grew from $42,100,000 in the prior quarter, demonstrating the business’ mostly fixed cost base and the resulting operating leverage. Net income attributable to Pason for the first quarter of twenty twenty five was $20,000,000 or $0.25 per share, down from $69,500,000 and $0.87 per share in the first quarter of twenty twenty four, which included a $50,800,000 noncash and nonrecurring accounting gain related to the acquisition of IWS. Our balance sheet remains strong and coupled with our free cash flow generation allows us to make growth related investments while returning meaningful levels of cash to shareholders continuing through periods of uncertainty. In the first quarter of twenty twenty five, net capital expenditures were $16,700,000 which includes investments in building out our valve management and automation technology offering within completions and the ongoing investments in our drilling related technology platform. Free cash flow in the first quarter of twenty twenty five was $23,200,000 compared to $11,700,000 in the first quarter of twenty twenty four, with lower capital expenditures and working capital investments year over year.

With this free cash flow, we returned $16,300,000 to shareholders, ten point three million through our quarterly dividend and $6,000,000 through our share repurchase program, ending the quarter with total cash, including short term investments of $87,400,000 and no interest bearing debt. In summary, we remain very well positioned to not only navigate ongoing uncertainties within geopolitical and industry conditions, but to continue to support further growth in all segments of the business while returning meaningful capital to shareholders. I will now turn the call over to John for his comments on our outlook.

John Faber, President and CEO, Pason Systems: Thank you, Celine. Our financial and operating results for the first quarter of twenty twenty five again demonstrated the strength and resilience of Pason’s competitive position. Our North American drilling segment revenue increased by 3% compared to a 3% decrease in North American land drilling activity on the strength of a 7% increase in revenue per industry day to $10.67 dollars in the quarter. The most significant driver of the increase in North American revenue per industry day was higher levels of product adoption. The compounding effect of Pason’s continued outperformance against North American drilling activity is more evident when taking a longer term view.

Between the first quarter of twenty fifteen and the first quarter of twenty twenty five, which represents a ten year period, Pason’s revenue per industry day has increased at a compound annual growth rate of 6.6%, while North American land drilling activity has declined at a compound annual rate of 7.1% over the same period. As a result, Pason’s revenue per industry day has increased by 90% over that time period, while industry activity decreased by 52%. The impact of our progress in generating additional sources of revenue, which are not directly correlated with North American land drilling activity, can also be seen through a historical comparison. Pason’s consolidated revenue of $113,200,000 in the first quarter of twenty twenty five was slightly higher than $109,300,000 in the first quarter of twenty thirteen, a time when there was 2,216 active land drilling rigs in North America compared to seven eighty five in the first quarter of twenty twenty five. Stated differently, Pason generated higher revenue in Q1 twenty twenty five compared to Q1 twenty thirteen despite industry activity being 65% lower.

In our International Drilling segment, lower levels of activity in Argentina as a result of a large customer’s ongoing shift from conventional assets toward more unconventional development was the primary driver of a 4% year over year decrease in revenue. The outperformance of our Completions segment was even more impressive than our Drilling segment. Revenue from our Completions segment grew 25% from the first quarter of twenty twenty four, far outpacing a 21% decrease in the reported number of active frac spreads in The United States. We saw year over year increases in both our average number of IWS active jobs and revenue per IWS day in the first quarter. As we have noted in previous calls, as we continue to grow our customer base in the Completion segment, we expect that revenue per IWS Day will fluctuate based on customer and job mix.

In our solar and energy storage segment, energy tool base revenue increased 98% year over year from twenty twenty four levels to $7,400,000 in the first quarter. Adjusted EBITDA for the quarter totaled $45,200,000 and was up 7% from twenty twenty four levels, while an adjusted EBITDA margin of 39.9% was slightly lower than the prior year owing to revenue contribution from the completions and solar and energy storage segments where segment margins are lower given their current stage of development. We expect margins in these segments to expand over time as revenues increase. In recent weeks, geopolitical factors have dominated the headlines with ongoing trade disputes, changes to OPEC plus production plans and concerns about the potential for economic recession. We anticipate that our customers are evaluating their capital programs in a variety of commodity price scenarios and may make adjustments to their activity in response to changes in market prices.

