Pason Systems Inc

TSX:PSI

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pason Systems Second Quarter Results. [Operator Instructions] The contents on today's call are protected by copyright and may not be reproduced without the prior written consent of Pason Systems Inc.Please note the advisory is located at the end of the press release issued by Pason Systems yesterday, which describe forward-looking information. Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about Pason Systems, including the risk factors relevant to the company, can be found in its Annual Information Form.Thank you. Mr. Marcel Kessler, President and CEO, you may begin your conference.

[Marcel Kessler, President, CEO & Director]

Thank you. Good morning, and welcome to Pason's Second Quarter 2018 Conference Call. With me here in Calgary, is Jon Faber, our Chief Financial Officer. I will start with the highlights of the second quarter. Jon will dive into the details of our financial performance. I will close with our perspectives on the outlook for the industry and for Pason, and we'll then take any questions.Pason achieved strong results in the second quarter. Our teams continued to perform well in all geographies. We generated revenue of $68.3 million, an increase of 22% compared to last year. The main drivers of revenue growth were increased drilling activity and market share gains in the United States as well as higher activity in all Pason's international markets. These improvements were partially offset by a decline in Canadian drilling and by a stronger Canadian dollar relative to the U.S. dollar.Adjusted EBITDA was $29.5 million, an increase of 52%. The drivers of this improvement were the significant increase in revenue with high incremental margins.Pason recorded net income for the quarter of $5.5 million or $0.06 per share. Net income was negatively affected by a significant devaluation of the Argentine peso relative to the Canadian dollar. At June 30, our working capital position stood at $225 million, including cash and short-term investments at $177 million. There's no debt on our balance sheet, and we are increasing our quarterly dividend to $0.18 per share.In the first quarter of this year, we began reporting our revenue along 5 product categories to better reflect the changing nature of Pason's business. Drilling Data contains all products and services associated with acquiring, displaying, storing and delivering drilling data. Revenue in this segment increased 25% and accounted for 52% of total revenue. This increase was driven by a 17% growth in total U.S. land drilling activity and U.S. market share gains from 56% to 61%. Drilling industry days in Canada decreased by 9%, while Canada revenue was essentially flat. The second segment, Mud Management & Safety, includes products such as the Pit Volume Totalizer, Gas Analyzer, Hazardous Gas Alarm and the Electronic Choke Actuator. In the quarter, this segment generated 28% of total revenue.Communications includes satellite and terrestrial bandwidth, Wireless Rigsite, VoIP and intercom services and accounted for 9% of total revenue. Revenue in this segment is showing lower growth because of the transitioning from satellite to terrestrial bandwidth, with lower pricing but better user experience for customers.Drilling Intelligence bundles Pason's offers targeted at enabling our customers' drilling optimization and automation efforts. It contains products such as AutoDrillers, abbl Directional Advisor, the ExxonMobil Drilling Advisory System, and Pivot, a pipe oscillation system to improve slide drilling. At 36% growth, Drilling Intelligence is our highest growth segment, and it generated 6% of total revenue. Our level of confidence in the successful commercialization of new Drilling Intelligence products continues to grow. There are now over 130 rig installations of new Drilling Intelligence software in North America. Analytics & Other, finally, includes our Verdazo Discovery Analytics product suite, various reports and other revenue streams. This segment is not directly correlated to drilling activity and accounted for 5% (sic) [4%] of revenue.I will now turn the call over to Jon.

[Jon Faber, Chief Financial Officer]

