Flotek Industries Inc

NYSE:FTK

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the Flotek Industries First Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 7, 2025.

I would now like to turn the conference over to Michael Critelli, Director of Finance and Investor Relations.

[Mike Critelli, executive]

Thank you, and good morning. We're thrilled to have you with us for Flotek's first quarter 2025 earnings conference call. Today, I'm joined by Ryan Ezell, Chief Executive Officer; and Bond Clement, Chief Financial Officer. We will start with prepared remarks covering our business operations, financial performance and the acquisition announced on April 28, 2025. Following that, we will open up the floor for questions. Yesterday, we announced our first quarter 2025 results and updated earnings presentation, both of which are available on the Investor Relations section of our website. This call is being webcast with a replay available on our website shortly after its conclusion.

Please note that the comments made on today's call regarding projections or expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Please refer to the reconciliations provided in the earnings press release and investor presentation as management will be discussing non-GAAP metrics on this call.

With that, I'll turn the call over to our CEO, Ryan Ezell.

[Ryan Ezell, executive]

Thank you, Mike, and good morning. We appreciate everyone's interest in Flotek and for joining us today as we discuss our first quarter of 2025 operational and financial results.

Despite the dynamic geopolitical and macroeconomic challenges that have injected uncertainty within the market, the Flotek team remains steadfast at the execution of our corporate strategy. This laser focus resulted in the delivery of the strongest quarter in a decade and our strategic expansion into real-time data monitoring and gas conditioning in the energy infrastructure sector. In the first quarter of 2025, Flotek continued its track record of increasing market share and profitability growth in both of our complementary business segments as we remain unwavering in our commitment to create value for our customers and shareholders through the convergence of innovative chemistry and data solutions.

With that, I'd like to touch on some key highlights for the quarter that Bond will discuss later in the call. As part of our Measure More strategy in the Data Analytics segment, we acquired 30 real-time gas monitoring and dual fuel optimization assets. We also secured a $160 million multiyear contract poised to drive substantial earnings growth and free cash flow for the segment.

First quarter 2025 results represented the 5th consecutive quarter of growth in revenue, gross profit, net income and adjusted EBITDA. Total revenue during the quarter rose 37% versus the first quarter of 2024, highlighted by an 88% increase in external chemistry revenue, which is our strongest quarter in the last 5 years and a 57% increase in Data Analytics revenue. Gross profit climbed 41% versus the first quarter of 2024 with first quarter 2025 gross profit margin rising to 23%. Net income and adjusted EBITDA were up 244% and 93%, respectively, versus the first quarter of 2024. Most importantly, all of these achievements were accomplished with 0 lost time incidents in the field of operations.

I'd like to take a moment to thank our employees for all their hard work and commitment to safety and service quality in achieving these outstanding results. I remain excited about Flotek's future as we strengthen our position as a technology leader, spearheading innovation and delivering tailored chemistry and data solutions that meet our customers' specific needs. We're committed to shaping the industry's future by leveraging chemistry as the common value creation platform.

Now let's dive into the details referencing Slide 5 of the earnings deck. Today, I want to spotlight the remarkable progress in our Data Analytics segment. We're particularly energized by 3 upstream technology applications: power generation, custody transfer and flare monitoring, all of which are fueling significant advancements for our organization. The first is our transformative power generation solution, which has evolved from a novel analytical approach into a game changer for the energy infrastructure sector, which we call PWRtek. What began as advanced analytics has grown into a comprehensive end-to-end fuel management platform, redefining performance standards and operations within the sector.

Looking at Slide 6. On April 8, 2025, we acquired 30 patented real-time gas monitoring and dual fuel optimization assets. This transaction instantly strengthens our presence across all U.S. basins, adding turnkey capacity for fuel valuation, conditioning and distribution to support remote energy services, data center and grid power generation infrastructure. This acquisition also secures a 6-year contract, anchoring over $160 million in recurring revenue backlog, generating over $20 million in annual operating income and boosting free cash flow. Importantly, this $160 million is just a starting point with additional revenue opportunities embedded in this contract.

