Slb NV ($SLB) Q3 2025 Earnings Call

Good morning. My name is Megan and I'll be your conference operator today. I would like to welcome everyone to the third quarter SLB earnings call. At this time, all participants are now in listen-only mode. After the speakers' remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. You may remove yourself from the queue by pressing star two. As a reminder, this call is being recorded. I will now turn the call over to James R. McDonald, senior vice president of investor relations and industry affairs. Please go ahead.

Thank you, Megan. Good morning and welcome to the SLB third quarter 2025 earnings conference call. Today's call is being hosted from Houston following our board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, chief executive officer, and Stephane Biguet, chief financial officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. For more information, please refer to our latest 10-K filing and other SEC filings which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our third quarter earnings press release, which is on our website. With that, I will turn the call over to Olivier.

Thank you, Olivier, and good morning, ladies and gentlemen. Third quarter earnings per share, excluding charges and credits, was 69 cents. This represents a decrease of 5 cents sequentially and 20 cents when compared to the first quarter of last year. We recorded 19 cents of charges during the third quarter. This includes 12 cents of merger and integration charges, largely related to the ChampionX acquisition that we closed during the quarter, as well as approximately 4 cents related to workforce reductions, and 3 cents related to the impairment of an equity method investment. Overall, our third quarter revenue of 8.9 billion increased 382 million, or 4% sequentially. I recognize that there are a lot of moving pieces this quarter, so let me bridge our Q3 revenue to Q2 at a high level. 579 million of the sequential revenue increase comes from the two months of activity we recorded this quarter from the acquired ChampionX businesses. This increase was partially offset by the loss of approximately 100 million of APS revenue due to production interruptions arising from a pipeline disruption in Ecuador, and the absence of approximately another 100 million of revenue following the divestiture of our interest in the Palliser APS project in Canada at the end of the second quarter. In other words, after considering the revenue contribution from ChampionX and the impact of the lower APS revenue due to the two factors I just mentioned, revenue was essentially flat on a sequential basis. Our pre-tax segment operating margin declined 32 basis points sequentially to 18.2%. The impact of the two months for ChampionX was accretive to these margins as ChampionX contributed 579 million of revenue and 108 million of pre-tax income in the quarter. Company-wide adjusted EBITDA margin for the third quarter was 23.1%, representing a sequential decrease of 92 basis points. The effect of the pipeline disruption in Ecuador negatively impacted our EBITDA margin by approximately 60 basis points. In addition, the divestiture of our interest in the Palliser project resulted in a further 30 basis points reduction. I will now go through the quarterly results for each division.