Thank you, Marcel. Pason posted excellent financial results in the second quarter of 2018. Our U.S. and international business units posted strong revenue gains on both a year-over-year and sequential basis. Our Canadian business unit saw a sequential revenue decrease due to the seasonal nature of Canadian drilling. However, Canadian revenue increased 2% year-over-year despite a 9% decrease in industry activity. Disciplined cost control and significant operating leverage drove strong growth in adjusted EBITDA.Consolidated revenue of $68.3 million, represented a 22% increase from the second quarter of 2017. Sequentially, revenue decreased by $5.5 million due to the seasonality of Canadian drilling activity. For the first 6 months of the year, revenue of $142.1 million was up 24% from the same period of 2017. Adjusted EBITDA in the second quarter was up 52% year-over-year to $29.5 million and decreased by $5.3 million sequentially from the first quarter. For the 6-month period, adjusted EBITDA of $64.2 million represented a 45% increase.Net income was negatively impacted by a significant unrealized foreign exchange loss of $5.9 million, largely due to the devaluation of the Argentine peso.Capital expenditures in the quarter, including capitalized portions of our R&D and IT investments, totaled $4.8 million, down 6% from the same period of 2017. As a result, free cash flow in the second quarter totaled $23.1 million.For the first 6 months of the year, capital expenditures totaled $10.6 million and free cash flow came in at $42 million. We continue to expect to spend up to $25 million in capital expenditures in 2018. At the end of the second quarter, Pason had positive working capital of $225 million, including $177 million of cash and short-term investments. I will briefly review the results of each of our operating segments. Our U.S. business unit posted second quarter revenue of $50.3 million, up 28% from $39.2 million in the same quarter of 2017. Measured in U.S. dollars, revenue increased 33% year-over-year. The year-over-year revenue growth in the U.S. was driven by increased drilling activity, a 4% increase in revenue per EDR day, and a 570 basis point increase in market share. Our strongest areas of revenue growth were Drilling Intelligence, which was up 47%, and Drilling Data, which increased 32%. Year-to-date, strong growth in these categories drove a 36% increase in revenue compared to the first 6 months of 2017. Operating cost in the U.S. increased by 7% against the 28% revenue increase in the quarter. As a result, segment gross profit was up by 53% year-over-year to $28.7 million in the second quarter. For the first half of the year, U.S. segment gross profit was up 77% compared to 2017 at $52.1 million. Our Canadian business unit represents our second largest segment. Despite a 9% year-over-year decrease in industry activity, our Canadian business posted 2% growth in revenue in the second quarter. Revenue for the quarter of $10.7 million was down $12.8 million sequentially from the first quarter due to the seasonality of Canadian drilling activity. For the first half of the year, revenue of $34.1 million was essentially unchanged from the first half of 2017, despite a 9% decrease in drilling activity. Notably, revenue per EDR day increased 13% year-over-year and 11% sequentially from the first quarter. The successful introduction of products in our Drilling Intelligence category has been a significant driver of revenue growth in the first half of 2018. Our Canadian results also include our Verdazo Analytics business for which revenue is not as directly correlated to industry drilling activity. The revenue decline in our Communications revenue category was in line with the decrease in EDR days. We're deploying lower-cost technologies in this category and, as such, we expect revenue in this category will decline as we share these cost savings with our customers. However, we expect to maintain margins due to the reduced cost of providing service.Our competitive position in Canada remains strong with market shares for the first 6 months of the year coming in at 87%. In the second quarter, our Canadian segment posted a gross profit of $306,000 compared to gross loss of $725,000 in 2017. In the first 6 months of 2018, segment gross profit of $12 million represented a 4% increase from 2017.Our International business posted revenue of $7.3 million in the second quarter, up 20% from the same period in 2017. Sequentially, revenue increased 17% from $6.3 million in the first quarter of 2018. For the first half of the year, $13.6 million in revenue represented a 21% increase compared to 2017.Despite the significant currency devaluation in Argentina, we saw revenue growth in each of our international regions on both sequential and year-over-year basis. Gross profit for the International segment of $1.7 million in the quarter was up $1.3 million from the second quarter of 2017, and up 162% sequentially from $636,000 in the first quarter. The International business unit posted $2.3 million in gross profit in the first half of 2018, up $2.1 million from the same period of 2017.In summary, Pason posted strong results in the second quarter and remains well-positioned going forward. In the first half of 2018, our U.S. business produced significant market share gains and posted the highest revenue per EDR day in its history as measured in U.S. dollars. Our Canadian business has managed to offset a 9% decrease in industry activity in the first half of 2018 by maintaining our strong competitive position in the market and increasing revenue per EDR day by more than 10%. Our International business unit posted revenue growth in all of its operating regions and returned to much higher levels of profitability. The investments we've made over the past few years in developing new technologies are coming to fruition, and have made Drilling Intelligence our fastest-growing revenue category with limited capital intensity to support the rollout of products in this area.With strong revenue growth, significant operating leverage and reduced capital intensity, our cash flow generation capabilities remain excellent. As such, we're increasing our quarterly dividend to $0.18 per share.I will now turn the call back to Marcel for his comments on our outlook.