Moving to Slide 7. At the heart of PWRtek is our Verax analyzer, which goes beyond data collection to deliver custody transfer grade measurements. It provides precise BTU and volume reporting for royalties, invoicing and performance guarantees. Complementing this, our patented ESD trailers actively remove liquids and contaminants, conditioning high-BTU hydrocarbon feeds to meet exact turbine or engine performance specifications. Because every site and grid conditions are unique, we've integrated Coriolis metering, automated CNG blending and seamless backup connections, allowing operators to switch fuels or go off grid with a single button resolving major constraints to the development of data center and grid power infrastructure.

But PWRtek is about more than just technology. It's about control. Operators interact effortlessly through an on-trailer HMI or a unified web portal that is accessible on desktop, tablet or smartphone. Our cloud-based portal enables the monitoring of live BTU trends, H2S alerts, Coriolis flow meter readings and automated CNG blend controls combined with custom alarm thresholds that automatically isolate off-spec hydrocarbon feeds and protect high-value turbines or engines from catastrophic damage, thus minimizing downtime and operational risk while enhancing safety.

All data flows securely through our patented edge-to-cloud pipeline, ensuring 0 manual intervention, end-to-end encryption, full audit trails and compliant custody transfer record-keeping. Our expanded fleet is already making an impact, monitoring and managing over 50 million cubic feet of gas daily, transferring raw feedstock into optimized safe fuel for our customers. Building on success, we're developing a smart filtration skid, which is a minimal footprint unit that integrates custody transfer analyzers to remove liquids, monitor BTU and emissions and auto divert out of spec gas. Capturing just 10% of the roughly 500 North American infill gas engines could drive 50-plus skid rentals, generating an additional $10 million to $14 million in annual revenue at 70% to 80% gross margins, all backed by robust precision measurement data.

Finally, our over 30 Data Analytics patents combined with 5 new patents from this acquisition, position Flotek as a leader across the natural gas value chain. When considering our capabilities for advanced fuel blending, zero emissions analytics, custody transfer grade flow cell measurements, wireless ESP actuation and secure edge-to-cloud data transmission, we deliver unmatched monitoring, control and safety for field gas operations.

Now let's transition to Slide 8 where we'll dive into our second upstream application, custody transfer. Since January of 2025, a leading E&P partner has been piloting this solution in multiple U.S. basins and the results so far are encouraging. At a single pilot site, we have pinpointed an annual customer opportunity of up to $3.5 million of savings, highlighting the significant value this solution creates. Considering the potential scale of this E&P operator, the enterprise value creation at this level is driving further applications with 8 custody transfer pilot locations set to transition to recurring DAS revenue in the second quarter of 2025 and more conversions planned throughout the year.

Additionally, we are actively pursuing opportunities with domestic operators and targeted NOCs in the Middle East. By monitoring hydrocarbon quality and composition in real time and taking measurements every 5 seconds, we're positioned to unlock a new market for Flotek in 2025. This groundbreaking application sets a new standard in the oil and gas industry, delivering unprecedented transparency and minimizing enterprise risk for producing wells like never before.

Let's move to our third upstream application, the VeraCal flare monitoring solution. In the first quarter of 2025, we saw an uptick in demand following the EPA's regulatory updates released in late December of 2024. Starting in mid-February, customer interest accelerated. And by March, VeraCal sales gained momentum. We're thrilled about the growth potential in flare monitoring as we partner with operators and flare developers to develop value that goes beyond compliance, unlocking new efficiencies and environmental benefits for our clients.

It's obvious that the strategy to grow our Data Analytics segment is gaining traction. But what is most important is what it means for our stakeholders and investors. First, our DAS driven strategy ensures predictable recurring revenue and cash flow, delivering stability and long-term value. Second, our proprietary technologies and superior measurement accuracy establish a high barrier to entry, securing client loyalty and supporting our value-based service model. And third, long-term high-margin subscriptions position Flotek for sustained growth and margin expansion, driving significant shareholder value over time.

Now looking over the next decade, global energy demands are projected to expand with sustained requirements through 2045 despite the ongoing market volatility and uncertainty in the near-term. For the first time in nearly 2 decades, U.S. electricity consumption is expected to surge by 15% by 2030 with natural gas poised to fulfill most of this additional need. We foresee continued global economic growth, fueling a strong appetite for all energy sources, heightening service intensity across this entire sector.