And let me begin by sharing more detail about our new digital reporting structure. As Olivier described earlier, digital is a fast-growing business and SLB is at the forefront of this industry transformation. We expect our digital business to grow faster than our core business for the foreseeable future with margins visibly accretive to the rest of the company. As such, our intent is to increase transparency around our digital business and better highlight its strategic value. To do this, we are now reporting digital as a standalone division. At the same time, our APS business is now being reported in the all other category together with our data center solutions and SLB capture businesses. To provide you with better insights into these reporting changes, as well as the impact of ChampionX, we have included supplemental pro forma financial information going back to the first quarter of 2024 as an exhibit to the form 8-K we filed this morning for our earnings press release. Getting back to digital, revenue is captured and will be reported across four categories where SLB offers solutions for our customers: platforms and applications, digital operations, digital exploration, and professional services. Let me briefly describe each of these categories. Additional details can be found in question 11 to the FAQs at the back of our earnings release. The first category is platforms and applications. Platforms and applications include SLB's cloud technologies, such as the Delphi and Lumi platforms, along with a suite of specialized domain-focused applications, such as Petrel and Techlog, offered as SaaS subscription or perpetual licenses. These platforms and applications automate complex models, unlock data, and utilize AI and machine learning to reduce cycle time and improve efficiency of workflows. This allows our clients to make better, faster decisions to improve their project economics and reservoir performance. With the exception of one-off license sales, revenue in this category is recurring in nature, underpinned by a globally installed software base built over four decades, and complemented by growing adoption of cloud-based capabilities and IoT-enabled solutions. As a result, platforms and applications have high retention rates and very limited churn, as illustrated by the fact that the net revenue retention rate was 103% at the end of the third quarter. This represents the percentage of recurring revenue retained from our existing customer base over the last trailing 12 months relative to the prior 20 trailing 12 months. The second category is digital operations, which combines the unique strength of SLB's core oil field services and products with advanced digital technologies to deliver more reliable and more efficient field operations. By integrating connected solutions with performance labs, digital service delivery centers, customers gain real-time monitoring, remote decision-making, and automated execution across their workflows from autonomous drilling to automated well internal intervention. Revenue in this category is generated from the same client base as our core divisions and is therefore repeatable. Additionally, a portion of the revenue is recurring in nature. To incentivize the three core divisions, well construction, reservoir performance and production systems, and digital to develop and promote this offering, the resulting revenue is recognized in both the respective core division as well as in the digital division. This revenue is then eliminated in consolidation. The third category is digital exploration. Digital exploration represents our exploration data business. Our differentiated library of seismic surveys and over subsurface data covers key exploration and producing basins worldwide. These licensed data sets are refreshed and reprocessed to benefit from the latest imaging algorithms and AI technologies enabled by high-performance cloud computing. Revenues are generated from one-time, non-transferable license sales and are therefore non-recurring in nature. Professional services makes up the fourth revenue category. This includes consulting and all other services required to support our clients' digital transformations. These services include transition support from on-prem to cloud-based digital solutions, data clean-up and migration, and workflow automation. Including deployment of solutions built using our global network of innovation factories. Professional services revenue is largely project-based and repetitive engagements with the same customers are common. These services generate pull-through opportunities across the overall digital revenue streams. In addition to reporting revenue across each of these four categories, we will also share annual recurring revenue, or ARR, on a quarterly basis. ARR represents the annual value of recurring subscription and maintenance revenue from platforms and applications along with the recurring portion of digital operations, providing a measure of predictable revenue over the next 12 months. Now that I have described our digital reporting structure in more detail, I will walk through our first quarter digital results. First quarter digital revenue of 658 million increased 11% sequentially and adjusted EBITDA was 215 million, reflecting a margin of 32.7% up 123 basis points sequentially. First quarter sequential revenue growth was driven by robust sales of digital exploration coupled with increased digital operations. It also reflects two months of activity from ChampionX, which contributed digital revenue of 20 million. Annual recurring revenue stood at 926 million at the end of Q3, representing year-on-year growth of 7%, highlighting our ability to continuously expand our offerings in platforms and applications and digital operations, as well as secure new customers.

Turning to the core divisions, reservoir performance revenue of 1.7 billion declined 1% sequentially as higher activity in Europe and Africa was more than offset by lower revenue in the Middle East and Asia, primarily in Saudi Arabia. Pretax operating margin of 18.5% was essentially flat sequentially. Well construction revenue of 3 billion was flat sequentially as higher revenue in offshore Guyana and North America were offset by lower drilling activity in Saudi Arabia and Argentina. Margins of 18.8% were essentially flat sequentially. Production systems as reported revenue of 3.5 billion increased 542 million, or 18%, sequentially. This reflects two months of activity from the acquired ChampionX production chemicals and artificial lift businesses, which contributed 575 million of revenue. Pretax operating margin of 16.1% declined 66 basis points sequentially driven by an unfavorable geographic mix in completions and lower subsea margins. This decline was partially offset by the accretive margin contribution from ChampionX. On a pro forma basis, production systems revenue of 3.8 billion was flat sequentially with lower completion sales offset by increased sales of valves and production chemicals. While it is still early days, we are quite pleased with the performance of ChampionX, which recorded a number of quarter of year-on-year revenue and margin growth, demonstrating the resilient nature of this production and OPEC-based business. Going forward, these results will be further enhanced by the 400 million of annual pretax synergies that we expect to generate within the first three years after closing. We remain confident that we will be able to realize 70 to 80% of the synergies within the first 24 months of the transaction. As a result, we expect the transaction will be accretive to both margins and earnings per share on a full year basis in 2026. Now turning to our liquidity. During the quarter, we generated 1.7 billion of cash flow from operations and 1.1 billion of free cash flow. These amounts include the payment of 153 million of acquisition-related items during the quarter. Capital investments, inclusive of capex and investments in APS projects and exploration data, were 581 million in the quarter. For the full year, we still expect capital investments, including the impact of ChampionX, to be approximately 2.4 billion. We expect that, following our historical patterns, free cash flow will increase in the fourth quarter on the back of lower inventory as a result of year-end product sales as well as higher customer collections. The extent of the sequential step-up in free cash flow will largely depend on cash collections in certain countries. And finally, we repurchased 114 million of our stock during the quarter, which brings our total stock repurchases to 2.4 billion on the year-to-date basis. When combined with our 1.6 billion dividend commitment for the year, this will result in us returning a total of 4 billion to our shareholders for the full year. I will now turn the call back to Olivier.

