ROC

As a reminder, this conference is being recorded. I would now like to turn the conference over to Jules Abraham with CORE IR. Please go ahead.

Thank you, Betsy, and good afternoon, everyone. We thank you for joining ROC's Q2 2026 financial results call. Presenting on today's call are Scott Swann, ROC's CEO, and Cody Barnes, ROC's CFO. Brendan Klare, ROC's co-founder and chairman of the board of directors, and David Ray, ROC's head of capital markets and general counsel, will also be available during the question and answer portion of the call. Before we begin, I remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in the company's quarterly report on Form 10-Q filed with the Securities and Exchange Commission, and it does not undertake any duty to update such forward-looking statements. Additionally, during today's call, certain non-GAAP measures will be discussed. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with US GAAP. Now, my pleasure to turn the call over to ROC's CEO, B. Scott Swann. Scott?

Thank you, Jules. Good afternoon, and thank you for joining ROC's Q2 2026 earnings call. The Q2 marked ROC's first full quarter operating as a public company, and it was reflected measurable progress in two areas we outlined on our Q1 call. We have seen improving government contracting activity and broad commercial adoption across the ROC product portfolio. We are pleased to report sequential growth nearly doubling our revenue compared to the Q1. We have also successfully monetized the entire ROC Vision AI platform ahead of our plan. Q2 revenue was $5.1 million. This is up 2% year-over-year, as I mentioned, nearly double Q1 revenue, primarily driven by a 41% increase in R&D contract revenue, which more than offsets the decline in product revenue attributed to the completion of a ROC Watch deployment recognized in prior year periods.

In May, we said government procurement activity appeared to be improving, with awards and revenue to follow incrementally through the remainder of 2026. The Q2 provided initial evidence that funding and program activity are actually beginning to return to normal and develop. Additionally, we advanced our newer ROC products across the Vision AI platform. ROC SDK, ROC ABIS, and ROC Enroll each generated strong year-over-year revenue growth, and ROC Evidence produced its first commercial revenue. Combined, these developments indicate early progress on the path to growth we've outlined. That does not mean growth for the business will follow strictly a linear trajectory. Government awards and deployment schedules are unpredictable, and they create quarterly variability.

However, we believe the Q2 performance demonstrates that the underlying government procurement activity level has increased, the contract awards that we target are beginning to be executed, and a go-to-market strategy is advancing. Taking a closer review of ROC's government-driven activity, R&D contract revenue increased to approximately $3 million from $2.1 million in the prior year quarter. This initial contract revenue growth is encouraging, but activity has still not returned to a normalized rate. Government program timing remains variable and business activity is informed by appropriations, procurement schedules, and the timing of individual awards. That being said, we believe ROC is well-positioned to capture growth opportunities through the H2 of this year. Importantly, the value of these programs extends beyond the initial contract revenue.

Government-funded work allows ROC to demonstrate its technology in demanding operating environments that deepen our customer relationships and position us to pursue expanded programs with our Vision AI solutions. Our overall strategic growth objective for our R&D contract business is straightforward. Converting research into successful mission deployments or proof of concepts that lead to larger, longer duration recurring revenue, and ultimately establishing ROC's American-built technology as the identity infrastructure of government customers. Turning to our product segment. Overall product revenue declined year-over-year due to the completion of a significant ROC Watch deployment, which was recognized in prior year quarterly revenue. To be clear, this was a profoundly successful project for ROC. Under the construct, the ROC Watch solution was selected for an initial short-term contract period with a strict timeline and a tailored to really highly sensitive mission for a government agency.

Based on rigorous intelligence results, it validated that mission and that critical utility, and ROC Watch outperformed customer expectations, and that deployment was subsequently expanded and ultimately completed successfully with high customer satisfaction. This ROC Watch mission is an important example of contract economics because certain ROC product programs are phased and finite Revenue may be concentrated in particular periods depending on program and deployment milestones. Excluding the ROC Watch year-over-year comparison, the broader product portfolio showed strong progress. ROC SDK revenue increased 84% to approximately $1.6 million, supported by growth in new customers. ROC ABIS revenue increased 723% off a marginal base in the prior year quarter. The current ABIS revenue contribution was a result of our early go-to-market process to advance these initial customer programs to commercial deployment, and we are continuing discussions with their consequential potential beachhead customers.

Our newest product brought to market, ROC Evidence, generated its first commercial revenue following an early deployment completed ahead of original commercialization timeline. ROC Enroll revenue increased 125%, also from a small base, reflecting continued adoption by our key enterprise customer, MTN in South Africa, as it activates an expanded rollout plan for identity enrollment and verification. Our commercial growth model remains consistent across our Vision AI platform. We introduce ROC products with a defined use case, prove our performance, and successfully expand across additional users, workflows, locations, and products. The ultimate objective is to secure beachhead customers that require capacity to deliver multiyear identity intelligence programs with ROC's technology and support for a recurring, repeatable revenue stream. Before shifting away from a product performance, I'd like to touch on our digital evidence growth strategy. During the quarter, we pursued a strategic initiative designed to enhance our ROC Evidence product.

As announced in June, we entered into an agreement to acquire ZTC, a legacy strategic partner of ROC. Consolidating ZTC into ROC's business and operations was a natural next step in our collaboration with this uniquely skilled engineering team. We see this as a strategic acquisition intended to build a robust version of ROC Evidence with ZTC's additional digital forensic capabilities, their domain expertise, and government customer relationships. We have already made a lot of progress on aligning our companies in advance of closing the transaction. Integration across our engineering, products, and business development is well underway and showing promising results, with the business operation integration to be completed quickly upon closing. We will provide further details once the transaction is complete with greater visibility into the financial profile and full scale of the integrated company. We anticipate closing the transaction by the end of the Q3.

I'd like to spend a moment to revisit ROC's differentiator. It is not simply that we are American-built. It's that we combine this U.S. ownership and development with technical performance validated by top-tier performance in independent industry benchmarks. We believe that combination is increasingly relevant to national security, public safety, and critical identity infrastructure. Our commercialization efforts are also supported by this independent validation as a key consideration in both government and commercial procurement processes. During the quarter, ROC achieved NIST results, including the fastest latent fingerprint search speed in the evaluation of latent fingerprint technologies benchmark, and leading identification accuracy results across multiple friction ridge image and features friction fingerprint technology evaluations. These results matter because our customers require this objective evidence of accuracy, speed, and scalability, and they frequently support their acquisition decisions.

We also continue to strengthen the platform and organization as we deepen our public market heritage. We appointed Dr. Kathleen Kiernan, former Assistant Director for the ATF Office of Strategic Intelligence and Information, to our board of directors. We also added Steven McQueen, former Director of the FBI's Threat Screening Center, as a senior advisor establishing our Homeland Security and intelligence market strategy. Additionally, our ROC Watch suite of solutions received a DT&E designation under the Department of Homeland Security SAFETY Act and were named Facial Recognition System of the Year in the 2026 AI Breakthrough Awards. As a newly public company, our mandate is to deliver on the objectives within our control to our shareholders, and we acknowledge that our credibility we build as we demonstrate execution against our expressed strategic priorities. The Q1, we said government activity was beginning to improve.

In the Q2, R&D contract revenue increased materially. We indicated that we were advancing ROC ABIS and ROC Evidence toward commercial use. In the Q2, ROC ABIS revenue expanded. We covered multiple new customers, and ROC Evidence generated its first commercial revenue ahead of our internal planning. We invested in talent across product development, business development, and deployment capacity, as well as investing in our AI ML algorithm development engine, our technology hardware, and processing infrastructure to drive durable growth and scale. Our responsibility now is to convert those investments into larger customer programs for a more durable revenue profile and scale. With that, I'll turn the call over to Cody Barnes, our Chief Financial Officer.

Thank you, Scott, and good afternoon, everyone. I will now provide a brief overview of our financial results for the Q2 ended June 30th, 2026. Total revenue for the Q2 of 2026 was $5.1 million, compared to $5 million in the Q2 of 2025, an increase of approximately $0.1 million or 2%. Product revenue was $2.1 million, compared to $2.8 million in the prior year quarter, a decrease of $0.7 million or 26%. As Scott said, the decrease in product revenue was due to the completion of a significant ROC Watch deployment recognized in the prior year quarter. ROC Watch revenue in the Q2 decreased 87% year-over-year. This was partially offset by higher revenues for ROC SDK, ROC ABIS, ROC Enroll, and ROC Evidence.

ROC SDK revenue was approximately $1.6 million, up 84% year-over-year, reflecting continued customer adoption of our foundational software platform. ROC ABIS revenue increased 723% year-over-year to approximately $0.2 million, driven by multiple new customer deployments. ROC Enroll revenue grew 125% to approximately $0.1 million, reflecting the planned expansion of our MTN deployment. ROC Evidence generated its first commercial revenue during the quarter. ROC R&D contract revenue was $3 million, compared to $2.1 million in the Q2 of 2025, an increase of $0.9 million or 41%. The increase reflected revenue recognized from an exercise of an option to significantly expand an existing government R&D contract. Importantly, this award reflects improving government contracting activity following the slower award environment experienced in late 2025 and early 2026.

Gross profit increased to $4.6 million in the Q2 of 2026 from $4 million in the Q2 of 2025. Gross margin expanded to 90% from 80% in the prior year quarter. The improvement reflected the quarter's shift to higher margin revenue mix with lower cost of sales. We believe this reflects the strength of our software-driven revenue model and the efficiency of our Vision AI platform. Notably, margin will fluctuate depending on the revenue mix of software licenses, services, hardware, and R&D contract revenue. Operating expenses were $5.3 million in the Q2 of 2026, compared to $3.2 million in the Q2 of 2025. Selling, general, and administrative expenses increased to $3.3 million, primarily driven by our continued investment in growth, reflected in higher personnel-related costs across engineering and product development, business development, and operations.

Research and development expenses increased to approximately $2 million. The increase from the prior year reflects continued investment in engineering, product development, and platform enhancement. Net loss for the Q2 of 2026 was $0.8 million, compared to net income of $0.6 million in the Q2 of 2025. Basic and diluted loss per share was $0.04, compared to basic and diluted earnings per share of $0.04 in the prior year period. as of June 30th, 2026, we had $11.9 million in cash, approximately $14.8 million in working capital, and no outstanding debt. We believe the post-IPO balance sheet provides the flexibility to continue executing our current strategic growth plan against product development, deployment capacity, customer acquisition, and the infrastructure required to support larger, longer-duration programs. With that, I'll turn the call back to Scott.

Thank you, Cody. In closing, our Q2 results showed progress, but they also clearly indicate there is work to do in executing against our stated plan. Our goal remains establishing beachhead contracts for all of our products and expanding those relationships both within the product line and across the Vision AI platform. Our priorities are to convert government-funded activity into larger production programs, advance ROC ABIS and ROC Evidence customers into expanded deployments, and grow existing customer relationships across additional ROC products. Completing the ZTC transaction will further accelerate our product development capabilities and our ability to serve new and existing customers. The core opportunity for ROC is market recognition as the leading American-built identity technology infrastructure for national security and law enforcement customers, which generates long-duration customer relationships and high-margin revenue. We're encouraged by the progress made during this quarter.

We also understand that credibility will be established as we demonstrate sustained execution with contracts secured, deployments completed, customers expanded, and financial performance delivered. That is the long-term value proposition of ROC. We appreciate the continued support of our dedicated shareholders, customers, our partners, and our employees, and we look forward to providing updates on our development. I'd like to now hand the call to the operator to begin the questions and answers session.

We will now begin the question and answer session. To ask a question, please press star then one to join the question queue. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Once again, to ask a question, please press star then one. At this time, we will pause momentarily to assemble our roster. The first question today comes from Yifu Lee with Benchmark. Please go ahead.

Hello, Scott, and the Rank One Computing team. Thank you for taking my question. Congrats on a strong Q2 on nearly doubling revenue quarter-over-quarter while boosting gross margin to 90%. Scott, I just want to start with the macro environment, especially as it relates to the government recovery. Obviously, R&D revenue grew 41% year-on-year. I think you clocked in at $4.9 million, which is pretty much nearly the entire balance of 2025, right, in R&D revenue. Can you describe what you are seeing, Scott, in terms of the government side, the recovery? I know you mentioned that it's not linear, the recovery, but as we all know, September is the fiscal government year-end. I just want to get your thoughts on how you characterize the funding environment.

I know in your prepared remarks, you say it's a little bit slower in terms of approval. Just want to get your thoughts on that just to start off the conversation, Scott.

Thank you, Yi. As we're coming off of a fiscal year in 2025 that was operated the entire year in a continuing resolution and then a record government shutdown, it did set the stage for a slow half of the year, in large part because the monies for government agencies hadn't made it to where they needed to get to those particular agencies that would execute against that money. The revenue is a good indicator. The award of the R&D contract is a good indicator that the government is back in more of a normal operation. But there are several other indicators that we really pay a lot of attention to.

Those are increases in interaction, additional quotes and pricing, and solicitations, and we're seeing all those signals from the government right now that they are moving toward their milestones of having to obligate their FY '26 monies by September 30th of this year.

Got it, Scott. Thanks for that. Would you characterize any possibility of a budget flush that we are accustomed to? I know like three years ago, in the SaaS software space, the government needs to spend that money before fiscal year-end. Would you anticipate any sort of that coming just because there is still a lot of money left?

There is certainly a lot of money left within the government. I think those that are doing business with government agencies will see a stronger performance in the H2 of the year. It takes time for them to move that money to a contract and get that awarded to particular vendors. The key for government agencies is that they have to obligate that money by September 30th, and that sometimes can go to third parties like integrators that can subsequently award that money to technology providers like us. I think that will trickle into Q4 in some respects for some government contractors. All that said, the government is sitting on some very large budgets that they need to execute before September 30th or to obligate before September 30th.

I think that there is a lot of energy toward that within the government agencies right now, and we are seeing all those signals with our customers.

Got it, Scott. The next topic is really the pipeline conversion. I am sure a lot of investors want an update, and you provided a great update. Let us start off with the ABIS contract first, right? You did two pilot programs in the quarter. Can you help us understand from these pilot programs to long-term deployment? We just want to understand the journey to get from initial pilot to full commercialization deployment. How long does it take for these projects to scale up? Because I remember during the IPO process, research process, you mentioned these are large scale projects, could be seven, eight figures, and you have two pilots going on. Can you give us a sense of the ramp-up on those?

