DRIL-QUIP INC (DRQ)·Q3 2023 Earnings Summary

Executive Summary

• Q3 2023 revenue was $117.2M (+31% q/q, +33% y/y), but mix shifted away from higher-margin Subsea Services due to offshore rig capacity constraints and FPSO timing, resulting in a GAAP net loss of $7.0M (-$0.21 EPS) and 27.0% gross margin .
• Adjusted EBITDA was $12.4M (+$3.6M q/q, +$5.3M y/y); free cash flow was $21.4M, the highest since 2017, driven by a $16.8M U.S. tax refund and improved DSO .
• Management issued Q4 2023 guidance: revenue $115–$125M, bookings $75–$100M, capex ~$10M, positive FCF, and adjusted EBITDA margins of 14–16% .
• Strategic catalysts: completed Great North acquisition (contributed $15.5M revenue in Q3), awarded Petrobras wellhead tender up to $28M, and early deliveries of XPak De liner hangers in Africa; management reiterated confidence in multi‑year offshore upcycle despite near-term rig constraints .

What Went Well and What Went Wrong

• What Went Well

  • Strong top-line: revenue up 31% q/q and 33% y/y; gross margin improved to 27.0% (+154 bps y/y) on leverage from Well Construction and Subsea Products .
  • Cash flow inflection: $26.8M cash from operations and $21.4M FCF, aided by a $16.8M U.S. tax refund and working capital improvements; ending cash, equivalents, and ST investments at $190.0M .
  • Strategic progress: Great North integration in line with expectations; Petrobras tender up to $28M; first XPak De deliveries in Africa; geothermal participation in New Zealand (connectors) .

  Quote: “Our third quarter delivered strong revenue... in markets such as Brazil, the Middle East, and West Africa... Free cash flow was very strong this quarter, the highest since 2017...” — Jeff Bird, CEO .

• What Went Wrong

  • Mix headwinds: lower Subsea Services revenue than expected due to offshore rig availability and FPSO timing; bookings decreased to $46.5M (-36% q/q, -25% y/y) .
  • Higher operating costs: SG&A rose to $27.0M (+$4.9M q/q), reflecting Great North expenses and higher bad debt reserve; acquisition costs $5.4M; restructuring $2.3M; FX loss $1.1M .
  • Profitability compressed vs prior quarter: GAAP net loss of $7.0M vs Q2 net income $3.5M, driven by mix shift and costs; adjusted EBITDA benefited from revenue scale and acquisition but margins were constrained .

  Management concern: “Capacity constraints in the offshore rig market are introducing headwinds... Multiple customers have delayed product orders and service deliveries... pushing some activity to spring of 2024... The lower Subsea Service revenue ultimately drove lower profitability in the third quarter.” — Jeff Bird .

Financial Results

Segment and Revenue Mix (Q3 2023):

Key KPIs and Cash Flow:

Notes: Segment y/y context per press release: Subsea Products +15% y/y to $55.9M; Subsea Services +6% y/y to $23.7M; Well Construction +117% y/y to $37.6M .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “Our third quarter delivered strong revenue... After closing on the Great North acquisition... we are excited about its continued growth trajectory.” — Jeff Bird, CEO .
• “Capacity constraints in the offshore rig market are introducing headwinds... The lower Subsea Service revenue ultimately drove lower profitability in the third quarter.” — Jeff Bird .
• Q4 set-up: “We expect fourth quarter adjusted EBITDA margins to be 14% to 16%... and positive free cash flow... a strong revenue ramp with a full quarter of Great North and sequential growth in our higher-margin Subsea Services business.” — Management call remarks .

Q&A Highlights

• Seasonality and bookings cadence: “The Q3 to Q4 step-up is always there for us... we would expect a pretty decent order flow for Q4... we have a seasonality to it...” — Kyle McClure, CFO .
• Backlog/MSAs and near-term deliveries: management cited ~70 MSAs and ~$200M backlog; call-offs timing impacted Q3 bookings but confidence remains in underlying demand .
• Profitability drivers: mix shift away from services and timing issues (rig/FPSO) compressed Q3 margins; expected services rebound in Q4 supports margin guidance .

Estimates Context

• S&P Global consensus estimates for Q3 2023 could not be retrieved via the tool due to a mapping issue; therefore, formal comparisons to Wall Street consensus are unavailable. Values from S&P Global could not be fetched at this time.
• Given the absence of S&P Global consensus, investors should focus on management’s Q4 guidance ranges and operational drivers (rig availability, bookings cadence) to calibrate near-term expectations .

Key Takeaways for Investors

• Top-line acceleration with revenue at $117.2M and gross margin improvement to 27.0%; however, mix headwinds from rig constraints pressed profitability — watch Q4 services rebound as a near-term margin catalyst .
• Strong cash generation in Q3 ($26.8M CFO; $21.4M FCF) and $190.0M cash/short-term investments underpin balance sheet flexibility for organic initiatives and integration of Great North .
• Q4 guidance implies continued momentum (revenue $115–$125M; bookings $75–$100M; 14–16% adjusted EBITDA margin) with seasonality favoring a step-up in orders and services mix — a potential stock reaction catalyst on execution .
• Strategic wins (Petrobras tender up to $28M; XPak De deliveries; geothermal participation) support medium-term growth and diversification of revenue streams .
• Non-GAAP adjustments were meaningful (acquisition costs $5.4M, restructuring $2.3M, FX loss $1.1M, gain on sale -$1.0M) — focus on normalized margins as mix improves and integration synergies accrue .
• Monitoring items: rig/FPSO availability normalization into spring 2024, Q4 services rebound, Great North run-rate contribution, and bookings trajectory against guidance .