That said, we see a number of factors which suggest that any potential decreases in activity would likely be more modest in both depth and duration as compared to previous industry slowdowns. Today, the North American oil and gas industry is comprised of a smaller number of larger, well capitalized producers with stronger balance sheets and less reliance on equity markets to finance their capital programs. A significant portion of current activity is directed at maintaining current production levels rather than growth. And we believe that maintenance capital is among the highest capital allocation priorities of most producers. The outlook for natural gas is more favorable than it has been for many years with expectations of demand growth related to LNG projects coming online and increased power demand related to data center requirements to support artificial intelligence applications.

We also anticipate that any capital reductions would be more proportionate between drilling and completions activity than in previous downturns, given that the current inventory of drilled but uncompleted wells appears to be at or near its minimum sustainable level. In that context, we expect Pason to continue to outpace industry activity and deliver strong financial results. Both our drilling and completions businesses benefit from increasing complexity in drilling and completions operations. As customers continue to pursue automation and analytics efforts, including leveraging artificial intelligence applications and the establishment of real time operating centers, access to consistent, reliable, high quality data is increasingly important for both drilling and completions operations. Pason’s experience over more than four decades in serving the data needs of the drilling market provides us with the ability to make meaningful advancements in helping customers access data across the entire well construction process.

The gains we have made in increasing North American revenue per industry day in our drilling segment and expanding our customer base while maintaining a strong revenue per IWS day in our completions business should translate into continued outperformance against industry conditions. Our innovative new drilling mud analyzer provides continuous real time readings of critical drilling mud parameters and we are seeing higher adoption of our automation products. Our wellsite automation products provide valuable safety and efficiency benefits for customers in their completions operations and we are working closely with customers to develop compelling data management solutions for the completions market, benefiting both operators and service companies. Our capital allocation priorities are driven by a focus on return on invested capital. Today, our highest expected returns on capital come from the organic investments we are making to continue the growth of our Completion segment coupled with the ongoing rollout of the mud analyzer in our drilling related business.

We continue to expect to spend approximately $65,000,000 in capital expenditures in 2025. We will continue to pursue disciplined shareholder returns over time through our regular quarterly dividend and share repurchases. We aim to consistently deploy capital to share repurchases through market cycles, thus buying back larger numbers of shares during periods of market weakness and less shares when the market is stronger. We are maintaining our quarterly dividend at $0.13 per share. We favor flexibility to continue repurchasing additional shares over higher dividends for incremental shareholder returns in the current environment of uncertainty.

We evaluate our capital program with a focus on increasing revenue, generating free cash flow and creating value for shareholders over time rather than simply in response to prevailing near term industry conditions. Our balance sheet remains strong. At March 31, we had $87,400,000 in total cash, including short term investments and positive working capital of $122,100,000 We would now be happy to take any questions.

Jenny, Conference Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question is from Keith McTee from RBC. Your line is now open.

Keith McTee, Analyst, RBC: Hi. Good morning. Maybe wanted to start out on good morning. Just wanted to start out on the tariff front, certainly a big topic of conversation this reporting cycle. Can you run through any of your potential exposure and if you’ve done any work on a potential dollar amount that you think Pason could be impacted?

Celine Boston, CFO, Pason Systems: Yes. Thanks, Keith. So of course, we’re watching the situation very closely much like many companies are. As you know, continues to evolve very significantly. So based on what we know today, we in our business, we do manufacture and repair things on both sides of the border, Canada and US, for use on both sides of the border.

But I’ll say we do have some flexibility around both where and when those things happen. So those are things that we’re keeping in mind as we plan going forward. We did pull forward a little bit of capital expenditures in the first quarter in advance of some potential tariffs, and so we’ve been proactive on that front to the extent we could be. But given what we know today, we don’t expect and don’t believe that the total impact for us in the context of additional CapEx would be overly significant, but we will continue to monitor as things evolve with our very skilled supply chain team.

Keith McTee, Analyst, RBC: Okay. That’s very helpful. And just on the completion side, certainly a nice improvement year over year in revenue and understand the market softness starting at the same time. Can you talk a little bit more about the drivers of that? Is it oil versus gas?

Is it new customers versus existing customers buying more products or increasing adoption? Just any color you can give us that might help determine the sustainability of that revenue level and the potential growth from here would be helpful.

John Faber, President and CEO, Pason Systems: Yes. Sure, Keith. Of the specific things you mentioned, I would say it’s probably not so much related to oil versus gas. You’ll recall last year, we talked about two major dynamics that had been headwinds for that business. One was the natural gas price.