Yes. Early in the deployment of your new product capabilities, a few things happen. First of all, the first adopters get the best deals. We work very closely with them to make sure the products are truly ready for market, and that helps us to really ensure that we have that scalability moving forward. We successfully worked with two of our ABIS customers this year to provide them with deployments. As we move forward into our next set of deployments, we would be looking at larger opportunities, depending on the agencies. Some of the agencies are smaller in size and could be smaller opportunities.

As we start approaching larger federal agencies and having ABIS opportunities in that particular space, we will have those credentials under our win column of already having proven out the technology, and that is what I believe where we will see our longer-term durable revenue with repeating year after year revenue grow.

Any timeline, like I know Trideum Corporation is part of the program. Should we think the cadence is like 12-18 months, to fully ramp these ABIS projects up?

That is about the cadence, but do note that we are not starting from zero. We have been working several of these, so we have already been working specifically for capture in many different AFIS and ABIS market spaces now. As I set out at the beginning of our IPO, our key priorities for this year is to establish our beachhead wins in each one of our product lines. Those two early ABIS wins this year, they do not constitute what we consider beachhead wins. Beachhead wins to us are multimillion dollar contracts, multimillion dollars per year, contracts that have multi-years associated with them. We are looking to establish that not just in the AFIS/ABIS market, but across a few of our product lines this year.

Got it. Just to balance things out for investors, I know you mentioned that ROC Watch, there is a completion of the ROC Watch deployment. We have seen some headwinds this quarter. Just want to get your help, investor understand, about the cadence of ROC Watch deployment going forward, whether the expanding customer base will create opportunities for more recurring value. Seems like there is some lumpiness on the ROC Watch side. Can you give us a little more color on how to think about ROC Watch?

Yeah, I think this is just timing. I think as you look at the particular project that gave us a spike last year, that was a very mission-related project that we were very successful in delivering that particular project. As I mentioned, in the government budget cycles, it takes time for the valuations, the money to get to the agencies and the actual obligation and execution of those funds to a contractor. We have been very active in various pilots and opportunities and quotes and activities within the ROC Watch portfolio. Our focus this year is scaling ROC Watch, as well as establishing a major beach customer in ROC Watch as well.

But would you anticipate, let us just say the H2, how would the ROC Watch? Will there be any headwinds on year-over-year comparisons, I guess, because of this roll-off of the contract?

I will not provide any formal guidance moving forward, but I will say that we are fostering several opportunities moving forward. I believe that we are really focused on the growth of our various product lines, and I anticipate that the Q2 of 2025 was a bit of a spike in ROC Watch performance in comparison to what we will see as we move forward within 2026.

Got it. Thanks for that. Scott, on the ROC Evidence, I will lump these two questions together. ZTC, you talked about how the strategic impetus to buy ZTC is to accelerate ingesting the data for the Evidence product. We see some wins at the U.S. Drug Enforcement Administration. It started last quarter, but I think you guys made good headway into that. How would you characterize ZTC will help you accelerate, let us just say, the Evidence side of your portfolio?

Yeah, they are a key partner in this. We would have been working with them even had we not moved forward toward an acquisition. They have decades of experience in working in the digital evidence space, and our ability to help them focus more toward a product mindset and working towards a ROC product in the digital evidence space is already paying dividends. As I mentioned, we have already made great strides in the integration of ZTC into ROC on the engineering and product space. Those strides have already been presenting to customers and giving us good signals of the demand signals that we are seeing from those that need forensic digital evidence capabilities.

Really combining their decades of engineering experience building these products with our product mindset of building out applications, is already well underway and something that I think that we will see a lot of benefits from in the near term.

Got it. Makes sense. For the technology enhancements, I know ROC won some award in fingerprinting search, whether it be search or accuracy. How should investors think about these award accolades? It seems like the ROC platform is earning more and more. Does this open the door to certain avenues that was not able to go into, in terms of those awards?

Yeah, it's very important. We oftentimes talk about being one of the only American companies in this space. We're really the only American company that's providing identity technologies across all the various biometric modalities. We don't win on just being American alone. We really have to prove our performance and that we are best in industry when it comes to our algorithms. So the recognition that we get from winning these benchmarks and awards is important from the business development perspective. Even more so, some of the government procurement activities are structured to help support acquisition decisions based on how well we perform in these evaluations. So we take them very seriously. We're performing extremely well across the board in all those biometric modalities, thanks to our research team.

Got it. I'll finish off with the financials, Scott. I'll ask, we'll put them at the same time, is go to market. In terms of the go to market investments, can you give us a status on that? How should we think about the team? Are you ramping up? Is there sufficient resource? Lastly on the financial is, I think you have $11 million, a little bit more than that on your balance sheet. Your timing on fundings, how much runway you have. Also give us some color. I know you gave us some qualitative guidance, but we've seen some good outperformance, right, in terms of revenue growth this quarter, almost 100%, as well as gross margin, 90%. How should we think of it as we head into the Q2 this year? That's it for me. Thank you, Scott and team.

That's right. I'll answer the first part of this question, then I'll hand it over to Cody to take you through the second part. I would say, we deployed capital early. We were prepared to launch that capital to support our growth. We intelligently deployed to make sure that we got people in place quickly, and also invested in the hardware resources that we need to accelerate the abilities of our research team. The majority of that allocation has been already put in place and deployed. To this point now, we'll really be focused in converting those investments into capital. Given the software nature of our business, as we look forward and we are optimistic about the H2 of the year, with the margins that we create, we essentially are able to start converting our business into cash also as we move forward.

Cody, I'll allow you to have some little more color on the balance sheet.

Yeah. Thanks, Scott. I think on the liquidity side, we ended the quarter with $11.9 million in cash, $14.8 million in working capital, and no borrowings outstanding on our facility. The use of cash reflects the investments that we've discussed and been discussing, mainly personnel-related, into product development, into our infrastructure and deployment capacity. Just overall, we're very comfortable with our current liquidity profile and balance sheet, and we'll continue to be disciplined with how we allocate operating capital. I think in terms of just forward-looking, we won't provide formal guidance, but I'll just emphasize again that we've been very deliberate with the investments we've made in the H1 of the year. We're obviously encouraged by Q2 results. We're seeing good engagement in the opportunity funnel and, again, the balance sheet's very healthy.

I think collectively, that sets us up really well for the H2. Then just to touch on the gross margin, I wouldn't think about it as a quarterly run rate, Yi. Gross margin is going to move around based on contract mix. This quarter in particular, we benefited from a higher mix of software license revenue and a relatively lower cost of sales associated with R&D contract revenue. By comparison, the prior year quarter included a large ROC Watch deployment, which carried some marginal delivery costs that were very unique to that project. I think we should generally expect some quarter to quarter variability in gross margin, and we should definitely look at this over a longer trailing period. Thank you.

Got it. Thank you, Cody and Scott, for patiently taking all my questions. Congrats again on a strong 2Q. Talk soon.

Thanks.

Thank you, Yi.

As a reminder, if you would like to ask a question, please press star then one to join the question queue. This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. The call has now concluded. Thank you for attending today's presentation. You may now disconnect.

As a reminder this conference is being recorded. I would now like to turn the conference over to Rory Rumore with CORE IR Investor Relations.

Thank you and good afternoon, everyone. We thank you for joining ROC's first quarter 2026 financial results call. Presenting on today's call are Scott Swann, ROC's CEO, and Cody Barnes, ROC's CFO. Brendan Klare, ROC's Co-founder and Chairman of the Board of Directors, will also be available during the question-and-answer portion of the call. Before we begin, I remind everyone that today's call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. During today's call, we may discuss certain non-GAAP measures which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. It's now my pleasure to turn the call over to ROC's CEO, Scott Swann.

Thank you, Rory. Good afternoon, and thank you for joining us for ROC's first quarter 2026 earnings call, our first as a public company. Before Cody reviews our financial results, I want to spend a few minutes introducing ROC, explaining how we think about the market opportunity in front of us, and framing the strategy we are executing as a newly public company. ROC is U.S.-built, owned, and operated Vision AI company focused on identity, security, and digital forensics. At its core, our technology helps customers transform visual data into operational intelligence. We help verify identity, detect threats, analyze evidence, and support faster, more informed decisions in mission-critical environments. Said another way, ROC's technology is analyzing and extracting meaning from raw pixels and visual data. That includes biometrics, video analytics, object detection, and digital evidence.

These capabilities support military, law enforcement, national security, financial technology, public safety, and commercial security customers tasked with protecting people, infrastructure, and sensitive systems. We operate in markets where accuracy, speed, trust, and control of the technology stack are critical. Our customers are not buying experimental or proof-of-concept AI. They're deploying operational technology in environments where performance matters and where failure is not acceptable. The simplest way to understand ROC is this: We combine biometrics, video analytics, object detection, and digital evidence into a unified Vision AI platform. Instead of offering a single point solution, our platform is designed to support multiple identity and intelligence use cases utilizing the same layer underlying technology architecture. That matters because the market is moving toward convergence. Identity, video, physical security, digital evidence, and mission intelligence are no longer separate categories.

Customers increasingly need systems that work together, share intelligence, and scale across agencies, facilities, and operating environments. ROC was built for that environment. A major part of our differentiation is that our technology is developed here in the United States. In national security, public safety, and identity infrastructure, that is not just a branding point. It is a strategic requirement. Much of the global identity and biometric technology market has historically been served by large foreign incumbents. ROC was founded to provide a domestic alternative with accuracy, efficiency, security, and scalability required for the most demanding applications, and our solutions have been built by the people who have lived the mission. Our team was forged in real-world crisis, from September 11th to the Boston Marathon bombing to Iraq and Afghanistan, and covert operations with operators, scientists, and engineers from the military and FBI.

People who carried the mission and now build the tools to win it. Our platform serves four major mission areas: national security, public safety, digital identity, and physical security. Within those markets, we commercialize a portfolio of products built on the same underlying technology foundation. ROC SDK is the foundation of our platform. It allows customers and partners to integrate our biometric and recognition technology directly into their own applications. ROC Watch is our video intelligence platform. Cameras are everywhere, but most camera systems remain passive. ROC Watch turns video into actionable intelligence through real-time analytics, visitor management, threat detection, and post-event investigation capabilities. ROC Watch is one of the largest contributors to our product revenue, and in the first quarter, ROC Watch revenue increased 77% year-over-year. Driving this growth were two expanded programs within the Department of War, demonstrating our land and expand business model.

In addition, we secured a new ROC Watch contract with the U.S. University, signaling early traction from the growing demand in the early security market. ROC ABIS is our automated biometric identification system. This is a national-scale biometric identity platform designed for large-scale matching and verification. We believe ABIS represents one of the most important long-term opportunities for ROC because these systems can become deeply embedded infrastructure for government and public safety customers. In the first quarter, ROC ABIS revenue increased 255% year-over-year from a small base reflecting early commercialization and deployment activity. In March, we launched the first ROC ABIS forensics capability pilot with a state and local law enforcement customer. ROC Evidence is our digital investigations platform. It is designed to help customers manage, analyze, and act on evidence in real-world investigative environments.

We believe ROC Evidence can become an important part of our public safety and digital forensics strategy as customers look for more efficient ways to handle growing volumes of digital information. In fact, in April, we deployed our first ROC Evidence program for the United States Drug Enforcement Administration to support the agency's digital and evidence management procedure. ROC Enroll supports identity onboarding and verification, turning a simple image capture into a secure biometric identity workflow. Finally, ROC Access is our entry into the intelligent physical access control. Our first hardware device, ROC Access Face1, combines biometric identity verification with embedded security intelligence at the point of entry. In March, ROC Access Face1 was recognized by the ISC West, which we believe reinforces the market relevance of bringing ROC's Vision AI capabilities into access control. Importantly, these products are not disconnected offerings.

They're built to operate on the same underlying platform, and the platform structure is central to how we believe ROC can scale. Our financial model is moving toward a product-led, programmatic, recurring revenue profile. R&D contracts will remain an important part of our business, particularly because they help fund innovation and deepen our relationships with government customers. Over time, our objective is to materially increase the contribution from productized software, platform deployments, and longer duration customer programs. That shift is important because it enables the broad scalability of the business. In the first quarter, product revenue represented the majority of total revenue.

Within product revenue, ROC Watch grew 77% year-over-year, and ROC ABIS grew 255% year-over-year, demonstrating continued adoption in the two product areas we believe will become meaningfully long-term growth drivers and where we expect to emerge as dominant market leaders. At the same time, our 79% gross margin reflects the software-driven economics of our platform and the operating leverage we believe will follow as product deployment scale. The way we build our product-driven revenue base is straightforward. We land, we expand, and then we count, compound. We often begin with a pilot, an initial deployment, or a specific customer use case. As those deployments prove their value, they can expand into broader programs across additional locations, agencies, workflows, or product modules.

Over time, the goal is for ROC identity and intelligence technology to become the embedded operating infrastructure for our customers. It is not a one-time tool, but a system they rely on every day. That is how pilots become programs. Programs can become systems of record, and systems of record can create long-duration, more predictable revenue opportunities. This is also why contract durability matters. Across our product portfolio, certain opportunities support multiyear contract structures, including three-to-five year and five-to-10 year contractual programs, depending on the product, customer, and deployment model. We believe that creates a foundation for improved visibility, recurring or repeatable revenue, and stronger long-term operating leverage as the business scales. Our capital allocation strategy is closely aligned with that model. We are investing to scale what is already working: engineering, product development, customer success, deployment capacity, business development, and compute infrastructure.

The objective is to shorten time to deployment, accelerate time to long-duration recurring revenue, support larger programs, and preserve the margin discipline that is central to our model. When investors think about ROC, we want them to understand the model clearly. Mission-critical technology, software-level gross margins, product-led expansion, longer duration program opportunities, and a platform designed to compound over time. The first quarter began a transition period for ROC. We completed our IPO, commenced trading on the NASDAQ, strengthened our balance sheet, and continued advancing our product and commercial growth strategy. At the same time, our reported revenue was impacted by lower R&D contract activity and public sector procurement timing, including the lingering effects from the late 2025 federal funding lapse resulting from U.S. government shutdown.

We believe the resolution of the government shutdown and the approval of DHS appropriations in April were important positive developments for the broader federal procurement environment. Earlier this year, many agencies were operating under continuing resolution dynamics and broader budget uncertainty, which slows procurement, new program starts, and award execution. Since appropriations were finalized, we have seen what we would describe as a healthier and more normalized federal budget environment across several areas relevant to ROC. Importantly, we are now operating within typical federal fiscal year window, where agencies are actively working to obligate fiscal year 2026 funding prior to September 30th year-end. Historically, that environment accelerates procurement activity, evaluations, pilot transitions, and contract execution timelines, and particularly in mission-critical areas tied to national security, public safety, identity modernization, and AI-enabled operational capabilities where ROC operates.