We will now begin the Q&A session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Dave Anderson with Barclays. Dave, your line is open.

Hi, good morning. So, good morning. On the IEA, uh good morning. On the IEA, put out a report highlighting increased global decline rates and and the need to spend capital just offset these barrels each year. You now have ChampionX in the fold and you've created really what looks to be the largest production-focused business in services. When you think about chemicals, lifts, subsea, something like 40, 45% of your revenue. Can you talk about how you see this part of your business growing? I I it's a little confusing when I think about your core business cuz this is seems a little bit different, but how are you thinking about this part of your business growing? Particularly with deepwater development ramping up. And I'm just wondering, are you thinking the production should outpace upstream drilling part of your portfolio through the end of the decade? Is that the right way to think about it in terms of the opportunity set?

So, shifting over to digital, throughout this year of the breakout here, I have a million questions here. I'm going to try to keep it to a handful of things to focus on. Stephane, you have the four different segments here. I was wondering if you could kind of just talk a little bit about how we should be thinking about those four segments and where they should be trending, kind of what the drivers are for those four segments. I guess the exploration part, but kind of the rest of it. And then secondarily, you highlighted 900 million in recurring revenue year-to-date, up 7% from last year. I'm just curious, are you expecting this to accelerate? Did you think it was going to grow more or less this year and how should we think about that going forward?

So, thanks for all the questions. Indeed, it's a lot of additional info. So, the ARR above 900 already, yes, it's growing and we clearly anticipate this to continue growing as we not only offer more to our existing customers, but also secure new customers. So, probably going into Q4, we can be looking probably at high single digit growth for ARR and with the kind of number you see now, we are not too far, I believe, from getting into next year getting to 1 billion dollars of ARR which really provides a very good baseline of revenue. For the rest of your questions, I will pass it to Olivier.

Appreciate the insight. Thank you.

Your next question goes to line of James West with Wells Fargo. James, your line is open.

Thanks. Good morning, Olivier and Stephane.

So, curious on two key markets here for you guys where you have a nice dominant position. I'd love to get your thoughts on. First is deep water. As we look out into '26, obviously that it's been very resilient although some white space, but it looks like we're going to kick off a lot of campaigns next year and I'd just love to hear your thoughts on how we should think about that unfolding and Schlumberger's position or SLB, excuse me, its position.

Got it. Okay, that's great. Thanks for that, Olivier. And then the other market, the Kingdom of Saudi Arabia, has gone through some gyrations here in recent quarters, but it seems to me like at least we may have found somewhat of a bottom and maybe looking to add to activity next year. Is that consistent with what you're seeing in that market? I know it's a sizable market for yourself.

Great. Thanks, Olivier.

Your next question comes from the line of Scott Gruber with Sanford C. Bernstein. Scott, your line is open.

Yes, good morning. I want to ask you about the solutions business. Morning. So, the data and analytics solutions business is growing pretty quickly here. It's actually becoming really sizable. Can you talk about the strategies for the business? Is there any here to develop a skill set and take it global, you know, as data center construction goes global? And overall, how do we think about the growth for the data center solutions business in 2026 and beyond?