And lastly, our Chemistry Technologies segment continues to deliver robust quarter-over-quarter growth driven by the differentiation of our prescriptive chemistry management services and our expanding presence in the UAE, Saudi Arabia and Argentina, as shown on Slide 13. Making an even deeper observation, Slide 14 validates the strong performance of the segment as revenue and profitability grew despite the historical trend of the first quarter being sequentially weaker than Q4 and overall market consolidation. It should be noted that the anticipated downward pressure on oil prices in the second half of 2025 prompted operators to accelerate first half completion activity, taking advantage of the higher prices, and in turn, increasing PCM adoption or enhancing asset value in the first half of the year.

It's evident that our chemistry team has executed our strategy flawlessly, steadily capturing market share, while creating value for customers. While Q2 schedules remain strong, uncertainties around activity levels in the second half of 2025 persist due to macro factors that could affect the completion chemistry market. However, we remain focused on defining these challenges, delivering differentiated chemistry and data services to provide our customers with industry-leading returns on their investment. We are confident that our expanding suite of services positions us to deliver superior solutions to a variety of the industry's most challenging problems, while maximizing our customer value chain.

Now I'll turn the call over to Bond to provide key financial highlights.

[J. Clement, executive]

Thanks, Ryan. Yesterday afternoon, we reported another quarter of exceptionally strong results that builds upon the financial momentum that began in the fourth quarter of 2022, as shown on Slide 12 in the presentation. On a sequential basis, we increased revenue 9%, net income 21% and adjusted EBITDA by 11%. As Ryan mentioned, first quarter 2025 marked the 5th consecutive quarter that we grew revenue, net income and adjusted EBITDA.

Before getting into the quarterly results, I wanted to touch briefly on a few details with respect to last week's announced Data Analytics transaction. Part of the consideration for the transactions included utilizing a portion of the 2024 and 2025 chemistry supply agreement shortfall payments. Utilizing shortfall amounts against the purchase price does not impact our revenues or profitability in any way as we are electing to use the shortfall payments to purchase assets versus collecting the cash.

We do expect to utilize future shortfall amounts to quickly pay down the $40 million note that we took on in connection with the transactions as there are no prepayment penalties to do so. Again, no impact to revenues or net income utilizing shortfall amounts to pay down debt. We fully expect to see our leverage ratio move well below 1x by the first quarter of 2026 through the combination of debt repayment and growth in adjusted EBITDA. For reference, the midpoint of our 2025 guidance implies 80% growth in adjusted EBITDA in 2025.

To put some context around the impact of the transaction, we noted in last week's release that we expected the contract to generate segment operating income in 2026 that exceeds the total company's 2024 adjusted EBITDA of $20.3 million. So assuming the contract contributes an equivalent amount of cash flow in 2026, this transaction would effectively increase adjusted EBITDA by at least 100% with only 20% share dilution, clearly, a very accretive transaction for the company.

Even though 8 of the 30 acquired assets are not currently generating fixed fee recurring revenue, we do expect to clearly see the impact of the transaction on our financials beginning in the second quarter. As the assets under construction come online throughout the year, we expect to see continued quarterly improvements in Data Analytics revenues and profitability. As shown on Slide 9, with all 30 assets in service during 2026, fixed fee revenue is expected to exceed $27 million.

Moving quickly through the quarter results. Revenue growth was led by an 88% increase in external chemistry versus the year ago quarter. International revenues totaled $3.8 million during the quarter, a roughly 250% increase from the $1.1 million in the year ago quarter. In total, chemistry revenue grew 36% versus the year ago quarter. For Data Analytics, we grew revenue 57% versus the first quarter of last year. Revenues during the quarter were skewed more heavily to product sales, but we also grew service revenues by 30% as compared to a year ago.

As shown on Slide 9, with the PWRtek transaction, we expect to see a big jump in recurring revenues throughout the remainder of the year as the new mobile power generation contract is expected to provide more revenue in 2025 than the entire Data Analytics segment reported in 2024. On the SG&A front, as we indicated in our year-end call, SG&A costs during the first quarter declined sequentially. SG&A as a percentage of revenue decreased to 11% in the first quarter of this year versus 13% in the fourth quarter. Net income for the quarter totaled $5.4 million or $0.17 per share. Our earnings per share in the first quarter represented 50% of the total earnings per share for all of last year.