From a demand standpoint, we continue to see strong interest across our core markets, including biometrics, digital evidence, real-time video and analytics, border and access control applications, and broader Vision AI platform opportunities. We believe the strategic relevance of trusted and sovereign AI solutions is continuing to gain traction within sensitive government environments where performance, transparency, and operational trust matter. We also continue to monitor developments on Capitol Hill and broader national security funding priorities. Overall, we view the current funding backdrop as constructive for our industry's customer engagement, pipeline activity, and demand momentum through the balance of 2026. Crucially, we do not view the long-term demand any differently. We continue to see strong demand for our trusted American-built Vision AI across government, public safety, digital identity, and commercial security markets.

Our focus now is execution, converting product adoption into larger deployments, expanding active programs, and judiciously deploying capital to support scale across the enterprise. With that overview, I'll turn the call over to Cody Barnes, our Chief Financial Officer, to review the first quarter financial results.

Thank you, Scott, and good afternoon, everyone. I will now provide a brief overview of our financial results for the first quarter ended March 31, 2026. Total revenue for the first quarter of 2026 was $2.5 million, compared to $3.2 million in the first quarter of 2025, a decrease of approximately $0.6 million or 20%. Product revenue was $2.3 million compared to $2.4 million in the prior year quarter, a decrease of $0.1 million or 5%. The decrease in product revenue primarily reflected lower revenue from ROC SDK and ROC Enroll, partially offset by growth in ROC Watch and ROC ABIS. ROC Watch revenue in the first quarter increased 77% year-over-year, reflecting continued customer adoption and expansion of active deployments.

ROC ABIS revenue in the same period increased 255% year-over-year, reflecting early commercialization and customer deployment activity. R&D contract revenue was $0.2 million compared to $0.7 million in the first quarter of 2025, a decrease of $0.5 million or 69%. The decrease was primarily attributed to the completion of a significant prior year R&D program, with new R&D contract activity in the current quarter occurring at a smaller scale. As Scott Swann mentioned, the pace of new contract awards and customer order placement during the quarter was affected by the lingering effects of the U.S. Federal government funding lapse that occurred from October 1st, 2025 to November 12th, 2025.

Although the funding lapse ended prior to the start of the first quarter, it constrained federal procurement and contracting activity through late 2025, which delayed certain customer purchasing decisions, contract awards, and program authorizations that we believe would have otherwise advanced during the quarter. Gross profit was $2 million in the first quarter of 2026 compared to $2.5 million in the first quarter of 2025. Gross margin was 79%, consistent with the prior year period. We believe this reflects the strength of our software-driven revenue model and the efficiency of our Vision AI platform. Operating expenses were $5 million in the first quarter of 2026 compared to $3.5 million in the first quarter of 2025. Selling general administrative expenses were $2.9 million compared to $2 million in the prior year period.

The increase was primarily driven by higher personnel-related costs across product development, business development and operations, and incremental public company costs. Research and development expenses were $2.1 million compared to $1.6 million in the first quarter of 2025. The increase reflects continued investment in product development and platform enhancement. Net loss for the first quarter of 2026 was $3 million, compared to a net loss of $0.7 million in the first quarter of 2025. Basic and diluted net loss per share was $0.18, compared to $0.05 in the prior year period. As of March 31st, 2026, we had $16.6 million in cash. Net proceeds from our IPO and the partial exercise of the underwriter's overallotment option totaled $21.5 million.

We believe our balance sheet provides the flexibility to continue investing in product development, deployment capacity, customer acquisition, and the infrastructure required to support larger, longer duration programs. With that, I'll turn the call back to Scott.

Thank you, Cody. In closing, with a strengthened balance sheet, we continued investing in the people, the products, and the infrastructure needed to support ROC's next phase of growth. During the quarter, we saw continued momentum in key areas of our product portfolio, particularly ROC Watch and ROC ABIS. While R&D contract revenue was lower in the first quarter, the underlying demand environment for trusted identity, security, and intelligence technology remained strong. Our strategy is straightforward: deploy our mission-critical Vision AI in markets where performance, trust, and control of the technology stack matter. Focus on providing American-built technology in areas that are central to national security, public safety, digital identity, and physical security. Implement a land and expand model designed to convert initial deployments into broader programs with durable recurring revenue. Invest with discipline to support high margin, long duration revenue opportunities over time.

We believe this is the right model for ROC. It is a product-led, it is platform-driven, and is focused on turning customer adoption into durable programs that compound revenue over time. ROC's opportunity is not simply to sell software modules. Our opportunity is to become part of the operating infrastructure that customers rely on to verify identity, detect threats, analyze evidence, and make decisions. This is the long-term value proposition of ROC. We believe we have the technology, the team, the customer base, and balance sheet to execute against that opportunity. We appreciate the support of our shareholders, customers, partners, and employees as we continue building ROC as a public company, and we look forward to providing updates on our developments in due course. Thank you for joining us today.

I'd like to now hand the call to the operator to begin the question-and-answer sessions with our covering analysts.

Thank you. We will now begin the question-and-answer session. The first question today comes from Yi Fu Lee StoneX. Please go ahead.

Thank you for taking my question. Congrats on the strong growth on the ROC Watch and ABIS product despite navigating through a challenging partial government shutdown while balancing obviously the IPO as a public company. Scott, I just wanna start with you first on the macro environment. Obviously, we're navigating through, you know, ongoing geopolitical conflict, higher oil prices, interest rate that doesn't seem to go anywhere. You know, as of April 30th, the longest partial government shutdown impacting, you know, the Department of Homeland Security has officially ended. Just wanna get your sense on, like Scott, like the market, you know, after the government shutdown has ended. You know, has the public sector been stabilized? What are you seeing, now that we're in midway through the second quarter, in terms of, you know, things turning?

Yes, thank you.

Yes.

Yeah, we're very optimistic about the current signals that we are seeing. As you alluded, not only was there a government shutdown, but there was also no official budget passed in 2025. Now we are on a routine fiscal year, where there is, you know, budgets that are seem to be very healthy within the federal government. They will, you know, need to obligate funds, much of those funds before September 30th of this year.

While we see internally, some lumpiness in the awards here at ROC, we do feel very optimistic about the communications and the growth of our pipeline for being able to be well-positioned to support the federal government and public sector throughout 2026.

Is it fair to say like, Scott, like I know like, you know, like after the, you know, reopening, I guess, right? That, you know, like you need to build momentum pipeline, right? contract doesn't get signed the next day, right? Obviously, right? Is it fair to say because the federal government budget, as we all know, we cover software, like in September 30th, that in terms of the timing perspective, does it make more sense that you would expect the flush to come in the third quarter in just a sec? I'm just trying to manage the expectations.

I think that's very observant. I think we can likely see much more activity in Q2, with probably more of a surge in Q3. As you allude to, it takes time for the government money to move. You know, as a new budget was finally released, you know, that has to work itself from treasury to the department level, down to the specific agencies that actually execute against that money. That process takes time. Then there's the interaction with the vendor to actually get the contracts or funding on existing contracts, in some cases, moved. All that takes time, the government doesn't move, you know, incredibly fast.

I think you're very observant to recognize that it will probably for 2026 for most federal contractors, there'll be more late awards than you would see in other years.

You would envision the budget is, if not the same as last year, even more healthier. Is that correct, Scott, to make that assumption or?

Yeah. That information is all public information, and from our observations, it looks as if that the federal agencies are well-funded this year, even more so than last year.

Yeah.

Let's move on to.

I'm sorry, just to add, I mean, they're further focused on our priorities that we're developing for national security, and U.S. nascency and the reauthorization of the SBIR program, you know, which had been stopped, is pretty important signal for us as well.

Okay. Thanks, guys. Let's move on to the pipeline. Obviously, like ROC Watch up 77% and ABIS up 2.55x. It's looking strong there, and obviously you have your first deployment on ROC Evidence as well as the launch of ROC Access. Just want to get your sense, Scott, Cody, Brendan, and team, on the pipeline. What are you seeing in your pipeline right now that you're working on? Like, what are like the near-term opportunities will, you know, you intend to let's just say convert? 'Cause, 'cause we all understand this is your year of IPO. You're still laying the foundation. Chances are there's gonna be, you know, greater momentum next year.

What are the low-hanging fruits, let's just say, that you feel, you know, more confident that you could get in the near term? Can you comment on those?

Yes, I can. You know, in 2025, at the end of 2025, we were at market with one product, which was ROC Watch, and so we landed some of our early wins in that space. This year we're still in a land phase, but we are starting to expand with that particular product to really achieve, you know, what we hope to be some of that longer duration ARR type contracts. We come to market this year with three additional products. Our goal for this year is to establish the beachhead contracts and players in that space. We will be in that land phase for our other product e-elements. As we mentioned, we do have some early ROC ABIS wins.

We had our first ROC Evidence customer in April of this year, and we're looking for expansion into those particular areas and to larger contracts. I would think our goal is to have, you know, beachhead customers across our entire product portfolio within the Vision AI platform in 2026.

Scott, I know like during the IPO process when we do our due diligence, ABIS is the product where if you land, you're gonna win big. These could be seven, even eight-figure contracts. We weren't expecting like, you know, you guys already make great headway into this product. Can you know, elaborate, you know, how did you pull forward like the adoption of ABIS? You just launched it, and it's already gaining like great traction there.

That's right. We achieved a lot of our development of the Vision AI platform prior to going public. As we have been able to start applying that capital, we've been able to scale the business and more complete those particular products and go to market. We have been working on our pipeline opportunities for some amount of time, even pre-IPO. You know, a lot of our opportunities are tied to the government's natural process for recompeting contracts. A majority of the federal contracts right now, especially in the ABIS market, are in some stage of market research or already starting recompete efforts. We have our targets in mind within the federal space, especially of the areas where we are trying to win business in 2026.

Across the rest of the sectors and the other products, we also have very specific targets in mind that we will be working toward in 2026.

Is it fair to say, like Scott, like most of your portfolio is government-heavy? On the commercial side, I remember you mentioned like telecom as well as fintech are certain engagements you're working on. Maybe give us a little bit more color if you can on those as well.

Yes. Late in 2025, we hired our channel manager within the commercial security market, we have had some early wins in that space. As we mentioned, we won the innovation award for biometrics at the ISC West with our ROC Access Face1. We are well into further business development in those particular spaces. In the commercial market, expanding several of the channel partners have been established, now we are looking to grow that channel in those spaces. In the telecom space, we have seen some uptick in volumes with one of our large customers for the telecom SIM card registration process. We will continue to monitor that market to understand how that might impact our growth in 2026.

Okay. Is there any, like, timing on that, on the telecom? Like, would it be a second half, fourth quarter, third quarter?

There's no key timing that we're eyeing there. You know, we see sustained growth in that side, but it's not the area that we'd consider most optimistic, you know, relative to ROC Watch, ABIS and ROC Evidence. You know, ROC SDK always has exposure there. You know, if you look at the latent effects of the government shutdown, you know, what that hit the most was ROC SDK and R&D contracts. You see, you know, our ROC SDK has always been spotty, and transactional in nature, really outside of the telecoms, and the fintech use cases that we support there. That, that has fit a nice pattern, you know, continued incremental growth.

Got it. Gary Lac. I just wanna, you know, get some color, like, you know, obviously he's a veteran, may have worked with you guys at IDEMIA previously.

Yes.

Can you comment on, like, maybe his priorities first 100 days? It sounds like you guys wanna, I guess, institutionalize a sales and marketing function. You know, how will he play a, you know, instrumental role in this?

Yes. Gary Lac has a tremendous amount of experience within the entire identity ecosystem, but specifically in the AFIS, ABIS market. He has worked at many of the larger foreign providers in this particular space. Gary is also technical in nature. I think an area of particular importance is the go-to-market strategies that Gary will assist us with. His ability to bridge between our engineers and our marketing team to ensure that we have the right go-to-market messaging, the right components to really represent the products that we're building, I think will go quite a way. Very specific strategy in the AFIS, ABIS space to assist us in how that go-to-market will really come to fruition in 2026 and beyond.

Got it. Scott, I understand, you know, you previously worked at IDEMIA, and obviously the recent headline, obviously, you know, a travel management software company, Amadeus, acquisition. Have you seen any change of control disruption that you may think that ROC can take advantage of because of M&A disruptions in the market?

Yeah. We view this as optimistic. You know, our focus is on our strategy, given that particular acquisition, I think it only strengthens our strategy with respect to trying to create the domestic capability to be able to provide identity technologies to the rest of the world as American growing capabilities. I think in that particular space, you know, acquisition tends to have a slowness in research, a slowness in really being able to get a lot accomplished. I think that particular, you know, activity, it probably won't be complete until summer of next year. There's a window here of opportunity for ROC to really, you know, accelerate our go-to-market focus on the strategy that we've always laid out here for us.

We still remain, to our knowledge, really the only U.S. provider of these identity technologies across the capabilities that we're trying to serve with this Vision AI platform.

Thanks for that, Scott. I just want to squeeze in one technology question for Brendan before I move on to Cody on the financial side. Hey, Brendan, you know, like, obviously, AI Labs has, you know, I would say, like, command a lot of the mind shares lately. How would you for the newer investors on the call, like, how would you characterize the defensibility of ROC's platform against the likes of, you know, the LLM providers in terms of technology moves?

Yeah, absolutely. You know, what we build is different architecturally from a machine learning perspective than large language models. They're much, much more efficient and precise at the computer vision tasks that our customers need us to perform, where, you know, massive scale identity databases or 100,000s of cameras, you know, looking for weapons. The, we see just, you know, the cost of compute, the cost of memory, all these things continue to run higher just because LLMs are very inefficient. They're also not that precise in general as well. You know, this is our core pedigree. There is areas that we use LLMs currently.

They're part of our strategy, we don't see anything changing anywhere in the foreseeable future in terms of how we build our algorithms. We see this as a strength too, you know, relative to legacy competitors of ours out there. You know, we're much further down, you know, sort of the deep tech, you know, compute stack. And then we're pulling in some of these nascent capabilities as well, we're not following what we see as maybe pitfalls for solutions to certain problems on the resource-intense nature of large language models.