One was also the M and A activity for some of the larger customers that IWS had been working with. I think we are starting to see a little bit of positive effects from some of that M and A transaction starting to settle out and people working on capital programs with the pro form a entities, sort of going forward. So that would have contributed a little bit in the first quarter. And then we’ve, we’ve been adding new customers as well. So that’s been been positive too.

Keith McTee, Analyst, RBC: Okay. That’s it for me. Thanks very much.

: Hey. Thanks, Keith. Thanks, Keith.

Jenny, Conference Operator: Thank you. Your next question is from Aaron MacNeil from TD Cowen. Maybe

Aaron MacNeil, Analyst, TD Cowen: I’ll just piggyback on Keith’s second question. You know, as we look ahead, like, are you seeing green shoots in terms of new customer additions or the potential for growth with existing customers in the current market? And maybe just, you know, are there any capacity bottlenecks or constraints, like, on the Pason side that we should think about in the near term?

John Faber, President and CEO, Pason Systems: I think we’d say, Aaron, that we’re we’re certainly encouraged about the opportunity both on the new customer side and the expansion with customers that we’re currently working with. And I will be careful to say that if we are in a period of a little bit more uncertainty in the market, that tends to slow the adoption of new technology. So we’re certainly encouraged, but I don’t know that I would qualify it as a green shoot in terms of something that we think will be significant in the next couple of quarters. But certainly, all the the base of what you wanna see in terms of more customers using your your products on more jobs and using more of your product on each job, all of those dynamics feel quite positive, in the current instance as we, we sort of look at that business. There’s no real constraints that we would see, within the organization today.

You know, clearly, we’re able to use some of our operational folks from from the drilling side to help with, some of the installation on the completion side. So on the the people related side, we we feel okay, and, we continue to deploy capital to, to building equipment to make sure we’re available to, to serve as opportunities come up.

: Okay. Makes total sense. This is maybe a bit of

Aaron MacNeil, Analyst, TD Cowen: an oddball question, but you’ve spoken to the outperformance relative to the rig count in North America over the past ten years. Can you speak to the potential longer term opportunity in Argentina? I guess, just specifically, like what would be the potential difference in average revenue per day in terms of the hardware on, you know, a a drilling rig targeting conventional wells versus unconventional wells?

John Faber, President and CEO, Pason Systems: Sure. I can kinda give you just a a general feel, Aaron. For for a lot of years, our our overall revenue per day in the Argentinian market would have been quite a bit lower because it would have been a very left skewed distribution of of rates. So we would have had a lot of rigs on the conventional assets using only a portion of the product suite, and so you’d be talking about revenue per day probably measured in the sub $500 range. As you start to move towards unconventionals, you start to adopt more technology, like, in terms of both the numbers of tech products you use, but also the number of instances of each product, as you get into more complex wells.

And then you start to see day rates that start to mirror more of what we see, on the North American side, which is, you know, closer to that thousand dollars a day. So it is a material shift when you move from the, the conventionals to the unconventionals.

Aaron MacNeil, Analyst, TD Cowen: Gotcha. And then maybe I’ll just sneak one more in if that’s okay. John, you’ve spoken confidently about ASOM’s ability to make countercyclical decisions as it relates to capital spending and growth. And I suspect you just have your hands busy or your hands full, sorry, with with the organic opportunities that you have today. But what about the potential for m and a?

Is there just any technology out there that you think would be complementary to the Pason platform? And is an acquisition something you’d consider? Or is that just not on your radar right now?

John Faber, President and CEO, Pason Systems: It’s certainly not something we’re looking for. We think we have lots of opportunities to grow the business today. I think today, when we look at the suite of M and A opportunities, the most attractive opportunity we see in M and A is our own shares. We see lots of growth opportunities for the business, and and the shares are not trading at high prices. And so, if we were gonna do M and A, that’s the most attractive opportunity we see is internal M and A, I.

E, share repurchases.

: K. Thanks, I’ll turn it back.

John Faber, President and CEO, Pason Systems: K. Thanks, Arne.

Jenny, Conference Operator: Thank you. There are no further questions at this time. I will now hand the call back over to John Faber for the closing comments.

John Faber, President and CEO, Pason Systems: Perfect. Thanks very much, Jenny, and thanks for those who have joined us for our our call today. We certainly appreciate your interest and your continued support. If you do have other questions, you can certainly reach out to Selena or myself at any point. We would, welcome your calls.

And otherwise, we will look forward to speaking you, with you again in August following the release of our second quarter results. Thanks very much, and have a great day.

Jenny, Conference Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

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