Looking at Slide 12. During the first quarter, we continued our strength with respect to adjusted EBITDA. The first quarter represented the 10th consecutive quarter of improvement. Our first quarter 2025 adjusted EBITDA was nearly 100% higher than the year ago quarter. Yesterday, we also provided our 2025 guidance on revenue and adjusted EBITDA, which we have highlighted on Slide 12. As a result of the strong start in 2025, combined with the impact of the Power Generation acquisition, we are guiding for continued growth in 2025 on both metrics. The midpoint of our revenue and adjusted EBITDA guidance indicates 2025 growth of 12% and 80%, respectively, as compared to last year.

Impressively, using the midpoint of both metrics implies a 17% adjusted EBITDA margin as compared to only 11% in 2024, demonstrating the positive margin impact that the Power Generation transaction is expected to provide. It's worth noting that our guidance does reflect a conservative outlook for the second half of the year as it relates to our chemistry business given the recent commentary from multiple E&P operators on CapEx reductions due to the uncertainty regarding oil prices and the impact of tariffs on the cost of pipe and tubulars.

Touching on the balance sheet. At March 31, we had nothing drawn under our ABL. We did collect $15 million in cash related to the 2024 chemistry shortfall penalty during March and paid off the ABL. In closing, we're excited about the continued growth in our base chemistry and Data Analytics segments and we look forward to realizing the very positive effects of the Power Generation contract is expected to provide over the next several years in terms of very high-margin revenue.

I'll now turn the call back over to Ryan for closing remarks.

[Ryan Ezell, executive]

Thanks, Bond. The first quarter of 2025 results build upon our now multiyear track record of consistently posting improved financials. Looking at Slide 10, and as I said at the end of last year, I remain convinced we are still in the early innings of Flotek's transformation as we continue to grow and maximize returns for our customers and shareholders across the entire value chain of the energy landscape.

Our transformative and strategic entry into energy infrastructure sector is expected to provide a significant increase in high-margin Data Analytics revenue and cash flow for years to come. Through the growth of our upstream applications, we believe the Data Analytics segment is poised to contribute over half of the company's profitability in 2026. We have now secured long-term contracts for both our chemistry and Data Analytics segments, which should provide confidence in Flotek's ability to deliver consistent revenue and profitability, helping to mitigate the impact of commodity price volatility in the near-term on our business.

No other company in our industry is better positioned to deliver the cutting-edge technologies needed to tackle unique challenges of the energy and infrastructure sectors. I'm incredibly proud of our progress and confident in our team's ability to execute moving forward. Given the growth potential for our chemistry and Data Analytics segments, we see Flotek as a compelling investment opportunity. Thank you for your continued support, and we're eager to share our vision for Flotek's future and looking forward to updating you on our progress in the quarters ahead.

Operator, we're ready to open the floor for questions.

[Operator]

[Operator Instructions] Your first question comes from Donald Crist with Johnson Rice.

[Donald Crist, analyst]

I wanted to start on the PWRtek side, obviously, a very good transformational acquisition for you all. But -- and it's going to obviously increase EBITDA and revenues as we kind of move forward into '26. But I was curious as to kind of third-party demand on this side. I mean, obviously, all those trailers are working with ProFrac today. And once they're all delivered in kind of early '26, just curious as to how fast you can expand that to third-parties and take over construction of that -- of those trailers moving forward?

[Ryan Ezell, executive]

Yes, Don, that's a great question. And in reality, what is probably the basis of some of the most exciting things that we have going on here at Flotek is that we've been testing the Verax on, I would say, almost 10 external or additional customers besides where we have the long-term contract now and getting great results. And what most of them have been telling us is they still don't have that full end-to-end solution, even though we're able to monitor the gas for them on their current things they're trying to test now.

So what this offers for us to go back to them and say, hey, you've been waiting to start Verax to monitor the gas quality, now we have the full solution. So we expect some pretty rapid uptake. We're looking at what kind of going forward, we may discuss a little bit further in future calls on what we'll be spending on CapEx to build additional units because I can tell you that we put in excess of 15 additional Verax units out to customers in the last quarter and testing gas quality for remote power operations. So we expect some solid opportunities there going forward.