That makes sense. Thanks for that, Brendan. Cody, just to wrap it up on the financial side, obviously we've seen some headwinds on the government contract, but the shutdown has reverted. It's been back in government's back in business. Was wondering if you could give us some, like, you know, like, soft guardrails in terms of, like, you know, what do you expect, your expectation for 2026, now that, you know, the government's back in business? Final question is obviously with the capital raise, I think you still have $16.6 million on your balance sheet. Your thoughts on the capital allocation. I know Scott mentioned about, you know, hiring talents as well as investing in the infrastructure. Just want to get your take, that's it for me. Thank you, guys.

Yeah, thanks for that question. You know, I think, you know, Scott, I think spoke to it really, really well. There's just gonna be some inherent lumpiness, especially driven by some of the more legacy, you know, SDK component business and the government R&D contracts. Overall, we're encouraged as we look forward to the subsequent quarters, from our perspective, and I think again, Scott and Brendan spoke really, really well about this. We don't see any sort of structural changes in the opportunity funnel. Overall, you know, we're encouraged, you know, as the government dynamics play out. You know, we are encouraged to see some more activity, you know, pick up in Q2 and throughout later this year.

From an overall capital allocation perspective, I think overall we transformed our balance sheet with the IPO. We're very well capitalized. We're focused in deploying capital into really four primary areas, engineering R&D, business development and sales, deployment infrastructure and algorithm compute capability. Our investment is focused on scaling what is working. We'll continue to pay attention to how the opportunity funnel converts over multiple quarters, and we're encouraged on the direction.

Thank you for that, team. Just a reminder for the, you know, general public, we are hosting the management team of ROC tomorrow. If you wanna get connected with the team, I'm happy to facilitate. Thank you guys, congrats on the IPO.

Thank you.

Thank you.

This concludes our question-and-answer session as well as our conference. Thank you for attending today's presentation. You may now disconnect.

Greetings, and welcome to the Drilling Tools International Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ken Dennard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2025 Third Quarter Conference Call and Webcast. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of third quarter results and 2025 outlook before opening the call for your questions. There will be a replay of today's call that will be available via webcast on the company's website at drillingtools.com. There will also be a telephonic replay -- a recorded replay, which will be available until November 14. Please note that any information reported on this call speaks only as of today, November 7, 2025. And therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on the call will contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand those risks, uncertainties and contingencies. Comments today will also include certain non-GAAP financial measures, including, but not limited to, adjusted EBITDA and adjusted free cash flow. The company provides these non-GAAP results for information purposes, and they should not be considered in isolation from other directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures and reconciliations to the most directly comparable GAAP measures can be found in the earnings release and our filings on the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne?

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials and our reaffirmed 2025 outlook. I'll then come back and provide a few additional thoughts before we open it up for questions. We are pleased to report that our 2025 third quarter results came in better than we anticipated. Proactive communications with customers and our ability to flex pricing options in response to commodity price swings have successfully stimulated higher activity levels during the quarter, offsetting the impact of any previously negotiated pricing concessions. We also demonstrated strong financial discipline during the quarter by simultaneously reducing debt, building cash reserves and returning capital to shareholders through buybacks. Specifically, we paid down $5.6 million in debt, increased our cash position by $3.2 million and bought back an additional $550,000 of common shares. DTI has benefited from solid progress on our strategic initiatives, particularly the integration of our recent acquisitions in the Eastern Hemisphere. During the third quarter, we saw a significant increase in utilization of the DNR tool fleet in the Middle East and throughout the Eastern Hemisphere. This increase and DNR tools deployed contributed to our Eastern Hemisphere growth and Middle East expansion during the quarter. Year-over-year, our Eastern Hemisphere operations grew revenue by 41% and contributed approximately 15% of our total revenue in the third quarter. The Eastern Hemisphere is performing in line with our forecast plan, demonstrating our disciplined approach to capital allocation and our ability to successfully integrate new assets into our operations. Looking forward, commodity prices continue to flex as geopolitical uncertainty has enhanced volatility in oil and gas markets. However, average rig counts and activity levels appear to have stabilized during the quarter. In as much, our teams continue to skillfully manage their current fluctuations in commodity prices and rig counts delivering resilient financial results while navigating this evolving energy landscape. Again, while the rig count appears to be stabilizing, we still expect uncertainty to continue causing disruptions through both pricing pressure and utilization. To combat these disruptions, we implemented a cost-cutting program in the first half of 2025 to reduce expenses by an annual $6 million in order to align our spending with the activity levels of our customers. However, we have experienced an increase in customer activity that has directly offset price discounts, particularly in our DTR product line as well as new contract wins with customers. Therefore, we are pleased to report that we no longer anticipate needing the full $6 million of cost cuts to maintain adjusted free cash flow and achieve other outlook ranges. Our pricing strategies that we have implemented are yielding positive results on activity levels, and we currently believe $4 million of cost cuts will prove sufficient for 2025. Please note, however, that we still have contingency plans to adjust the organization while maintaining operational flexibility to quickly respond to any market events in the future. David will now take you through some third quarter and 9-month metrics as well as our 2025 outlook. David?

Thanks, Wayne. In yesterday's earnings release, we provided detailed third quarter and 9-month financial tables. So I'll use this time to offer further insight into specific financial metrics. Looking at our third quarter results, we generated total consolidated revenue of $38.8 million. Third quarter tool rental revenue was $31.9 million, and product sales revenue totaled $7 million. Net loss attributable to common stockholders for the third quarter was $903,000 or a loss of $0.03 per share. And adjusted net income was $751,000 or adjusted diluted EPS of $0.02 per share. Third quarter adjusted EBITDA was $9.1 million and adjusted free cash flow was $5.6 million. Additionally, our capital expenditures in the third quarter were $3.5 million. If activity stays level, we expect CapEx to be relatively flat for the fourth quarter. Looking at maintenance CapEx for the third quarter, it was approximately 10% of total revenue. As a reminder, our maintenance capital is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market trends. As I say each quarter, we will continue to review all CapEx spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow. As an update on our capital allocation strategy, we are constantly evaluating opportunities to strategically deploy capital with the sole focus of maximizing value for our shareholders. I am pleased to announce that during the third quarter, we paid down $5.6 million in debt, increased our cash position by $3.2 million and bought back an additional $550,000 of common shares at an average of $2.09 per share. As of September 30, 2025, we had approximately $4.4 million of cash and cash equivalents and net debt of $46.9 million compared to $1.1 million in cash and cash equivalents and net debt of $55.8 million at the end of the second quarter. We will continue to prioritize financial strength through a disciplined capital allocation strategy by utilizing all of the tools at our disposal when opportunity presents itself. Looking at our geographic segment mix, we continue to benefit from our diversified geographic footprint and customer base with 15% of our total revenue coming from our Eastern Hemisphere segment. We continue to expect gradual improvement in this area with additional product sales and rental opportunities as rigs are added back in the Middle East and customers' existing inventories are depleted. The Eastern Hemisphere segment has helped offset some of the activity declines in North America by contributing to our overall positive trajectory throughout the first 9 months of the year. Before I turn to our outlook discussion, let me recap the results of our first 9 months. Nine-month revenue totaled $121.1 million, adjusted EBITDA was $29.2 million, capital expenditures were $16.1 million and adjusted free cash flow during the first 9 months of 2025 was $13.1 million. Our team continues to execute well across multiple fronts from operational efficiency to customer satisfaction to strategic initiatives. As we disclosed in yesterday's earnings release, and as Wayne mentioned earlier, we are maintaining our 2025 full year guidance ranges, albeit leaning at or slightly above the midpoints of these ranges based on our past 3 quarters' positive results. 2025 revenue is expected to be in the range of $145 million to $165 million. Adjusted EBITDA is expected to be within the range of $32 million to $42 million. Capital expenditures are expected to be between $18 million and $23 million. And finally, we expect our 2025 adjusted free cash flow to range between $14 million to $19 million. In the long run, we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale. The strategic acquisitions to our portfolio are positioning us for international growth and are also providing valuable synergies that will benefit our long-term growth trajectory. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Thank you, David. We are continuing to make substantial headway on our synergy program called OneDTI. Our OneDTI program has been onboarding all our operating divisions onto the same systems and processes and integrating the acquired business units to our Compass platform to manage assets and customer transactions. As I mentioned on our last call, we relocated our U.S. Drill-N-Ream repair facility from Vernal, Utah to Houston, Texas, and it is now fully operational. This strategic relocation came 2 years ahead of schedule and is delivering expected cost savings and efficiency benefits. Additionally, we expect to have integrated all Eastern Hemisphere operations into one centralized accounting platform by the end of December, going live in January of 2026. This is a major milestone for the growth potential of the company as it streamlines workflows, maximizes accountability and importantly will accelerate the integration of future acquisitions into the DTI platform much more quickly. And of course, we continue to be actively looking at M&A opportunities. So before we open up the lines for questions, I would like to highlight the following. We remain upbeat about our prospects for the remainder of 2025 and into 2026. While the activity declines to date have not been quite as severe as we initially anticipated 7 months ago, we have demonstrated that we can quickly adapt to a rapidly evolving market, preserve our financial strength and deliver meaningful shareholder value. We continue to see opportunities in our core markets. Our competitive position remains strong, and the acquisition integrations are positioning us well for sustained growth. We are confident that elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe. The foundation we've built through our strategic acquisitions gives us confidence in our ability to capitalize on emerging opportunities that broaden our geographic reach, diversify our revenue streams and serve our customers even more effectively in key markets. Our past M&A activity has enhanced our competitive position, increased our resilience in a dynamic environment and has positioned us to move quickly when new value-creating opportunities present themselves. We believe that our best-in-class performance-driven, technologically differentiated offerings, expanding global geographic footprint, combined with disciplined M&A activity will deliver solid results as energy markets recover in 2026 and beyond. In closing, I'm encouraged by the momentum we are building across the organization, and it's exciting to see how we have adapted and pushed ahead in a dynamic environment. We are seeing the benefits of our investments beginning to materialize, and our personnel continues to execute well in a rapidly changing global marketplace. I would like to thank every member of the DTI organization for their continuous dedication to working in a safe, inspired and productive manner. This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth and ability to deliver value to our shareholders. With that, we will now take your questions. Operator?

[Operator Instructions] Your first question comes from Steve Ferazani with Sidoti & Company.

Appreciate the color on the call this morning.

Sure.

I want to break it down a little bit into U.S. versus Eastern Hemisphere. Obviously, 3Q, maybe the rig count didn't decline as much as a lot of people had anticipated. Nevertheless, it was still down about 5%. Can you talk about how you've -- how utilization has been for you? I mean when I look at your product sales, which is primarily drill pipe recovery, it held up very well. It was actually up sequentially in Q3. So you can talk about how the U.S. is holding up for you for your business and what we're still seeing maybe a moderating decline, but still a decline in 3Q?

So thank you, Steve. This is Wayne. We've been working on a number of initiatives to mitigate this slow creep of rig count decline, but it was certainly a lot less of a decline than we tried to anticipate early on with all indications where it was going to be more sphere. We've participated in a number of RFQs and tenders in the North American market throughout the last few months, and we were able to win some business and maintain some of the business we had with existing clients. So that enabled us to maintain a very reasonable level of activity despite seeing a rig count decline. Now rig count decline means some jobs are not going to be available for the suppliers. So there seems to be a mix that occurs when that happens. And we were more successful, we believe, in maintaining or aggregating some of that business over that period of time. And I think that sells itself well because what we're able to do is our best-in-class products and service and the things that we do usually are successful when quality and service matter. And what happens in these down cycles, these operators focus specifically on who or what service suppliers and product suppliers are giving the best quality and service because they need that to translate into performance and results in their wellbores and less in those events. So our market-leading position and tools and the things we provide to all of these clients, that leading indicator for us prevail throughout this little -- the cycle that we're experiencing. So we're pretty proud of that. And our other product lines have held up pretty well. So overall, I think we feel like it's a win-win. We've outperformed the down cycle.

Yes, no doubt, no doubt. We've seen the primary portion of the rig count decline was coming in the Permian, but we've seen some pockets of strength and/or stable drilling in other markets. Talk about your positioning because I know you have operations in every major U.S. basin. How that's helpful? And are you seeing an uptick in some of the markets outside of the Permian?

So we're well positioned in every market out there and appropriately positioned for scale, size and capabilities, particularly in the Northeast, where our activity in Haynesville is where gas activity is holding strong, and you're seeing some light at the end of the tunnel. And as your -- you remember in some of our discussions, we were able to move tools around to service those markets fairly easily because of the type of business we have. So we've made sure that we've supplied those customers in those areas where the activity creates -- is created. And we keep those supply chains running smoothly.

In terms of -- I know your guidance, you mentioned the seasonal slowdown through earnings season. We're hearing a lot of folks saying that it's not going to be as pronounced this year. What are you hearing from customers? I mean we're into early November. What are you seeing and hearing from customers so far as far as the normal seasonal slowdown in December?

You mean in Q4?

Yes.

Well, it seems to -- it doesn't feel like it's accelerating. It feels like we're still a month away from someone having budget exhaustion and thinking they're going to drop a number of rigs, but we're not seeing an acceleration of that happening as of today. That doesn't mean it couldn't -- we couldn't see a more accelerated decline. But it feels like it's just flat to slightly down the rest of the year than some optimism going into next year, depending on which operator you talk to.

That's fair. On the international side, I think you pointed out Middle East, Saudi strength. Can you provide a little bit more color on where you're seeing the stronger versus weaker areas versus your expectations 6 months ago or 12 months ago?

Sure. I'll tell you, I spent the last week in the Middle East and there's definitely some optimism, and there are some detailed announcements where Saudi is picking up a few rigs from land and offshore. And ADNOC, I think, in UAE is also going to maintain an activity that's solid. The interesting thing is there's so much talk about the unconventional gas becoming more prevalent in both of those major operating areas being Saudi and UAE. So again, because of our experience and the types of tools and services we provide, we will be more and more successful in supplying those markets because we have all the experience here, and we've transferred a lot of the tools and technology and people that we have aligned there. We're ready to -- we're kind of ready to go in the unconventional uptick that's going to happen in those markets. So we're pretty -- feel pretty positive about that.

Excellent. If I get one more in. You talked about the rental tools model and how you can generate cash flow in a down market, and you've proved it through the first 9 months. Your net leverage is basically flat from the beginning of the year. Your net debt is basically flat from the beginning of the year. And you've been able to buy back stock. I mean your net leverage is still very reasonable. Does that make you think you might get more aggressive on stock repurchase? Or how are you thinking about that given a very healthy balance sheet after going through several months of this slowdown or several years, you could say?