[Marcel Kessler, President, CEO & Director]

Thank you, Jon. We have increased our investment in R&D and IT by 7% in the first half of 2018 with a focus on machine learning algorithms. We expect to maintain our R&D and IT spend at this level for the rest of the year. Our capital expenditures will be relatively modest going forward, with development efforts focused on software and analytics. We intend to spend up to $25 million in capital expenditures in 2018. Our capable and flexible IT and communication platforms can host additional new Pason and third-party software at the rig site and in the cloud. The Permian Basin in Texas and New Mexico is the most active basin in the United States. It has been the focal point for the industry recovery since the downturn and a key driver of revenue growth for Pason. There is the potential for a slowdown in drilling activity in the Permian in the second half of 2018 due to takeaway capacity issues. However, we have not yet seen any signs of a slowdown, and we would expect activity levels to plateau rather than decline significantly. In Canada, the ongoing crude oil and natural gas takeaway capacity issues continue to create an environment of extreme caution for E&P companies. The industry is watching for signals from Shell on plans for the $40 billion LNG Canada project on the West Coast. The project is still under study, but Shell has recently called it very promising. A positive final investment decision could be a catalyst for some increase in Canadian gas drilling activity. The outlook for our International business is positive. Market fundamentals continue to evolve favorably as the global balance of crude oil and supply and demand tightens. Despite OPEC's recent decision to increase production, global supply continues to weaken from geopolitical pressure to remove Iranian oil from the market and no resolution to falling production in Venezuela. Spare production capacity, which is limited to a few OPEC countries, is at a relatively low level. It is becoming apparent that the new projects expected to come online during the next few years will not be enough to meet the increasing demand. These developments underline the growing need for international E&P spending to increase significantly.Pason's market positions remains very strong. We are the service provider of choice of many leading operators and drilling contractors, with Pason equipment installed in over 65% of all active land drilling rigs in the Western hemisphere and the growing position in the Middle East. We continue to be very well-positioned to participate in the industry's growth. And we would now be happy to take any questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Greg Colman from National Bank Financial.

[Greg R. Colman]

Couple of quick ones here. We're still seeing strong year-over-year incremental margins. That's not new for this quarter, but we are still continuing to see it. I suppose a question for either one of you, but either, Jon or Marcel, could you give us an idea at what run rate of revenue would you expect the incrementals to level out?

[Jon Faber, Chief Financial Officer]

Greg, when we were at sort of the trough on the revenue side, I think we've communicated incremental margin expectations in the range of 75%. I continue to be fairly comfortable with those types of incrementals here for the next little while. I think that the one potential squeeze on the incrementals will be on the Drilling Intelligence side and we've talked about some of the earlier revenue we've been able to generate in that revenue category was a little bit quicker to deployment and some of the next stages of revenue will be a little bit more work on the installation and integrations on some of the other rigs. And so you may see a little bit of lag between some of that revenue and some of the costs that we would put towards moving forward in that category. But I think I'd be pretty comfortable with that 75% range.

[Greg R. Colman]

But -- that's good to know still for sort of this year. If we look at the first half of the year, you're looking at about $140-ish million in revenue or suggesting a full year approaching $300 million top line, maybe not quite there. If we grow beyond that $300 million going into '19 and belong, would we expect to see those incrementals level off? Or would you still be comfortable with the incrementals in the 75% range?

[Marcel Kessler, President, CEO & Director]

I think there's really -- we don't see any indication of a step change in cost here. So I think yes, going into 2019, based on everything we've seen to date, there's no reason to assume that would change.

[Greg R. Colman]

That's great to hear. And then secondly, Marcel, you highlighted Drilling Intelligence growth in the quarter as an area of sizable growth, which is great to see. Can you talk to us a little bit about the profile of the customers that are driving that growth rate, either in terms of geography or company size, company profile, target hydrocarbon basin? Just trying to get a little bit more nuances as where the growth is coming from on the Drilling Intelligence side?

[Marcel Kessler, President, CEO & Director]

Yes. So Greg, we have decided to essentially use Canada as the test bed for all those new products and services. So that's why you would have seen the uptick of Drilling Intelligence primarily in Canada in the first quarter. And I think we continue to test and refine our products initially primarily in Canada. It's close to R&D, it's a drive away for our engineers essentially to the rig. So it's much easier that way. And as you've seen, the second quarter rollout has started in the United States. And I think at the third -- and we expect, obviously that to continue over the next year or 2 and the third phase would be to deploy the new Drilling Intelligence products internationally. In terms of customers, I think it is the larger customers both on the operator and the drilling contractors' side, the most sophisticated customers that are interested in these products and services. In terms of basins, I don't think there is a specific basin that stands out -- well, of course, the Permian stands out just given the volume of activity in the U.S. But there is no specific basin in terms of oil versus gas or shallow versus deeper, more complex. I think it's quite universally applicable.