[Donald Crist, analyst]

It seems like a very good opportunity for you all. And I wanted to shift over to the custody transfer. Obviously, that's a very big market for the Verax sensors and 8 pilot locations are converting over. Just curious as to customer demand and how many other pilot locations you have going right now? And where you think, from a sensor count, you could get to maybe by the end of the year as kind of those pilot locations transfer over to monthly revenue and it grows from here?

[Ryan Ezell, executive]

Yes. I would say that we mentioned around -- we have the 8 units that only with that one single E&P operator right now that are converting essentially in this month into revenue streams. They have an additional, I want to say, 14 verified putting into a basis now. 5 of those are on location. The other 11, we're finally validating where the install sites are. We've got probably up to 10 additional customers that we're moving those forward to. And as a matter of fact, our team, including Tom Redlinger is in the Middle East right now validating where we are on the pilot locations in 2 additional countries there in UAE and Saudi.

So we do -- I expect the UAE contracts to come online by mid-year, on a conservative side, maybe sooner. And I really believe that as we're reporting more and more of this, the people start to understand the enterprise value that this is creating, this thing you're going to see a rapid uptick. I do believe we started looking at from the capital investment side around -- this is driven by our new generation measurement unit, the XSPCT unit, which is the third generation. We've advanced building those at our facility in Austin to meet this demand. But I do think we're going to continue to see that probably growing in a much sharper than linear fashion in the back half of the year.

So it's probably overall, Don, I know we talked about the power generation side have such an immediate impact and will continue to be when you look at the energy growth. But I do believe that still all in all, when you look at enterprise value and the market size for custody transfer, it still continues to be the longer to grow, but it's still the biggest market that we'll get in the upstream Data Analytics part of the business.

[Donald Crist, analyst]

I totally agree with you. And if I could sneak in one more. On the external chemistry, you had a huge uplift in international sales. Just curious, that's obviously much more stable than the U.S. market as we kind of ebb and flow here in this environment. But just curious as to where you think that international market can go in the coming years? Obviously, you have some pretty big customers over there and I don't know kind of how many you're with today versus what you think you can get to in the future?

[Ryan Ezell, executive]

So I would say, we -- when you look at the international spread, a big majority of our revenue is obviously focused in the Middle East, particularly in Oman, Arab Emirates and Saudi with the consistent NOC customers you see there with ADNOC, Aramco, NESR, Halliburton, the general trends that we use there. I do think -- and I can get Bond to comment on the percentage numbers, but we will see a material increase year-on-year in international revenue and I think it's going to be relatively stable.

You've seen where Saudi Arabia is adding additional frac fleets and the growth there with -- we've got approved slickwater system and the mega tender that's been coming out at ADNOC will be released in the back part of this year. And we are the preferred chemistry supplier and approved technically for the majority of a lot of the specialty chemicals on the traditional acid and carbonate type simulation solutions. And so I think we're going to see just that consistent, steady, profitable growth in the Middle East over the next couple of years is what we believe.

And the Latin American business is interesting because most of it is around Argentina, around our entry with our completion chemistries. And we're monitoring that. Our big thing there is to make sure that we ensure payment cash flow for that market. But I think it's a great opportunity. Leon and his team are doing a phenomenal job of pursuing that work, what I think is an effective cash flow manner for how we're going to grow our business.

[Operator]

Your next question comes from Jeff Grampp with Northland Capital Markets.

[Jeffrey Grampp, analyst]

I want to circle back on PWRtek here. Can you touch a little bit on the competitive environment? What are the main incumbents that are kind of servicing this industry, if there are any? And then I wanted to confirm, in your prepared remarks, I think you mentioned a 500-unit kind of TAM in North America. I just want to make sure I understood. Is that kind of specific to the oil and gas market? Is that a broader definition of the industry? Just to make sure I kind of understand the market opportunity you guys see over the next couple of years.

[Ryan Ezell, executive]

Yes. So I'm going to try to -- and you've talked to me many times, I'm going to try not to fall into my technology definition of all these gaps, right? But you've got a lot to kind of unpack in that question. So looking at the initial assets that we have driven by our proprietary Verax measurement technologies that we just acquired, they are 100% active differentiating turnkey operations. We're not only detecting out-of-spec field gas, but also safely conditioning it and optimizing the fuel flow to whether you're looking at a turbine, dual fuel engine or whatever you've got in operation.