Well, we continue to try to look at the 3 or 4 tools that are at our discretion to use for our free cash flow. And debt reduction is probably the primary one that we'll use. So it's kind of baked into -- remember, our stock buyback program is baked into some limitations on volume. So as that ebbs and flows, we'll take advantage of that. And we believe our stock is undervalued. And we'll use a portion of those proceeds to do that with those limitations. So I think it's more debt pay down, some stock buybacks and some selective CapEx purchases were needed, where we think the opportunities arise. And then as usual, we've got our -- we're laser-focused on M&A opportunities going forward.

Next question is Sean Mitchell with Daniel Energy Partners.

Wayne, I know you were recently in the Middle East. Obviously, that drove a lot of your -- the Eastern Hemisphere drove a lot of the growth. Can you talk a little bit about lessons learned from your acquisitions in the Middle East and maybe the opportunity set going forward? I know you said you're looking hard, but is there specific countries or regions that you're really going to be focused on? And then maybe even the opportunity set on the M&A front in the U.S.?

Yes, no problem. So historically, you could count on the international rig count, the international activity being NOC-driven, more longer-term different operating metrics there, driven by those NOCs for longer-term objectives. And so the rig count is usually stable. But we had a little outlier event when Saudi dropped a bunch of rigs here last year and kind of surprised. I think there was not a -- it was every surprised soul in the market was watching that with wonder. And -- but I think it was temporary, and I think the market is becoming more in balance, and we're hearing good -- we're good -- we're hearing some positive indications that they're going to pick up some rigs next year and reimplement some drilling programs that they had recently idled. So that's good news. But the remaining part of the international market was relatively flat. I mean with -- but for a few ebb and flows that naturally occur. We're seeing -- the enthusiasm around that show at ADIPEC is it's really an international oil show. It's amazing how many people throughout the world attend that show. And it's not just specifically focused on the Middle East. So there's a lot of enthusiasm around what's happening in the Eastern Hemisphere. And we're glad that we're strategically positioned to be a part of it. To answer your question about our acquisitions, the lessons learned is make sure we stay focused on executing on those. And -- but for the Saudi downturn of -- recent downturn activity, but hopefully pick up in the future, that would be the outlier on some of our acquisition execution expectations.

I would like to turn the floor over to Wayne Prejean for closing remarks.

All right. Thank you, everyone, for your interest in listening. We continue to be focused on executing on our international expansion. And we've got a lot of resources focused on making that happen. We have a solid team here, a well-old machine here in North America that continues to be a market leader and perform well in a challenging market environment, but we see optimism on the horizon as well, and we'll continue to deliver solid financial results throughout this continuous cycle that we're experiencing. We have optimism for 2026. So thank you for your interest, and we look forward to the next call.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Greetings, and welcome to the Drilling Tools International 2025 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International 2025 Second Quarter Conference Call and Webcast. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of second quarter results and 2025 outlook before opening the call for your questions. There'll be a replay of today's call that will be available via webcast on the company's website at drillingtools.com. There will also be a telephonic recorded replay available until August 21. Please note that any information reported on this call speaks only as of today, August 14, 2025, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read DTI's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. The comments today will also include certain non- GAAP financial measures, including, but not limited to, adjusted EBITDA and adjusted free cash flow. DTI provides these non- GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why the company believes these non-GAAP measures are useful to investors, certain limitations of using these measures and reconciliations to the most directly comparable GAAP measures can be found in the earnings release and our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne?

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials and our reaffirmed annual 2025 outlook. I'll then come back and provide a few additional thoughts before we open it up for questions. Despite well-documented industry headwinds and global rig count declines, we are pleased to report that second quarter year-over- year total revenue grew nearly 5% and adjusted EBITDA grew 4%, this tracks ahead of our forecast plan as we reach the halfway point of the year. Our performance this quarter reflects strong execution across most of our business segments, though we continue to see some variability in specific areas. As you may recall last quarter, we felt it was prudent to revise our annual revenue, adjusted EBITDA and adjusted free cash flow guidance ranges based upon expected lower commodity prices resulting in reductions in rig count and pricing pressures. However, DTI benefited from solid progress on our strategic initiatives, particularly the integration of our recent acquisitions in the Eastern Hemisphere, European drilling projects and Titan Tools. Additional progress came from the cost reduction program we instituted early in Q1, and we benefited from outperformance in our DTR and pipe rentals product offerings in the Western Hemisphere. This was somewhat offset by a decrease in product sales due to market conditions and significant softness in our deep casing product line as a result of rig declines in the Middle East and Mexico. Overall, we delivered consolidated financial results that slightly exceeded our internal forecast for the second quarter. Another highlight for the quarter is we achieved positive adjusted free cash flow in the second quarter for the first time since becoming public. Historically, this has been our weakest quarter due to the impacts of front-loaded CapEx and seasonality effects in Canada. We also continue to benefit from our diversified geographic footprint and customer base. Sequentially, our Eastern Hemisphere operations grew revenue by 21% and contributed approximately 14% of our total revenue in the first half of this year. The Eastern Hemisphere is performing in line with our forecast plan, demonstrating our disciplined approach to capital allocation and our ability to successfully integrate new assets into our operations. During the second quarter, we saw a significant increase in utilization of the DNR tool fleet in the Middle East and throughout the Eastern Hemisphere. This increase in DNR tools deployed contributed to our Eastern Hemisphere growth and Middle East expansion during the quarter. As a result, I am pleased to report that our Drill-N-Ream Eastern Hemisphere Group achieved its first positive adjusted EBITDA month during the quarter, and this momentum is something we expect to build on in future periods. Looking forward, commodity prices continue to flex as world events have created volatility in the oil markets. Average rig count and activity levels have continued to trend downward. In the past, current oil prices would typically support higher drilling and completions activity than we are seeing today, but our customers have remained cautious as uncertainty persists. Our team continues to skillfully manage the current volatility in commodity prices and rig counts delivering resilient financial results while navigating the evolving energy landscape. While the market works to find its footing, we still expect uncertainty to continue causing disruptions through both pricing pressure and utilization. In anticipation of these disruptions, and as I mentioned earlier, we implemented a program in the first half of 2025 to cut expenses by an annual $6 million in order to align our spending with the activity levels of our customers. We are pleased to report that we are on track to exceed this goal. Should the market deteriorate further, we have contingency plans to continue adjusting the organization while maintaining operational flexibility to quickly respond to the current challenging environment. Despite these challenges, I'm encouraged by the momentum we're building across the organization. We are seeing the benefits of our investments beginning to materialize, and our personnel continues to execute well in a dynamic market environment. David will now take you through some second quarter and 6-month metrics as well as our reaffirmed annual 2025 outlook. David?

Thanks, Wayne. In yesterday's earnings release, we provided detailed second quarter and 6-month financial tables. So I'll use this time to offer further insight into specific financial metrics. Both total revenue and adjusted EBITDA increased over last year's second quarter by 4.8% and 4.1%, respectively, in the face of a 7% global rig count decline over the same period. These results reflect our continued focus on operational discipline and the successful contribution from our recent acquisitions. The integration of Eastern Hemisphere acquisitions is proceeding as planned with these businesses contributing nicely to our overall results. We believe this continues to validate our stated growth and M&A strategy to further strengthen our business model and diversify our geographic footprint. Looking at our second quarter results, we generated total consolidated revenue of $39.4 million, comprised of tool rental revenue of approximately $32.8 million and product sales of $6.7 million, in line with our forecast expectations despite a drop in deep casing sales compared to last year. Our tool recovery revenue has remained slightly elevated and continues to underpin our product sales performance and fund our maintenance CapEx. While pleased with this performance, we continue to gather forecast intel as our best-in-class commercial team works diligently to monitor market conditions and customer demand patterns closely. Second quarter adjusted EBITDA was $9.3 million and adjusted free cash flow was $1.8 million. At the end of the second quarter, we had approximately $1.1 million in cash and cash equivalents and net debt of $55.8 million. We are focused on driving sustainable improvements in our cost structure while maintaining our investment in growth opportunities. Looking at our geographic segment mix, we continue to benefit from our diversified geographic footprint and customer base. Our Western Hemisphere activities slowed in the second quarter compared to the first quarter of 2025. And as Wayne mentioned, while the majority of our company is performing at or above expectations, our deep casing business continues to lag behind our other product lines, which impacted overall sales. However, we expect to see gradual improvement in this area with additional product sales and rental opportunities as rigs are added back in the Middle East and customers' existing inventories are depleted. The Eastern Hemisphere segment has helped offset some of the activity decline in North America by contributing to our overall positive trajectory throughout the first half of the year. Specifically, our Eastern Hemisphere operations grew sequential revenue by 21% and contributed approximately 14% of our total revenue. We expect the Eastern Hemisphere contribution to grow in the second half of the year. Adjusted free cash flow in the second quarter was $1.8 million, a positive indicator given that we have reported negative adjusted free cash flow in every second quarter since we went public in 2023. Additionally, our planned CapEx spend in the second quarter was considerably lower than in the first quarter. Going forward, we expect CapEx to be significantly lower in the second half of this year than it was in the first half. We will continue to review all CapEx spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow. Looking at maintenance CapEx for the second quarter, it was approximately 10% of total revenue. As a reminder, our maintenance CapEx is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market trends. Before I turn to our outlook discussion, let's recap our first 6-month results. 6-month revenue totaled $82.3 million. Adjusted EBITDA was $20.1 million. Capital expenditures were $12.6 million and adjusted free cash flow during the first 6 months of 2025 was $7.5 million. Our teams have executed well across multiple fronts from operational efficiency to customer satisfaction to strategic initiatives. As a result, our financial results are slightly ahead of where we expected to be at the halfway point of 2025. As we disclosed in yesterday's earnings release and as Wayne mentioned earlier, we are maintaining our full year 2025 revenue outlook to be in the range of $145 million to $165 million. We continue to expect adjusted EBITDA to be within the range of $32 million to $42 million. Gross capital expenditures are expected to be between $18 million and $23 million. And finally, we expect our 2025 adjusted free cash flow to range between $14 million to $19 million. As I stated during our first quarter conference call, pricing pressure, product mix and activity declines have impacted our margins. While we didn't experience significant pricing pressure in the second quarter, we believe the margin compression from pricing pressure will emerge in Q3 and Q4, while activity declines may continue, albeit at a slower pace than before. However, in the long run, we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale. The strategic acquisitions to our portfolio are positioning us for international growth and also providing valuable synergies that will benefit our long-term growth trajectory. Finally, as an update on our capital allocation strategy, we are constantly evaluating opportunities to strategically deploy capital with the sole focus of maximizing value for our shareholders. Back in May, we added another tool to our tool belt with the initiation of a share repurchase program. I am pleased to announce that during the second quarter, we repurchased $600,000 of DTI common stock at an average price of $3 per share. We recognize that there is a significant disconnect between the price of the stock and our perceived value, and we feel it is prudent to act accordingly. We will continue to prioritize financial strength through a disciplined approach and we'll strategically utilize all the tools at our disposal when the opportunity presents itself. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Thank you, David. Earlier this month, we eclipsed the 1-year anniversary for our SDP acquisition, and I would like to provide an update on the integration strategy that we launched a couple of quarters ago. It's called One DTI. This is an active consolidation effort to get all of our operating divisions synergized on the same systems and processes. We have recently relocated our U.S. Drill-N-Ream repair facility from Vernal, Utah to Houston, Texas, and it is now fully operational. This strategic relocation came 2 years ahead of schedule and is delivering expected cost savings and efficiency benefits. Additionally, we've made significant progress integrating our Eastern Hemisphere operations into our centralized accounting platform. This is a big step forward as it will further streamline workflows and maximize accountability. Finally, we are onboarding all of the acquired business units to our Compass platform to manage assets and customer transactions. We are continuing to make substantial headway on all of our synergy efforts, and we'll continue to provide updates in future quarters. Before we open up the lines for questions, I would like to highlight the following. Based on our solid first half performance and the momentum we're seeing across our business, we remain upbeat about our prospects for the remainder of 2025. While the activity declines to date have not been quite as severe as we initially anticipated, we are beginning to experience various pricing pressures, which we previously baked in that margin compression into the back half of this year. Despite these headwinds, I'm confident in our ability to adapt to the rapidly evolving market, preserve our financial strength and deliver meaningful shareholder value. Since the new administration's tariff policies were introduced, worldwide sentiment across the energy industry remains apprehensive. Despite the ever-changing news or trade policy shifts, we included any anticipated impact to our business this year into our annual guidance that we updated in the first quarter, which we have reaffirmed this quarter. We continue to see opportunities in our core markets. Our competitive position remains strong, and the acquisition integrations are positioning us well for sustained growth. We are confident that our elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe. The foundation we built through our strategic acquisitions gives us confidence in our ability to capitalize on emerging opportunities that broaden our geographic reach, diversify our revenue streams and serve our customers even more effectively in key markets. Our past M&A activity has enhanced our competitive position, increased our resilience in a dynamic environment and has positioned us to move quickly when new value-creating opportunities present themselves. Finally, we again believe that our best-in-class performance-driven technologically differentiated offerings, expanding global geographic footprint, combined with disciplined M&A activity will deliver solid results as energy markets recover. In closing, we are on track as we reach midyear. It's exciting to see how we adapt and push ahead in a dynamic environment, building real momentum for the company. We value and appreciate our customers, our employees and our shareholders. I would like to thank every member of the DTI organization for their continuous dedication to working in a safe, inspired and productive manner. This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth and ability to deliver value to our shareholders. With that, we will now take your questions. Operator?

[Operator Instructions] Our first question comes from Steve Ferazani with Sidoti & Company.

I appreciate all the color on the call. I know a challenging quarter and challenging times ahead. So I appreciate all the detail. David, you spoke a little bit on the margins holding up pretty well, which is impressive given the decline in rig count in the quarter. I know you indicated pricing pressures are to come. Nevertheless, when I think about the quarter, given how quickly the rigs came out and given your growth is in international, where if you're trying to increase penetration, gain market share, that shouldn't necessarily be a positive contributor to margins. So if you can just walk us through how you kept your margins at this level in 2Q, when I would have expected there were numerous pressures.

Yes. Thank you, Steve, as we kind of talked about earlier this year as well, we saw the activity declines coming, and we kind of considered that factor in our numbers. And then we know, as a result, we're going to face the pricing pressure that's going to be inevitable. But I think throughout the first half of the year, even into the second quarter, those were just sort of muted and kind of deferred a little bit longer than we initially thought, but they didn't go away, obviously. So we see those still impacting our Q3, Q4 numbers, mainly from a pricing standpoint. We think we felt most of the activity declines. I think I mentioned we might see additional activity, but it will be a slower pace than we saw in the first half of the year.