Got it. No, very interesting. It's a little bit different business. Is the data center business a little capital intensive and balance sheet commitment with the business, or is there an investment needed to grow that business?

Excellent. Well, we'll continue to watch. Thank you.

Your next question comes from the line of Josh Silverstein with UBS. Josh, your line is open.

Yeah, hi everyone. Thanks for the new digital details here. You highlight the 7% growth in the annual recurring revenue. Is this growth predominantly coming from new customers or growing the existing customer base? Obviously, the 100% net retention rate shows how sticky the revenue is, but I'm curious about if you need to keep adding customers to drive that growth going forward.

Great. And then just as a follow-up, I wanted to go back on the EBITDA margin comments that you guys have made. You highlighted that it was around 32% for the first 9 months, but I think you said you expected to reach 35% for the full year, which implies a very large jump towards 45% in the fourth quarter. So, I wanted to just make sure that was right, and then where you think margins can kind of go to if we look at 2026 versus 2025.

By the way, if I can add something we've not discussed before on the EBITDA margin, except for the digital exploration part of it, is a very good proxy for free cash flow. There's obviously no CapEx in the digital business, again, excluding exploration data.

Great. Thanks, guys.

Your next question comes from the line of Arun Dhingra with JP Morgan. Arun, your line is open.

Yeah, that was my question on kind of digital margins and kind of the capital intensity of that segment. So, you know, I was just wondering about as you think about, you know, longer term growth from that segment. I mean, you mentioned that you think that it could outstrip the core business by double digits. Just wondering if you maybe elaborate on that commentary on growth from digital.

Great. And one follow-up, Olivier. I wanted to see if you could elaborate on your commentary on what would happen in the recovery. Your commentary suggests you expect that international would lead in a recovery. Historically, it's been North America. So, I was wondering if you could maybe just elaborate on that thought behind that commentary.

Great, thank you.

Your next question goes to line of Neil Mehta with Goldman Sachs. Neil, your line is open.

Good morning, Olivier and team. Thank you for taking the time. So, I was wondering your perspective on the oil macro and this is more of a near term question. Certainly the market has flipped into oversupply and I think what a lot of market participants are trying to figure out which you have unique perspective on is what is the rebalancing mechanism to get the market back into balance. And there are a couple of different levers. Certainly the US could be part of it and part of it could just be time and demand can grow into it. But how do you guys see the market rebalancing from this current period of oversupply?

Yeah, thanks Olivier. You have a unique perspective to what's going on in the oil market. The follow-up is just on M&A ChampionX. I think in retrospect really helped to balance out the portfolio on the production side. I'm just curious to the extent we are in a period of softness do you see there an opportunity for SLB to continue to be a consolidator or given the softness in the equity do you feel like a more organic approach is the right strategy?

Okay, thanks Olivier.

Thank you, Neil. Your last question will go to line of Steve Richardson with Evercore ISI. Steve, your line is open.

Thank you. Thanks for putting me in. Good morning. I was wondering if you could talk a little bit about the addressable market in digital. I think you just talked about the longer term growth but how should we think about the addressable market? I mean I think we've seen consultants talk about a mid $30 billion for total revenues in 2030 or should we think about it as a proportion of total upstream spend? You know how do we think about the total pie here? And I appreciate that it's very subjective in terms of how you define what is digital and what is not.

That's great, Olivier. Thank you so much. I mean I think the quick follow-up if I may on the commercial push here. Do you find that you are is it fair to assume that you're coming in to your customer and providing a new solution that's outsourcing or replacing something that they're doing internal? Are you finding that you're bidding against a competitor? And then as a follow-up there how much of digital would you think right now is bundled with something that comes out of the core? So does that create the commercial entry to then make the digital sale or should we think about them completely separately? Thanks.

Okay, thank you.

I will now turn the call over to SLB for closing comments.

This concludes today's conference call. You may now disconnect.