So it doesn't matter if you're looking at energy oilfield services, if you're looking at the -- solving the constraint of why data centers haven't grown from field gas because of need to be able to control and monitor the volume and create a valuation of how to pay the entities. It solves all these problems, even on the grid power support, whether you're going remote or not. When we look at some of the other assets that we're looking at -- and there's nothing really to compete with these things. It's the full turnkey solution.

What does exist right now is something similar to what we were talking about where we were looking at our smart filtration skids. There are current, what we call, knockout filtration units out there that can detect big volumes of liquids or they use almost like a JT skid and that they use a pressure drop to drop out some of the heavier hydrocarbons and try to stabilize the BTU, but they can't real-time monitor it, they can't condition it. They're almost just like just a heavy-duty filter. And so even our smart filtration skids will be an advancement compared to them differentiated.

So our high-level ESDs and Veraxes, there's nothing really to compete with them. They are differentiated premium priced technologies for any application. The -- if we look at the smart skids, we were targeting most of those will be oilfield locations because you need a smaller footprint to get a location and it's that first backup to knock out something that could damage whether you're looking at a genset or turbine or engine, whereas the other units like ESD can operate anywhere. And it's a much, much, much larger market for those than just oilfield services. Does that gives the clarity you're looking for?

[Jeffrey Grampp, analyst]

Yes. That's perfect, Ryan. And is that kind of what that 500-unit number represents with respect to kind of the...

[Ryan Ezell, executive]

Yes, the 500 unit is mostly just domestic oil and gas, like when you're looking at rig power or frac power only, not counting -- it doesn't address industrialized grid power support, AI data center support or any of those like what the ESDs can do. In other words, it's a much larger market when you pull all of it together.

[Jeffrey Grampp, analyst]

Yes, definitely. Understood. Okay, great. And then I wanted to circle back, Ryan, you kind of wrapped up the prepared remarks on Slide 10, which I thought was a really cool slide and kind of laying out the longer term opportunity. I'm curious, I know this doesn't all happen overnight, but what do you see, Ryan, as kind of the next 1 or 2 steps we get the PWRtek assets closed and integrated? What's kind of next for Flotek in that schematic in terms of other, I guess, kind of end markets or opportunities you guys are excited about?

[Ryan Ezell, executive]

Yes. I talk in general terms, I'm always about executing these small steps as part of our -- that multi-phase strategy that we talk about. Slide 10 references the overall view of the runway that Flotek is on. So there's no doubt we're going to make a hard impact where you see PWRtek notating around data center power, grid power and we call energy services, oilfield service power generation.

The next step for us that we really see focusing is upgrading more of our real-time instrumentation along this value chain from coming out from chain of custody. When we can do that, you essentially have a company that can design your completion from the chemistry side, monitor the chemicals going downhole. Once the well comes online, we leave an XSPCT unit, monitors the quality of production coming out and the additional assets that we'll put to look at the aqueous-based monitoring gives us the ability to run production chemistry in real-time, which opens up a $6 billion market just on the domestic side alone with a differentiated service offering.

So you'll start to see us start just filling the gaps along here. But I think our real-time monitoring based out of custody transfer and moving in the production chemistry direction will be the next big phase that we move into. Because holistically, Jeff, what the long-term strategy of us is, we're creating an industrialized chemical and data company that can manage the entire energy landscape if you need to monitor anything related using chemistry as a platform. And so we think that makes it a massively valued investment opportunity for the market.

And more importantly, you can see the impact that it is having on an addressable TAM for us, right? And that where we started out, when we put the strategy in place, we had about a $2 billion TAM. It's opened up to more than $13 billion and that's just talking domestically, not talking about what we may be able to do internationally. What's most exciting about it is, all of this growth we're talking about would take place if they stopped drilling today and we didn't complete any more wells because all the stuff is on the effects and energy support landscape. And so that's really exciting for the long-term investment in Flotek.

[Operator]

Your next question comes from Gerry Sweeney with ROTH Capital.