[Greg R. Colman]

Is it fair to characterize the rollout in Canada then as a bit of a beta program, which is now being -- sort of gone into full commercial stage with the exposure into the U.S.?

[Marcel Kessler, President, CEO & Director]

Yes. I think that's -- at the high level that it's fair to characterize it that way. Now keep in mind, there are various products in this segment, some of which are much more mature than others. So there's a lot of product in this segment would be -- compare pretty much fully commercial with ongoing improvement. But others would be much more in a beta-type phase with significant ongoing development.

[Greg R. Colman]

And is there any reason not to expect the same type of market penetration in the U.S. that you would experience in Canada? Is there any structural difference in the markets that Drilling Intelligence shouldn't take the same sort of uptake in the U.S. over time?

[Jon Faber, Chief Financial Officer]

Well, I think the key there Greg, is the "over time" comment. The one structural difference between the 2 markets is the proportion of rigs that are mechanical versus AC. And the mechanical rigs are a faster deployment path for us on some of the initial products we've been rolling out. And so I think you would expect that ultimately, you may get to similar type of adoption levels, but it will take more time on a market that has heavier AC splits, which is the case in the U.S.

[Greg R. Colman]

Got it, okay. And then just last one for me and I'll hand it back. You mentioned the Permian there, Marcel. Can you remind us again just of your exposure in the Permian. Of the 620-ish average rigs in the U.S. you were on in Q2, how many were there? And related to that, can we think of a Permian rig as an average rig in the U.S. or are the revenue per EDR days materially higher or lower than what we see on your total U.S. revenue per EDR day?

[Marcel Kessler, President, CEO & Director]

I think it would be about average. Market share we have in the Permian would be slightly above average, about 63, 64 today. But I don't think there's a fundamental difference.

[Operator]

[Operator Instructions] And your next question comes from the line of Jon Morrison from CIBC Capital Markets.

[Jon Morrison]

Just in terms of the Drilling Intelligence division and the rollout, can you give any more color on how you're thinking about a rollout across more customers and geographies from a timing, logistical and capital expenditure perspective? And specifically, are there any logistical or capacity bottlenecks that would limit the pace in which you could roll out these products in the U.S. if you have end-market demand from customers?

[Marcel Kessler, President, CEO & Director]

I don't think we can give you too much detail on the rollout plan. In terms of CapEx, CapEx is quite limited. There is very limited hardware requirement here for most of those products. So that will clearly not be a significant factor or a bottleneck. I would say the bottleneck -- the potential bottleneck is, to some extent, R&D capacity for installing on a wide variety of modern AC rigs that Jon alluded to earlier, which could slow down deployment a bit. So it all depends what kind of rigs we're talking about here. If it's a fairly homogenous rig fleet, with a standardized control system, integration into that fleet is much simpler. If it's more of a hodgepodge of rigs, with various types of control systems, various generations of software it runs, the integration is more difficult and longer. So that is the potential limiting engaging factor in deployment.

[Jon Morrison]

From a customer training perspective, is there a lot of upfront investment that you guys have to do from a personnel perspective to get customers ready to run the products? Or it is fairly seamless if they're already running a full piece on suite of products?

[Marcel Kessler, President, CEO & Director]

There is some -- depending on the product, again, there is a variety of products here, but given that they are new and require some change to a workflow, there is some upfront training required. I think our field technicians who are out there and covering the rigs are well-positioned to deliver that training. So I don't think that will prove to be a significant bottleneck. But there is some upfront training. Now, ultimately, of course, the intent of most of those products is more automation rather than better advice. It's a mix today, but the most successful ones are clearly what I would call automation products. So there's not going to be a lot of ongoing handholding past the initial rollout and training.

[Jon Morrison]

And Marcel, just to go back on your comments about CapEx, it's really a function of being counted in possible inflation in the millions range, not the tens of million range. Is that the right way to think about it if adoption ends up exceeding expectations?