Okay. Did we see the full impact of the cost cuts in Q2? Or are we going to see more of the benefit in Q3, Q4?

We'll see more of the benefit in Q3 and Q4. They really were just getting implemented in Q2 when we were first talking there. So yes, we'll see the full benefit more accrue to Q3 and Q4.

I mean, given that you're still a fairly new public company, I'm sure as you've gone back and reviewed the costs, how many of these costs that you're taking out now could be viewed as permanent? You're looking at costs that just now a couple of years being public, didn't need to be there? Or how much of this is going to be temporary given the slowdown in activity?

Yes. I mean most of the reductions we look at is part of our what we refer to as a scalability factor of our business. And so it's really activity weighted. So we look at across every division, every product line, every location and just make sure those units are rightsized for their current activity levels. A lot of the other costs are, like you said, the cost of being public and some of that's ongoing. But we obviously -- we continue to manage some of that cost as well from a third-party standpoint versus what we do internally. We continue to look at all that as well. But a lot of it's activity-driven cost reductions that we're seeing right now.

Okay. Fair enough. Could you talk a little bit about what gets you to the low end versus the high end of the guidance range for this year?

Well, I think it's -- the activity factor that we talked about already occurring, obviously, combined with the pricing pressure. I think we're doing a good job of kind of trying to hold our position in the market. And -- but when that comes with a little bit of pricing pressure, that's obviously the most EBITDA impactful that we'll see in the second half of the year.

Fair. And if you could kind of give the biggest highlights from the sequential international revenue growth this quarter because I mean, you closed Titan, what at the very beginning of January. Was this pure organic growth and what's driving it?

Steve, this is Wayne. We're seeing some good positive momentum from that acquisition. And then we're also the post-acquisition of Superior with the Drill-N-Ream assets in the Middle East, getting a lot of organization established and I'd say, relaunched into that market. We're making steady traction. So those gains are offsetting some of the reductions in other areas, but it's definitely positive momentum in that Eastern Hemisphere business unit. And then we're really maintaining our competitiveness in the Western Hemisphere. We've gone through a lot of RFQs with different clients. And we're the incumbent in most of the cases, and we've done a good job of negotiating faithfully with our clients and delivering value to our customers. And I think we've won more than we've lost in this cycle. So we kind of actually gained a little business here and there. But with the pricing offset, it becomes neutralized a little bit. But we are going to hold our market position. That will -- that is one of our initiatives that we're focused on, and our team members are doing a great job with that.

How much more challenging is it to grow in the Eastern Hemisphere in this kind of environment? And what's your thoughts on that over the next 6, 12, 18 months?

I think that we have some really good opportunities to gain traction with many of our technologies. We've expanded the deep casing product offerings to Asia. And now we're going on projects in Africa. So as a result of us acquiring them, we've enabled them to have more horsepower and resources to chase things in concert with our other product lines and getting the leverage and benefits of mutual sales teams and so on and so on. So it's -- there's -- we feel like that's our real opportunity to see some growth by having a significant and meaningful footprint in the Eastern Hemisphere going forward.

Our next question comes from John Daniel with Daniel Energy Partners.

I guess the first question just relates to the pricing pressures. Is that being prompted by customer RFPs? Or is that competition dropping price proactively to try to get into the door?

That's a great one, John. Quite frankly, I mean, I think when you see the commodity prices reduce and all of the major operators we work with, they have significant programs. That's where we've aligned our business. You're well familiar with who they are and what the names of those people are, those operators are, which is the bulk of our business. I think we faithfully work with our clients in good communication to recognize that they are going to want to reduce cost, and that process is always in motion with them when they see a reduction in oil price and activity. That's their opportunity to lower their costs as well. So we have to provide them value, and we have to negotiate with them. So in many cases, it's them signaling to us, hey, look, we're going to need to take a look at this for the next few months, and we go in there and negotiate with them. And it's not really just a competitor walking in and just lobbying missiles at us. I'm sure that's some of the cases, but most of what we do is ongoing communication with our clients to make certain that we remain the incumbent and provide them value.

Okay. And then the second question and last one is just -- it's more of a reminder to me is, can you remind me on the exposure to Western Canada and gassy markets in the U.S. Haynesville, Marcellus, kind of where you are and what that opportunity set might be for you over the next year or 2?

Sure, sure. We have a solid presence with our pipe rentals in the Haynesville, and we also have a pretty good business in the Northeast, which has surprisingly been stable for us for quite a while. And Canada is our second biggest distribution center. But for Midland, we have a very solid and strong business in Canada and with a number of loyal customers that have delivered results with us year-over-year. So I think we're in pretty good shape in both of those places. We're not heavily weighted in any particular area, but we have a solid participation in those gas markets. So we'll take advantage of that.

Our next question comes from Poe Fratt with Alliance Global Partners.

If you could talk about margins as you progressed through the third quarter, we're halfway through the third quarter. Have you seen margin erosion yet? Or is it something that we're likely to see more in the fourth quarter and looking into early 2026?

Yes, I'll take that one. Thank you for the question. Yes, I think we kind of alluded to that and mentioned that in our notes on the call that Q1, Q2 was basically on plan, kind of ahead of our forecast slightly, but we did see some activity decline there. And then we expect the pricing and pressure to continue into Q3 and Q4. So we're mindful of that compression, and we're taking that into account in our forecast as well.

I guess maybe try to ask a question a little differently. Are you on plan through the middle of the quarter?

Yes. We're not in a position to give guidance on Q3 at this point.

Okay. And then I think you talked about the M&A environment. Could you just put some more color on that? Are you seeing more opportunities, less opportunities, where the opportunities might lie right now?

Poe, this is Wayne. I'll answer that one. We're still in process of having meaningful dialogue with our -- with a number of potential targets. Clearly, in this cycle, the difference between buyers and sellers always becomes a little bit more strained. But it's all relative in the marketplace. So we're going to actively pursue potential good bolt-on and synergistic candidates, and we're going to keep that dialogue going and try to find good value along the way even through this cycle, and that we'll keep you posted as those things materialize.

This now concludes our question-and-answer session. I'd like to turn the floor back over to Wayne Prejean for closing comments.

All right. Thank you. Well, thanks, everyone, for your interest in our call today. We continue to remain competitive and work through the challenges in this cycle, and we feel like we have a quality opportunity out there to continue to deliver shareholder value. So thank you for your interest. Have a great day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Greetings. And welcome to the Drilling Tools International First Quarter 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International’s 2025 first quarter conference call and webcast. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of first quarter results and 2025 outlook before opening the call for your questions. There will be a replay of today’s call and it will be available by webcast on the company’s website at drillingtools.com, and there’s also a telephonic recorded replay available until May 21st. You can find information on how to access those replays in the press release from yesterday. Please note that any information reported on this call speaks of today, May 14, 2025, and therefore you are advised that any time-sensitive information may no longer be accurate as the time of any replay listing or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of DTI’s management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures, including but not limited to adjusted EBITDA and adjusted free cash flow. We provide these non-GAAP results for informational purposes and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliation to the most directly comparable GAAP measure can be found in our earnings release and our filings with the SEC. And now that behind me, I’d like to turn the call over to Wayne Prejean, DTI’s Chief Executive Officer. Wayne?

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials. I’ll then come back and provide a few additional thoughts before we open it up for questions. We are pleased to report first quarter sequential and year-over-year revenue growth and solid adjusted EBITDA despite industry headwinds. Revenue grew 16% over last year’s first quarter and was up nearly 8% over 2024 fourth quarter results. Adjusted EBITDA grew nearly 18% year-over-year and was flat sequentially. Our team has much to be proud of and has skillfully managed the recent volatility in commodity prices and rig counts. We have yet to experience tangible disruptions to our forecast in North America for the rental or sale of our tools. However, we do see increased volatility and uncertainty in the marketplace due to the impact of tariffs, a potential recession that could lower demand for hydrocarbons and OPEC+’s decision to increase production, among other challenges. In anticipation of when, not if, these potential disruptions impact our order flow, DTI has begun executing on a two-phase strategy. We are proactively negotiating with our suppliers and our customers to ensure stability and profitability. We are implementing a multi-level internal cost reduction program. Phase 1, implemented in Q2, will result in an estimated $6 million in annual cost reductions. Both David and I, along with our entire management team, have decades of experience working through multiple commodity cycles and prudently right-sizing the business when demand for our products and services changes. The anticipated rig count drop in the U.S. will challenge all service providers. I am confident we will prove to the investment community and shareholders our ability to sustain solid EBITDA and free cash flow in the face of volatility. While we cannot control global economic forces, we do believe that our input costs or cost of goods, are strategically positioned to minimize the increase in the expenditures associated with any near-term tariff risk for three reasons. Should the industry experience a significant reduction in rig count, DTI can quickly curtail planned growth CapEx. DTI has a strong and diverse manufacturing base in North America. In addition to manufacturing for our own consumption, DTI already sources a large amount of made-in-America steel. And our international footprint and diverse supply chain provides us flexibility in the face of uncertainty and exposure to other concentrations of rigs that may not lay down as quickly as U.S. shale producers. So based on this volatility and uncertainty, we are proactively adjusting our annual revenue, adjusted EBITDA and adjusted free cash flow guidance ranges for 2025. David will discuss our updated guidance in his formal remarks. We remain committed to identifying future cost reduction opportunities and maintaining operational agility to quickly respond to this challenging environment, furthering our mission to enhance shareholder value. Also related to our capital deployment strategy, our Board of Directors has unanimously approved a share buyback authorization. This authorization is up to $10 million of buybacks. We believe our undervalued stock price presents one of the most compelling return on investment opportunities to deploy our capital. David will now take you through the first quarter financials and discuss our 2025 outlook updates in more detail. David?

Thanks, Wayne. In yesterday’s earnings release, we provided detailed first quarter financial tables, so I’ll use this time to offer further insight into specific financial metrics. Despite continued rig count softness and market choppiness in the first quarter of 2025, revenue increased over last year’s first quarter by 16% in the face of a 6% global rig count decline over the same period. We believe this continues to validate our stated M&A strategy to further strengthen our business model and diversify our geographic footprint. Looking at our first quarter results, we generated total consolidated revenue of $42.9 million, comprised of tool rental revenue of approximately $34.5 million and product sales revenue of $8.3 million. We reported total operating expenses of $39.6 million and operating income was $3.3 million. The first quarter adjusted EBITDA was $10.8 million and adjusted free cash flow was $5.7 million. At the end of the first quarter, we had approximately $2.8 million in cash and cash equivalents and net debt of $52.1 million. During the quarter, as part of our recent segment reorganization, we conducted a comprehensive goodwill impairment assessment. This process required us to allocate goodwill between all affected reporting units and test each for potential impairment. As a result, we have recorded a non-cash goodwill write-down attributable to our Vernal, Utah bit repair operations in the Western Hemisphere and the Deep Casing Tools reporting unit in the Eastern Hemisphere. The approximately $1.9 million impairment is a function of purchase price accounting and does not affect our day-to-day operations or our ability to execute on our strategic priorities. From a purchase accounting standpoint, it is important to note that the increase in our stock price pre-close of the SDPI transaction caused the total allocated purchase price consideration to increase beyond the amount by which we underwrote the deal. Importantly, this charge is non-cash in nature and does not impact liquidity, free cash flow or adjusted EBITDA. Adjusted net income, which excludes this non-cash charge, remains positive and in line with our strong operational performance for the quarter. We believe taking this impairment now provides a more accurate reflection of asset values in the current market environment and positions us for improved transparency and comparability going forward. As previously mentioned on our last call, our new Western and Eastern Hemisphere segment reporting structure began this quarter. Our Western Hemisphere segment, which includes products and services like Directional Tool Rentals, Wellbore Optimization Tools, Premium Tools, and bit repair, remains steady. Moving to the Eastern Hemisphere, which is predominantly made up of Deep Casing Tools, European Drilling Projects, and now Titan Tools, you’ll see some choppiness as we compare Q1 2024 to Q1 2025. With the addition of the European Drilling Projects and Titan Tools, our tool rental revenue is up significantly over Q1 2024. Our decline in product sales was primarily due to Deep Casing Tools. We believe that the product sales at Deep Casing Tools bottomed out in the second half of 2024, given their exposure to the Saudi offshore market and Mexico. These tools are high spec and we expect demand for them to pick up internationally throughout 2025 as existing customer-owned inventory is depleted. With our expanded offering of rental tools, including MechLOK Drill Pipe Swivels, the Rubblizer P&A Tool, Fixed Blade Stabilizers, Drill-N-Ream, and other BHA components, rental revenue is becoming a much larger percentage of the Eastern Hemisphere revenue mix and we anticipate steady growth and better cost absorption in future quarters. Previously, we’ve spoken about the total revenue contribution from each hemisphere and indicated an expectation for the Eastern Hemisphere to grow to 18% of total revenue. As you can see in Q1 results, the Eastern Hemisphere accounts for 11% of revenue, but we expect the Eastern Hemisphere contribution to grow as the year progresses. Adjusted free cash flow in the first quarter was $5.7 million. We maintained our planned CapEx spend in the first quarter to support the momentum we have been experiencing from our organic RotoSteer product growth story and our international expansion. Going forward, we will continue to review all CapEx spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow. Looking at maintenance CapEx for the first quarter, it was approximately 10% of total revenue. Although up slightly in Q1, this portion of our capital investment has trended lower in the past several quarters due to the decline in rig count and our customers’ focus on drilling efficiencies translating into fewer lost and whole and damaged beyond repair events. As a reminder, our maintenance capital is primarily funded by tool recovery revenue which keeps our rental tool fleet relevant and sustainable regardless of market trends. To summarize the first quarter of 2025, we saw the positive effects of our acquisitions and organic growth in the RotoSteer product line which offset some of the decline in our Directional Tool Rentals and Deep Casing Tools product lines. Pricing pressure, product mix, and activity declines have impacted our margins. We believe this will continue throughout 2025 with pricing pressure and further activity declines resulting from the fears of oversupply caused by a slowdown in demand and increased production. However, in the long run, we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale. As Wayne mentioned, we have proactively initiated cost reduction measures in Q2 that will result in approximately $6 million of annual cost savings which is reflected in our updated 2025 guidance. We have also updated our guidance to reflect a further decline in the North American land rig counts. Although we do not have a crystal ball, our previous assumption of a flat to slightly up market has shifted to a down market for the remainder of 2025. With that in mind, we now expect full year 2025 revenue to be in the range of $145 million to $165 million. We expect adjusted EBITDA to be within the range of $32 million to $42 million. Gross capital expenditures are expected to be between $18 million and $23 million. Finally, we expect our 2025 adjusted free cash flow to range between $14 million to $19 million. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Thank you, David. Before we open up the lines for questions, I would like to highlight five points. First, over the past six weeks since the new administration’s tariff policies were introduced, worldwide sentiment across the energy industry has become anxious. Recently, various news outlets announced some adjustments to the tariff policy and it appears negotiations are headed in a positive direction. Despite the ever-changing news or trade policy shifts, we assume there is likely a negative impact to our business this year. Second, DTI has taken certain initiatives to remain competitive, including remaining resourceful and innovative when combating pricing pressures. Third, we are constantly evaluating customer activity levels and adjusting our operations to align with demand. Fourth, we are confident that elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe. Finally, we believe our best-in-class, performance-driven, technologically differentiated offerings, combined with our expanding global geographic footprint, will deliver solid results as energy markets recover. In closing, we value and appreciate our customers, our employees and our shareholders. I would like to thank every member of the DTI team for their continuous dedication to working in a safe, inspired and productive manner. This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth. With that, we will now take your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Steve Ferazani with Sidoti & Company. Please proceed with your question.