[Gerard Sweeney, analyst]

I want to start with Data Analytics and then like everybody else we'll shift over the power market. But on Data Analytics, obviously, one of the core areas you've been working on, and you spoke a lot about custody transfer, just sounds as though there's a little bit of a longer sales cycle there. Just curious what can open up that market a little bit? Is that getting a couple of maybe anchor investors and proof of concept or any thoughts on that front?

[Ryan Ezell, executive]

Yes. So I think technically -- and if you know I have been talking about this for over a year, you've seen us steadily pull forward. We feel that's going to be the impact from custody transfer. At a point in time, I would say, at the beginning of 2024, we had not completed building the XSPCT unit into full production yet. And now that we've gotten there and we've actually built, proven the unit, we're starting to see this opportunity in custody transfer significantly accelerate.

We mentioned in Q2 of last year that we were targeting trying to get 5 to 8 pilot sites. We're now at over 20 and those 8 are converting to full-time DAS revenue. And this is, like you're talking to me, this is that proving use case by a large proven E&P operator that we think is going to drive significant impact. We do believe that our international pieces will have secured by mid-year is going to drive impact in terms of use case understanding.

And right now, I think the biggest hurdles we kind of crossed is that, #1, they wanted to ensure that -- honestly, they -- we're seeing such a monumental variance in most of these sites that we test. These operators sometimes are like skeptical and that they bring GCs out the location to test. We've always tested within 1% or less variance from a GC. And right then, the operators were just taken back.

And then while you've got -- we're getting a measurement from a unit that's as accurate as our GC, we're getting it every 5 seconds. And there's a trust build there. And then they're starting to realize we're seeing this potential on one site and we have thousands of these. What you have is transition from a localized basin operation to complete enterprise value for the whole company. And so we do believe those will really start to accelerate.

The biggest risk still for us is helping them understand it's easy selling these on new wells, like almost every one of these applications are on new well. The ones where they're still hesitant is putting it on old producing wells because there's still some potential concern on opening the back door liability on someone being underpaid. And that's probably the most inertia that we have right now.

And I do believe as you see it on more of these new construction wells that we're going to be pulled into settling disputes that are upcoming because most of the work on the old wells we're doing right now are settling disputes. And it works out pretty well because we're the unbiased view on that between the operator and resource owner or the end-use buyer.

So -- but all in all, though, I do believe it's just -- there's just too much enterprise value, Gerry, for the whole oil and gas industry to provide this low transparency for it not to grow and move forward. I mean, Warren Buffett even commented on this years ago, sooner or later, you see such measurement level of automation that it removes all the [ snake hole ] measurement out of it, right? It will be completely understood data. And we want to be the tip of the spear of innovation side doing that. So I think that we're going to start seeing this thing really get critical mass sooner than later, honestly.

[Gerard Sweeney, analyst]

Got it. And on the power gen side, a lot of information has been thrown out there. I apologize if this was sort of asked writing, thinking, crossing the finger at the same time. But now that you have the assets -- and this may not be solidified, which I understand, but what is the growth strategy or growth assets going forward this year into next year? I mean, do you need to add salespeople? How do we think about how the opportunity not only develops, but you sort of build the scaffolding around it?

[Ryan Ezell, executive]

Yes. That's another solid question in terms of -- we look at it very much similar when you look at the PWRtek component, very similar to what we've done with our chemistry business. We want to create a push-pull mechanism. In that, there are some of the larger entities that have enterprise value around selling field gas for the data center components or selling field gas or grid power, et cetera, that we work directly with, provide these assets for the total turnkey solution, no matter what it's doing.

There's also some channel partners, for lack of a better term, that we'll work with that are on site doing particularly in the energy services side that we will provide the technology to as part of their service to sell to pumping companies or people who are providing mobile turbines or things of that nature. So we want to work with both, right? We want to be partners with people who are doing a lot of field services where we provide the patented technology on a service or DAS service type mechanism.

And then there will be some of these E&P operators who have large installed projects, particularly focused on we can solve a lot of the problems from what they've seen in the past around data center support or grid power by inconsistency of gas, how to pay people, how to value and all those, we can solve those problems and we'll work with the E&P guys direct. So depending on what the customer is, we have a little bit of a hybrid business model that we hope creates the push-pull mechanism.