[Jon Faber, Chief Financial Officer]

Yes, I don't think the CapEx question, Jon, is going to be driven by adoption of the Drilling Intelligence. The CapEx question will be more driven by the extent that some of these new products drive market share further, and then you'll actually be deploying that base hosting platform. But the algorithms themselves don't require much in terms of capital. So you're right in your thinking in single-digit millions in terms of what the CapEx requirements would be around that type of a rollout.

[Jon Morrison]

Okay. I realize it's early days, but have there been any negative impact on your Saudi operations, given the diplomatic standoff that we now see between Canada and like S.A. right now?

[Marcel Kessler, President, CEO & Director]

Oh, it is very early days, but I think it's fair to say that it's not good. Now we are watching it very closely, but it's obviously kind of 48 hours old, so no specifics I can give you today.

[Jon Morrison]

Got it. And can you give any more rationale on what set the pace of the dividend bump that you put through? And is there any tangible metrics that investors can look at as a signal to how you're thinking about the payout ratio on a go-forward basis?

[Jon Faber, Chief Financial Officer]

Well, the metric would not be paying out ratio, I guess, is maybe the initial comment I would make. It's not about a target yield or a target payout ratio. It's really when we look at that excess wedge of free cash flow that we generate over and above the existing dividend, what do we think is an appropriate level of increase to absorb some of that. And it's really a question of how much is the free cash flow increase being driven by how we feel about some of the core fundamentals around market share revenue per day, those sorts -- the success of new products, more so than the fact that free cash flow increased simply because the industry increased. Because the industry goes both ways, as you know, and we would be pretty hesitant to move our dividend up to a point where we felt like a slight pullback in the industry could have an impact on our ability to fund that through the free cash flow side. So it's really driven more as we look at the metrics that drive free cash flow. And clearly, when you look at this quarter, you would say, okay, market share is strong, revenue per day is strong, success of new products is strong, all geographies on the International are showing strength, it's an appropriate time to move the dividend a little bit up to take some of that free cash flow, but measured growth in the regular dividend.

[Jon Morrison]

And so all else equal, if we were just through a cyclical expansion, don't expect the dividend to go up; but if you continue to grind away with more products per customers and more market shares, then it's logical to think that it inflates but probably not at the pace that your cash flow grows. Is that fair?

[Jon Faber, Chief Financial Officer]

That's a fair comment, Jon. I think the cyclical benefits you get, to the extent that adds cash to the balance sheet, that's where we'd be revisiting questions around special dividends, M&A or share buybacks, those uses of capital. And it's more around some of that longer-term sustainable fundamentals that are not industry effectively itself that drives thinking around regular dividend measured increases over time.

[Jon Morrison]

In the preamble and the release, you talked about a potential slowdown in the Permian, but you were fairly confident that it was probably going to be more of a plateau than an actual downdraft. What drives that thought process? Is it just customer conversations more than anything else?

[Marcel Kessler, President, CEO & Director]

I think it's the observation on the ground, right. We're already in August and we have not really seen any signs of a pullback. So my comments there relate to the second half of the year; it's only a few months left. So we're not seeing it, and we haven't really heard it on the ground. That's all. We have no more insight than that.

[Jon Morrison]

Okay. Last one just for me. How do you think about growth opportunities within the Analytics & Other division? And is near-term expansion largely just going to be a function of rollout into the U.S. and hitting more producers and operators with uptick of that product offering similar to what you've kind of done in Canada?

[Marcel Kessler, President, CEO & Director]

I think that is right. So in the short to medium term, the opportunity here is U.S. market entry. I think the expansion of the product suite is something we're working on but it's a relatively small team and a small operation. I think that the medium- to longer-term question is whether there is going to be more of an analytics package built into alongside the Pason core offerings. But I don't think that's something we should really go into details here for the next year or so.

[Jon Morrison]

Can you give any comment, Marcel, around what customer uptake has been for Verdazo in the U.S. so far?

[Marcel Kessler, President, CEO & Director]

It's been quite slow.

[Operator]

Your next question comes from the line of Scott Taylor from Pembroke Management.