Good morning, Wayne. Good morning, David. Appreciate the detail on the call. Also, the detail around guidance, which is always challenging. I imagine exceptionally challenging, given the aftermath of Liberation Day. I want to ask about first just on, obviously, the second half should be more challenging, particularly in the U.S. short cycle. But you’re not moving free cash flow much. Looks like you’re taking about $6 million out of your growth CapEx. Talk a little bit about the fact that you can maintain pretty good free cash flow in this environment?

Thanks, Steve.

You want me to take that one?

Yeah. Sure.

Yeah. Thanks, Steve. Yeah. Part of that, I think, is two-pronged, obviously, focusing on the cost reductions to preserve as much of the EBITDA margins as we can obviously helps. And then, as we look at the activity and projected activity going forward and our CapEx spend, kind of making sure we coincide any purchases or defer same along the lines we did last year on future CapEx to make sure we preserve that ability to generate the free cash flow.

Right. It sounded like you’re still expecting sequential Eastern Hemisphere growth this year. I think you pointed to Deep Casing Tools, particularly. Can you talk a little bit about what you’re seeing specifically in Saudi and otherwise in the Middle East?

Yeah. Most of the Middle East is relatively flat, but the Saudi rig reduction in their offshore market, particularly the offshore market, was impactful to us because we have many, many sale -- product sales going into that market. But we’ve managed to pivot and see some consumption in their other areas. And in parallel to that, our acquisition of ED Projects has some technology in our fixed blade and sleeves and other stabilization technologies that are gaining more and more traction in that market. In addition to that, our DNR product line is starting to gain some traction in that Middle East market. After the acquisition, we had to kind of unpack and aggregate our teams there and kind of integrate all those groups together and I think that most of that is behind us. And we feel like our momentum is picking up there. Despite that Saudi rig count softness that impacted everyone, I believe, we were able to start spreading our wings across the Middle Eastern market and gain traction there, which will offset some of the activities that are in possible decline here. We’ve kind of baked all that in. So…

Okay.

…that’s kind of the impact.

So you’re expecting, at least given the weakness, that this growth and these acquisitions are certainly going to help offset in a challenging 2025?

Right. We have some emerging products that are gaining ground. Our -- one of the products that we acquired in Deep Casing was the MechLOK Swivel and the Rubblizer product…

Right.

… one for installing complex casing strings in horizontal wells, that which is the swivel. And then the Rubblizer is more of a plug-in abandonment technology that couples well with a lot of applications. And those were in their infancy at the time of acquisition, so they were not a material part of the acquisition value.

Okay.

They are kind of in addition to and we -- as we call it in Louisiana, line you up a little bit extra for nothing. So we are now moving those into full commercial stage, and they’re gaining traction and offsetting some of the drop in the product sales that I spoke of earlier, so.

Got it. Got it. That’s helpful. And you noted you haven’t seen the tangible impact in North America yet. I mean, we are hearing -- I mean, we’re seeing rig count come down, but it seems like it’s the smaller operators. We know the guides we’re seeing for CapEx is down a bit. I’m assuming the guidance changes primarily second half. In terms of cadence to the guidance, does 2Q look similar to 1Q based on what you know right now, obviously, with six weeks to go?

David, what you -- how do you think we answer that one?

I mean, yeah, I think, we’re looking at the rest of the year in totality and it’s hard to…

Yeah.

… predict the combination of activity and pricing and so forth, but…

Yeah.

… on a blended basis, we’ve got that kind of spread out over the year.

Okay.

We have -- Steve, we’ve anticipated some softness in the U.S. market throughout the rest of the year, but what’s interesting is, and we’re also going through the Canadian seasonality dip right now, so that will ramp back up and help out…

Yeah.

… as well in the rest of the year. And there’s been some reports where Canada might be a little more immune to some of this downturn because of their particular situation in production and cost and economics and things of that nature. So we’re happy that we have a strong business in Canada and very, very solid and sustainable operation there. What’s kind of interesting about the U.S. market, and I think what has most of the company’s OFSs and everything perplexed, is the lack of a swift downturn. It’s more of just a slow leak and that’s what’s happened…

Yeah.

… over the last year. Now we have some additional leakage, excuse the expression, but that’s kind of leakage. It’s a slow burn. We -- historically, when we would have downturns, you’d have a swift rig downturn and everyone would correct. Well, when it goes slow, it’s a little more challenging for each company to decide how they make those adjustments. And we’ve done this before, we’ve seen this movie a few times and we’re adjusting, understanding that metric of our customers of how they manage their rig counts.

Perfect. That’s helpful. If I could get one more in just on capital allocation and the guide, you have a pretty wide range on the full year interest expense. Is that because it’s how much debt you may or may not reduce in the remainder of the year?

Yeah. I think that’s very accurate, Steve. Obviously, depending on the capital spend and where we exercise that free cash flow deployment, we have an opportunity to lower our debt if we pull back on the CapEx and adjust according to the activity. So that all happens in the downturn. We’ve also obviously, as you saw, kind of considered the share buyback as part of our use of cash as well, that opportunity. So, we’ll kind of look, excuse me, look at that as time progresses.

Great. Okay. Thanks, Wayne. Thanks, David.

Thank you, Steve.

Thanks.

Our next question comes from Josh Jayne with Daniel Energy Partners. Please proceed with your question.

Thanks. Good morning. First question, I just wanted to dive into North America a little bit more. I think in your slide deck, you highlight that 60% of the drilling rigs in North America utilize DTI tools and equipment. So, just given your broad exposure, could you talk about how you’re thinking about the back half of the year? I know you said probably flattish or maybe look similar spread across the last three quarters, but could you talk through what regions may be the most at risk in North America for a little bit of a pullback and what regions may hold up better than some others?

That’s a great question, Josh, because as you well know, the economics in these different basins are -- will drive the behavior of the operators and the rig count will result thereof, those economics. So, the resiliency of each area is going to be challenged here in the next few months if oil prices keep dropping. Something in the 60s helps many of them continue with what they’re doing. If it drops it with a five handle for a significant amount of time, we’re pretty sure that we’ll see some reductions in areas where the economics aren’t as strong. I would hate to lean into exactly which areas, whether it’s DJ or the Oklahoma oily basins, or if it’s Permian, Midland or Delaware Basin, there’s a lot of narratives and information out there on which ones have the strength to sustain lower oil prices. But there -- so the Haynesville tends to be, the gassy areas tend to be more sustainable. So, we have good exposure to every area. We’re heavy in the Permian. We have really good operations in the Haynesville as well. We’re renting a lot of tools, pipe and downhole tools, reamers, you name it. So, our spread and diversity gives us the strength to move around in these basins respective to activity. And we can ebb and flow and pull the levers up and down in our locations and move tools to where they need to be in the activity that is most vibrant. So, it’s going to be an interesting next few months.

Okay. Thanks. And then I just wanted to follow up on CapEx because you noted that you could potentially curtail growth CapEx if the macro turns out to be more unfavorable. Could you comment on your CapEx program for this year on the growth side and the things that you’re spending money on and what -- which regions you’re ultimately trying to growth with that growth CapEx would be great? Thanks.

Thank you. So, most of our focus on anything growth related in that category will be in new technology and new types of tools that have growth potential. And we’ll be -- we will continue to sustain our existing rental fleet, our legacy fleet, which is your common stuff on a day-to-day basis. But our new stabilizer technology, our new swivels, that swivel technology I spoke of earlier with MechLOK, our RotoSteer product line, which is gaining steady traction in the U.S. and finding its niche in certain directional and horizontal drilling applications. We are continuing to make sure we put the appropriate amount of capital for the future. Even though we see the softness in our general marketplace today, we see the future in the next year to come that we need to put these tools in motion and get their stickiness and commercial traction with our clients so that we have a long-term participation in the drilling program. So, that’s where most of our CapEx focus.

Thanks. I’ll turn it back.

This now concludes our question-and-answer session. I’d now like to turn the floor back over to Wayne Prejean for closing comments.

Thank you. I would like to thank everyone for their participation and interest today in our earnings call and make everyone aware that our company is continuing to be competitive and is ready to meet all the challenges that we face in our industry going forward. And we thank you for your interest and have a great day.

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.

Greetings. Welcome to Drilling Tools International 2024 Year End and Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jacqueline. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International 2024 year-end and fourth quarter earnings conference call and webcast. With me today are Wayne Prejean, Chief Executive Officer, and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of year-end fourth quarter results and 2025 outlook, opening the call for your questions. There will be a replay of today's call. It will be available by webcast on the company's website at drillingtools.com. There will also be a telephonic recorded replay available until March 21st. Please note that any information reported on this call speaks only as of today, March 14th, 2025, and therefore, you are advised that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. We encourage the listener or reader to read its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies. Comments today will also include certain non-GAAP financial measures, including but not limited to adjusted EBITDA and adjusted free cash flow. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliations to the most directly comparable GAAP measures can be found in our earnings release and our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne?

Thanks, Jacqueline, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the numbers. I'll then provide a few final thoughts before we open it up for questions. Let's get started. As you saw in our pre-release last month, and in our detailed earnings release yesterday, we are proud of our strong finish in a tough industry environment. Despite the industry-wide headwinds that persisted in Q4, including rig count softness in US land, US Gulf, and Middle Eastern markets, we generated 2024 revenue growth at the high end of our guidance, and our adjusted EBITDA was near the midpoint of our guidance. For adjusted net income, we finished the year above the high end of our guidance, and we more than doubled our prior year adjusted free cash flow. Tool rental revenues were $117.9 million and product sales $36.5 million for a full year 2024 consolidated revenue of $154.4 million. Adjusted net income for 2024 was $10.1 million, and adjusted diluted EPS for 2024 was $0.31 per share. We generated 2024 adjusted EBITDA of $40.1 million and adjusted free cash flow of $17.2 million. As of December 31st, 2024, we had approximately $6.2 million in cash and cash equivalents and net debt of $47.6 million. In a moment, David will take you through the year-end and fourth quarter financials in more detail and discuss our 2025 outlook. We have now been a public company for seven quarters, and our mission remains as clear today as when we began. We continuously demonstrate to our customers we are the premier drilling tools rental solutions provider for servicing the wellbore construction and casing installation market segments. We believe our expertise, experience, and market-leading position enable us to continue our growth initiatives through expansion and consolidation. We've been extremely active in the M&A market to generate the scale needed to achieve our mission. As part of this process, throughout 2024, we acquired three companies: Deep Casing Tools, Superior Drilling Products, and European Drilling Projects. In the first quarter of 2025, we closed on our fourth acquisition, Titan Tool Services. These acquisitions, which I've detailed in prior calls, demonstrate our focus on international expansion and technology ownership. Our integration approach is to adopt best practices from all parties and implement a common accounting system that migrates all Eastern Hemisphere operations to our Compass asset management platform to minimize replication and maximize accountability. These systems conversions will be completed in the first half of 2025. We believe collating the best-in-class systems and processes from DTI and our newly acquired businesses will foster an organization and structure that generates excellent results and efficiencies for our customers, our employees, and our shareholders. We look forward to reporting on our progress in future conference calls. Over the past several years, our customers have consolidated to gain scale, and so must DTI. We continue to believe there are meaningful consolidation opportunities that exist in our sector. We have a solid M&A process and robust pipeline that will allow us to selectively and strategically consolidate numerous oilfield service product and rental tool companies that meet the criteria for our growth plan. We have a proven team and process to achieve these integration synergies. We believe our best-in-class performance-driven, technologically differentiated offerings combined with our expanding global geographic footprint will deliver solid growth as energy markets recover. Looking at the longer term, energy demand trends remain robust. Many industry experts are forecasting that the medium to long-term natural gas demand outlook is very strong, particularly with the new LNG capacity slated to come online in 2025 and 2026. And with electricity demand rising, DTI is well-positioned for these industry trends. Before I turn the call over to David, I wanted to commend our employees for their unwavering commitment to safety. In 2024, DTI achieved a remarkable marking a significant 6.5% improvement year over year. This achievement is particularly noteworthy given the challenges faced in our industry. Our employees' proactive approach to safety combined with effective safety protocols and training programs has been instrumental in driving this improvement. We are proud of this accomplishment and look forward to continuing our efforts to ensure a safe and healthy workplace for everyone. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results and outlook.