[A. Scott Taylor, Vice Chairman, Partner & Portfolio Manager]

My question was about the dividend issue, which has been largely covered, but I would like to tease you with the fact that when you start with a balance sheet of cash per share of over $2 or approximately $2, without being unduly Scottish, I would have thought that the dividend could have gone to $0.20 a quarter. The incremental dollar out on that against the old rate would be something in the order of $10 million, which, in the light of your more modest expenditure forecast for the business going forward, could easily be financed. So again, this is a tease. How come you were so Scottish?

[Jon Faber, Chief Financial Officer]

Well neither of us are Scottish, but I'm Dutch. And Marcel is Swiss, so there might be something there. Look Scott, I think that the truth is we certainly have no hesitation around thinking about how we give cash back to shareholders. The question is how much do you do versus regular dividend and other mechanisms. And we continue to believe that slow measured growth in the regular dividend is appropriate, just given the seasonality of the business. But your point is well taken that there's certainly more cash that could be handed back to shareholders.

[A. Scott Taylor, Vice Chairman, Partner & Portfolio Manager]

Fair enough. I guess it's from the perspective of the fact that, going forward, you don't see the business being on an incremental basis as capital-intensive as it has been 5 to 10 years ago.

[Marcel Kessler, President, CEO & Director]

That is correct. Yes, absolutely.

[Operator]

And your next question comes from the line of Greg Colman with National Bank Financial.

[Greg R. Colman]

Just a follow-up. Scott asked the cash balance question far more eloquently than I could. So I'll leave that alone. I just wanted to actually poke a little bit on U.S. revenue per EDR day. You mentioned in sort of the outlook there that it was a record in U.S. dollars. Is there any reason we should consider that a local high? Or as you can continue to see product deployment uptake, can we grind higher on that one? I'm not looking for specific guidance, but I'm just wondering if there's any reason we should consider this bit of a local peak in 2018.

[Jon Faber, Chief Financial Officer]

No. I think there's still some reason why we think that that revenue per EDR day could continue to increase. I think we've talked in the pastaround just increased penetration of some of the older or existing legacy, however you want to think about it, product suites, and it bringing that alongside some of the operators who are using contractors that we've had some recent success with. Obviously, some increased penetration on the Drilling Intelligence side over time should contribute. And we have had the ability to selectively increase price on some products in the U.S., and the full effect of those wouldn't have been in place even in the second quarter. So I think there's some room there yet, Greg.

[Operator]

And your next question comes from the line of Elias Foscolos from Industrial Alliance Securities.

[Elias A. Foscolos, Equity Research Analyst]

Got a couple of questions for you. First one relates to the U.S., and in particular, the Permian. Are you seeing any pricing pressure in terms of cost, in particular, I'm thinking in terms of bodies that might impact margin a bit going forward?

[Marcel Kessler, President, CEO & Director]

We have not -- so obviously, there is pricing pressure in the Permian overall in terms of the cost of labor and materials that are locally sourced. We have not really been directly affected by it yet. I think the challenge that our U.S. team has had is to -- the ability to attract and retain and train sufficient local staff. I think they've done a great job at that but that's an ongoing struggle. It's a significant effort that the U.S. presence here has had to put in this area. But no, we have not really seen a cost escalation. We believe that the compensation that basin is offering and the structure of that compensation to field technicians has been attractive enough to date.

[Elias A. Foscolos, Equity Research Analyst]

Okay, good. I appreciate that color. I know there's been a lot of questions in terms of revenue growth by product line, but maybe I'd like to focus a bit on geographic potential for revenue growth and, in particularly, international and excluding Saudi Arabia. Are there any possibilities you have in maybe expanding outside your traditional areas of operation like Argentina, Saudi Arabia, where growth could occur there in geographically instead of sort of a product mix?

[Marcel Kessler, President, CEO & Director]

So the areas that we -- that -- where there are significant drilling activities that we are not really well presented in or not represented at all are Russia, China, India and let's call it the broader Middle East and North Africa. I think we have stayed away from Russia and China, and I think we'll continue to do that for different reasons. India is potentially an area we're going to look at over the next year or so. It's a difficult market to operate in, but there are no insurmountable hurdles so we have some conversations there. The focus continues to be to get significantly more activity in the broader Middle East and North African areas where, as you know, we have a newer business development office in Dubai. We have recently seconded another person from the U.S. to that region to develop business. So we do expect to see some uptick in activity from areas like Kuwait, Oman, United Arab Emirates, maybe Egypt and some other markets. So that's really the area of focus expansion in the broader Middle Eastern region.

[Elias A. Foscolos, Equity Research Analyst]

Okay. And one last question, and it kind of dovetails on Scott Taylor's question regarding the dividend. A bit of a flavor of the day for energy service stocks has been buyback. I understand the dividend or buyback is a board decision. But how would management think about presenting an option like that? Is that something that could be on the table or not at this point in time?

[Jon Faber, Chief Financial Officer]

Elias, we talked about outside the regular dividend, the other 3 mechanisms of using some of the excess cash balance around both -- or is from M&A, special dividend or share buybacks. And I think all 3 of those are live conversations that we would have with the board on an ongoing basis. So you should expect that any of those could happen at some point.

[Operator]

[Operator Instructions] Your next question comes from the line of Ian Gillies from GMP.

[Ian Brooks Gillies]

With focus on machine algorithms, I suspect you're having to attract, I guess, different people and from different sort of industries than you have historically and the…

[Marcel Kessler, President, CEO & Director]

Ian, I'm sorry to interrupt you here. You're coming through very, very faint. We can't really hear you.

[Ian Brooks Gillies]

Is this better now?

[Marcel Kessler, President, CEO & Director]

Yes, it is better. Thank you.

[Ian Brooks Gillies]

Okay. With respect to the machine algorithms and trying to help along that side, I suspect you're having to attract different sorts of people than you've had to recruit in the past. I'm just curious on how you're going about doing that? And I suppose competing with some of the other industries that are going to be looking for those sorts of people, just given the high -- I would suspect, high competition for, I guess, that sort of background?

[Marcel Kessler, President, CEO & Director]

So a good question. So our focus on, let's call it, higher science, and specifically, machine learning algorithms that would live in ExxonMobil's DAS or the GBD smart alarms, as well as in a different form and different agile products, the focus then is not that new for us. We have actually launched most of those efforts over the last 3 or 4 years. And we have been able to attract some really great new talent over the course of the last few years. So it's not that something that has really been brand new for us. I think the environment that we have created at Pason is very attractive for many people in terms of the attractiveness of the work, the corporate culture. I think we have been able to get some really smart people and really talented people into our R&D and IT organizations. It has not really been a significant challenge. I always thought that it would be, but it hasn't really materialized yet. We have been able to get some real talent. Now, that's not to say that that there is no war for talent going on, especially on the software side. But our team has done pretty well.

[Ian Brooks Gillies]

Okay. That's helpful. And with respect to the R&D piece, I apologize if this got hit on earlier, but as the business evolves, as a percentage of revenue, the [ debt's ] likely going to go higher, correct, just given more revenue, more development, et cetera, et cetera?

[Jon Faber, Chief Financial Officer]

I think you should expect, Ian, the percentage of revenue would go down as we add revenue. I think in aggregate terms, you should expect that it will increase. But the revenue growth rate might outpace the R&D expense growth rate, right. There is -- the commercialization of products, R&D is a very important part of a process there, but you need to make the balanced system around the whole commercialization effort. So it's not as though you can kind of ramp the R&D efforts beyond the capability of your organization to absorb developments either.

[Ian Brooks Gillies]

Okay. And that's fair. Jon, that's helpful. And last one for me, Jon. With respect to taxes, I mean, how are things looking from a cash taxability perspective this year? And perhaps heading into next year?

[Jon Faber, Chief Financial Officer]

We will become cash taxable in both Canada and the U.S. later this year or maybe next year would be our expectation based on what we know today. Now obviously, the movements on U.S. tax reform late last year have changed how we feel about taxation in either of the jurisdictions. But some of the benefits we would have gotten through the older U.S. tax regime will continue to carry forward, and we'll use up losses that would have generated under that regime in the past.

[Ian Brooks Gillies]

And as a follow-up, I mean, with the shift in spending in R&D from, call it, typical CapEx, how does that impact your ability to shield taxes?

[Jon Faber, Chief Financial Officer]

Well, taxes, of course, are going to be on a when-you-pay basis, right. It's a cash basis, it's not sort of when you accrue the expense. So it's sort of indifferent whether it's going to be CapEx or OpEx in terms of the investments you make in R&D in terms of the cash tax side. It may move the effective tax rate a little bit because some of it doesn't hit the income statement, but from the actual cash taxes paid, it doesn't make a difference.

[Operator]

And there are no further questions. This concludes today's conference call. Thank you for joining. You may now disconnect.