Thanks, Wayne, and thank you everyone for joining us today. In yesterday's earnings release, we provided detailed year-end fourth quarter financial tables. So I'll use this time to offer further insight into specific financial metrics. Wayne gave an overview of full-year results in his opening comments. So I will provide some color on our fourth quarter results. We generated consolidated revenue of $39.8 million with tool rental revenue of approximately $31.5 million and product sales revenue of $8.3 million. While we saw continued rig count softness and some fourth quarter budget in 2024, revenue was nearly flat sequentially. Fourth quarter revenue also increased over last year's fourth quarter by 13% despite a 4% global rig count decline over the same period. We believe this is a true testament to the resiliency of our business model and diversified geographic footprint. Total operating expenses were $38 million and income from operations was $1.8 million. Net loss for the fourth quarter was $1.3 million, and adjusted net income was $600,000. Diluted EPS for the fourth quarter was a loss of $0.04 per share and adjusted diluted EPS was a profit of $0.02 per diluted share. Fourth quarter adjusted EBITDA was $9.1 million and adjusted free cash flow was $5.9 million. While we made decisions throughout the year to delay or defer CapEx, we maintained our CapEx spend to support the momentum we are seeing from our organic RotoStream product growth story. As a result, adjusted free cash flow was slightly below our expectations in the fourth quarter, but important to note that adjusted free cash flow was still more than double the prior year. Consolidated gross profit was mostly flat compared to the prior quarter and increased 9.5% over Q4 2023 with the increase over the prior year coming mainly from the effect of acquisitions. Gross profit margin was down just slightly from the prior quarter and which was down over Q4 2023. While we are seeing top-line growth, pricing pressure, lower tool recovery revenue, and a change in the overall product mix related to acquisitions is impacting our gross profit margins as expected. However, despite the lower gross margin, the product sale additive mix is accretive to adjusted free cash flow since it does not require CapEx. Our SG&A expense increased in the fourth quarter due to the full impact of recent acquisitions. For 2024, our SG&A expenses reflect the first full year of public company costs plus the acquisitions that were not reflected in the prior year. Looking at maintenance CapEx for the fourth quarter, it was approximately 8.5% of total revenue. This portion of our capital investment trended lower in 2024 due to the decline in rig count and our customers' focus on drilling efficiencies translating into fewer lost and hold and damaged beyond repair events. As a reminder, our maintenance capital is primarily funded by tool recovery revenue which keeps our rental tool fleet relevant and sustainable regardless of the trend. To summarize, the full year of 2024 we saw the effect of acquisitions and the organic growth in the Roto Jear product line we more than offset some of the decline in our Directional Tool Rental's product line revenue and tool recovery revenue. Both directional tool rentals and tool recovery revenue were impacted by the activity decline many of our customers faced in 2024. Pricing pressure, product mix, and fully burdened public company costs have impacted our overall margins. However, we will be able to improve the overall margin as we continue to build scale and manage cost. Now moving on to our outlook, we expect 2025 revenue to be in the range of $163 to $183 million. We expect adjusted EBITDA to be within the range of $40 to $50 million. Gross capital expenditures are expected to be between $23 and $29 million and finally, we expect our adjusted free cash flow to range between $17 to $21 million for the full year 2025. As we discussed last quarter and coinciding with the closing of the acquisition of Titan Tools Services in January, we have realigned DTI's operations to support our strategic initiatives to expand our global operations and reach new markets particularly in the Eastern Hemisphere. As a result, effective January 1, 2025, the company will be reporting results in two segments, Eastern Hemisphere and Western Hemisphere. This realignment of our reportable segments corresponds with changes to our operating model, management structure, and organizational responsibilities. As of December 31st, 2024, this realignment has not yet been reflected within the company's financial statements. Therefore, beginning with the first quarter, our 10-Qs for 2025 will reflect the new reporting segments, and corresponding information for prior periods will be retrospectively revised to reflect this change in our reporting segments. This new reporting structure reflects our commitment to enhancing transparency, and aligning our operations with our global growth objectives. We believe this change will enable us to better manage our business, and allocate resources more effectively across different regions. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments before taking your questions.

Before we open up the lines for questions, I want to officially welcome Titan's talented team to the DTI family. As we continue to integrate Deep Casing, STP, EDP, and Titan, we have greatly expanded our geographical footprint. Enhanced our technological capabilities, and positioned DTI as a leader in the evolving energy landscape. We believe we will be able to provide our customers with access to an even wider array of products and services with the addition of these quality organizations. I would like to point out that we remain competitive and profitable despite soft market conditions, and we continue to be resourceful and innovative while combating pricing pressures. We constantly evaluate customer activity levels and adjust our operations to align with the demand. And we believe we will be well-positioned to come out stronger when the market recovers with the best personnel processes, products, and performance, all focused on best practices. And finally, as I have said before, we believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. We believe acquiring high-quality companies at attractive multiples positions DTI to successfully participate in the next three to five-year expected growth cycle. We are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced. Our acquired technologies are gaining traction due to their unique value and differentiated technological advantages. Some examples are our Deep Casing group deployed our MEK lock swivel for installing extended reach completion tools and it is making steady progress on locations across the globe. Our Revelizer tool is also gaining traction in the wellbore abandonment segment. Our proprietary stabilizer and reamer technology acquired from ED Projects is also growing rapidly and making a contribution in both hemispheric on land, and offshore markets. Elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe. In closing, we value and appreciate our customers, our employees, and our shareholders. I would like to thank every member of the DTI team for their continuous dedication to working in a safe, inspired, and productive manner. This commitment by our employees is crucial in driving our success and is integral to our future growth. With that, we will now take your questions. Operator?

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions.

Morning, guys. Thanks for the time.

Good morning, Jeff. First, I want to start on the M&A market. Obviously, super busy last, you know, nine, twelve months for you guys. Can you talk about kinda current trends or themes in the M&A market broadly and guess curious your overall level of optimism about guess, the number of opportunities as well as the transactability of those, for lack of a better term. Thanks.

Sure. Sure. We we Joel will have a this is Wayne. Thanks, Jeff, for the question. We still have a steady pipeline of opportunities that are out there, and we continue to look at deals on a, you know, strategic level of how they fit into our organization, we've we, you know, you can see there's been some deals done in the industry over the last year, not only ours, but a few others. And I think that develops deal metrics and how the expectations between the buyers and the sellers are starting to come together. And I I think that's productive for all of us. So I I feel like we still have, you know, quite a few opportunities on the horizon. And, hopefully, be acting on those this year.

Okay. Great. Thank you. And for my follow-up, somewhat related on the balance sheet side of things. I think you guys ended the year maybe a little over one times leverage on a trailing basis. How important is delevering this year when we look at that adjusted free cash flow guide? You know, is is the first use of that to to pay down debts? And how do you think about you know, potentially using some of that free cash or further using your balance sheet for M&A opportunities.

I'll let David take that one. Dave?

Yeah. Jeff, thanks for the question. Yeah. We need to kinda look at the balance sheet and how we ended the year. The the net debt number of approximately I think it was $47 million or so was basically, the the full use of that was related to the cash portion of the acquisitions. So that kinda tells us, obviously, that was planned, number one. And number two, we basically used all of our, you know, all the CapEx was funded out of our free cash flow. So we can see that trend continuing. We'll be able to support our our CapEx needs, you know, for for twenty five as well as have that free cash flow to pay off debt or do further M&A kind of again, pull those levers as we need to based on the opportunities that come up in twenty five.

Okay. So I I guess to to rephrase the the answer, essentially, we should think about, you know, potential use of the balance sheet is is still in the cards for you guys in the context of M&A. Like, you guys feel good with with the balance sheet position that you're in. There's not an imminent urgency to you know, attack the debt side of things at at the detriment of M&A.

No. Absolutely. I think we're we're well positioned on the balance sheet. We still have availability under the know, credit facility, but we are obviously mindful and keeping an eye on our overall. And we'll do the, you know, the right strategic decisions there depending on the M&A opportunities. But focus on, you know, aggressive pay down of debt with our free cash flow.

And, David, further that, Jeff, we're very mindful of keeping an eye on the activity trends of the industry. You know, we're assuming flat to we have some, you know, baked in potential downward activity you know, bets placed into our forecast. But, you know, if we saw the industry changing, we we would pivot we have the means and the wherewithal and the cash flow to to accelerate any kind of delevering that that might be required. So

Understood. I'll turn it back. Thank you, guys.

Our next question is from Steve Ferazani with Sidoti and Company. Please proceed.

Morning, Wayne David. For taking the questions this morning. I know it's was a very, very active twenty twenty four. I'm sure it's gonna be an active twenty twenty five as well. I did wanna ask about the the the mix in four Q on the tool rentals, I was surprised at the sequential growth given that US land, as you noted, was was sequentially drilling was flat to maybe even down a little bit. So I'm curious if that was just international growth or if you gained any share on the rentals. And then product sales, the sequential decline, how much of that is typical seasonality or is there something else in play?

I think I think the answer to the first question with the product sales. We did, you know, the the the reduction in Saudi activity did affect our decasing product sales flow into that market. As well as, you know, softness in PEMEX. We have pivoted, you know, a lot of those efforts, you know, to other parts of the world and they're gaining traction steadily. But there's no we're not immune to that Saudi decline, I can assure you. As far as our tool rental activity, I think we've just you know, had a little surge of you know, your general activity. You know, we have gains and losses and they'll ebb and flow of the business. And deploying a new tool, some of the newer technologies that we have are getting more traction at higher pricing. So that's that's helping neutralize some of the other, you know, activity fluctuations. So I guess that would be the the general answer to that question about tool rentals changing.

Great. Thanks. And then on the the your your CapEx being high, you expect your guide is for higher in twenty twenty five and obviously after very low CapEx in the second half of twenty four. Is twenty five a catch up after a very low CapEx in the second half of twenty four? Are there any specific growth initiatives you wanna highlight behind the higher CapEx, which is not high, but higher. Target. I I understand. David, you wanna I'll stay by I'll I'll take that question. Yeah. Basically, you know, we're seeing the the change in twenty five related primarily to the the growth in the Eastern Hemisphere following these acquisitions. Know, with with some of the new technology that we've acquired. The CapEx to support that Eastern Hemisphere growth is really what we're seeing the difference you know, from twenty four to twenty five.

Mhmm. And supporting our rotor steer, which is continuing to grow off of you know, as well. So which is some of our newer technologies we're funding you know, as as and we're kinda neutral to negative not negative, but neutral on all of our supporting all of our other products, but no catch up is like I mean, I think I think the the source of your question is, are trying to catch up because we were behind The answer is we're we're we're still in the neutral zone on those, but we're investing some of the new things that we're supporting to grow in other areas and other product lines.

Fantastic. If I could just get one more in. Can you talk a little bit of I mean, you obviously pointed out we know Saudi and PEMEX specifically or or are areas for weakness in the first half of twenty five is most expect and and and obviously start impacting in twenty four. Any particular successes you wanna point to anything going better than expected with some of these acquisitions integration getting easier as you're getting more experience with it? If you can just sort of walk through your your view of of the international picture as twenty four went and how you're thinking about twenty five?

Yeah. So I think we're starting to the first the first part of that question is synergies. You know, we paint a significant amount of cost savings to the the the the SDPI transaction, and we're really excited about that. And now, you know, our launch in the Middle East, notwithstanding the Saudi decline, is starting to gain traction. And, you know, it's it's slow evolutionary process here to, you know, re you know, organize the group, get things moving faster and faster. We're in dozens of countries and and locations around the world, and so we've got a lot of diversification in traction gaining. You know, we're it's disappointing the softness in Saudi. That that one's, you know, you know, kind of little more impactful. But we we see our indications or that will heal itself over a short period of time. They can't stay low forever. But, you know, short term, that is that is slowed down our momentum. But the synergies are really taking place with the reduction in public cost, the reduction in repair cost, the reduction in royalties. All those those are ongoing sustainable synergies that will get savings from for years to come. And add more value. Then some of the new acquisitions, EDP and Titan, are just gaining, you know, getting off the ground because they were later in the year or early this year. So we're really excited about the technology we acquired from EMEA Projects. We're starting to gain traction in so many parts of the world. And with major customers around every operating environment. Offshore, land, you name it, North Sea, you know, Europe land, Middle East, getting constant orders. So it's picking up steam, and I think those premium products will help offset some of the, you know, the less than stellar activity issues that are ongoing in different parts of the world. So Right. Right.

Thanks, Wayne. Thanks, David.

Our next question is from Sean Mitchell with Daniels Energy Partners. Please proceed.

Good morning, guys, and thanks for taking my question. Wayne, maybe I hate to stay on the M&A theme, but just as you think about M&A opportunities, over the course of the next year or two, you you guys are gonna be reporting Eastern Hemisphere, Western Hemisphere. Can you give us some color around you think more M&A opportunities in the Eastern Hemisphere or Western or is it too early to tell? I mean, I know you're not breaking that out today on your financials, but just kinda thinking about the M&A market.

Well, we we do have targets in both places. So we are working actively working on opportunities. I wanna be careful not to say we're actually working on deals because we don't have any deal. We're just working on opportunities. But to be clear, we do believe that there are significant opportunities in these in the industry, which we're we're And there are some where we consider accretive bolt on really tuck ins that work for us here to strengthen our our North America business. And and we have willing, you know, sellers and and, you know, who people who see the the benefit our platform and wanna join our the the culture of our team, and they see the opportunity. So it should be on both sides of the of the water. So and we'll we'll just evaluate those as they come, you know. It's kinda like you know, we gotta hit a shot and, you know, in the fairway, then we gotta get it on the green next. So we're we're just gonna keep moving through each deal as they present themselves and seize those opportunities.

Fair enough. Maybe one more for me. I'll sneak one in. Given your exposure in the international markets, kinda how are you guys thinking about tariffs? And where do you see the risk So do you want me to take that one away? Yeah. Sure. Sure. So yeah. Sean, obviously, a very fluid and dynamic topic. But we have been kinda working with our our US trade council here You know, the the short two short answers are we believe a diversified supplier base and a diversified manufacturing base are are some of the best mitigating strategies, and I think we have both of those.

Got it. So that's a good box that we can check. The other thing, obviously, we're we're, you know, sort of contemplating is that the the Canadian, US, Canada, US affects our business the most. You know, we believe right now that's you know, the the the long term you know, you know, sooner than later because think the desire, you know, of both countries is to kinda create a free trade zone. So we don't think those tariffs right now and our council kinda believe the same, but they've that they won't be long term in nature. So we just need to address the any short term implications, you know, while they do last. And we can do that currently under the know, everything we do falls under the USMCA agreement or the know, Mexico Canada agreement there. So the way we move tools around and can you know, divert raw material to different locations as needed and do repairs, we have all that kinda working in our favor right now.

Got it. For taking my questions, guys.

Alright. Thanks, Sean.

This now concludes our question and answer session. I would like to turn the floor over to management for closing comments.

Okay. Thank you, everyone. Appreciate your interest in Drilling Tools International and participating in the call. We we are executing well throughout this this challenging cycle. I think we've demonstrated our resilience and viability through this continued challenge in the marketplace and we're you know, we're we have some bright things that we're working on and and and continuing to grow our business. Wanna invite everyone to we'll be participating at the Rolf and Piper conferences next week and hope to see you all there. So you for your interest. Have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.