This works the same way -- on the chemistry side is we work with E&P operators to get a better reservoir in terms of how it produces. We work with the pumping companies to get effective output from their pumping equipment with how we look at friction reducers, service quality, tank configuration, real-time monitoring, things like that. So we're going to create a very similar, I would say, ecosystem on the power gen side of the business. We've already started adding sales force on the power gen side.

[Gerard Sweeney, analyst]

Got it. Would it be fair to say on the PWRtek side, you enable some of the gas providers or equipment providers the ability to sell to the data centers. You provide that certainty of quality of gas and uptime, et cetera?

[Ryan Ezell, executive]

Yes. When you look at a lot of these data centers, you look at what they're going to do here in Texas, right, or even just electricity demand in Texas to grow. You've got this gas strained in these remote locations that comes to gathering sites. And so one of -- 2 of the big problems that they've had is, #1, when you look at just the pure quality gas, they can't necessarily handle the liquids or they can't handle the BTU fluctuations or anything of that nature to basically optimize the fuel, to optimize BTU so that you get the maximum life out of the power gen devices, right?

Our technology uniquely solves that. But more importantly is, even if they could do that, which they haven't been able to successfully, even if they could do that, they can't meter and value the quality of all the different gases that are co-mingling coming in, whereas our Verax and our XSPCT sensors can go out and measure each line so that we know the volume composition and the quality of gas that's all flowing to the combined point for the data center. And so we can actually give the actual royalty payments accurately to all the people who are supplying gas, which is always problematic too.

And so this really unlocks a lot of the past constraints of really making this successful. And not to mention is that it has a backup capacity where if you get a bad point of field gas, we can automatically actuate off your smartphone, close it and make it run off compressed natural gas that you can have an emergency tank while you fix the field line. So it just offers a unique solution that's just not currently out there and it really does some amazing things.

[Operator]

Your next question comes from Gowshi Sriharan with SRI Singular Research.

[Gowshihan Sriharan, analyst]

Given the growth in the international markets, how are you seeing whether the impact on tariffs will have any -- you wouldn't need any external partners or investment in local suppliers?

[Ryan Ezell, executive]

Yes. So it's a good question. And technically speaking, when you look at the way we've been constructing Flotek to be able to manage cycles and changes in commodity pricing and geopolitical environments is that most of the chemicals that we're supplying to international markets, we are buying manufactured in country or from partners over there to one, improve our in-country manufacturing, whether we're looking at IKTVA and the other localized country sourcing that we see in the UAE. So we're definitely doing that in terms of just what's required for table stakes to operate in those countries. But more importantly, we're running consistent inflationary and price changing impacts based on what we see with tariffs, what countries we buy and some of this little bit of shift we're seeing.

There's no doubt, though, we've seen -- we are experiencing some there -- I should say the industry is experiencing some supply chain disruption. I do believe that we're positioned in a place to outperform a lot of our competitors in that because -- the team here at Flotek comes with a massive amount of experience in the background. We've kind of done a lot of this before and we were really preparing for this potential shift that we're seeing right now. So -- but there is no doubt, it still causes a little bit of headaches. It still causes a little bit of timing problems. But I think we've taken some really strong steps to put guardrails in place so that we get maximum benefit from in-country manufacturing, blending and how we source the material depending on where we are on the global brand operations.

[Gowshihan Sriharan, analyst]

And I think you've alluded in the past that there's been some bureaucratic hurdles, especially in the Middle East. As we move forward, and I think you've kind of become a proven commodity, does the margins and the lead times get shorter as we move into FY '26?

[Ryan Ezell, executive]

Yes. I think that anybody that's out in our international markets knows that you're dealing with particularly the countries in the Middle East, there's constant pressure on the commoditization of the systems and the margins. However, as one of the unique things that we do on the chemistry side is we're constantly evolving our product mix and how we address those. But I do -- but you are correct is that as you establish maturity with these operators, there is an expectation of your nimbleness and ability to shorten lead times. And we've actually been working with some local partners there to create that critical footprint for us as our revenue is growing in those areas.

And I think that as we continue to grow, we'll look at making -- we created our local entities in the UAE. And what we're doing there, laboratory-wise, storage-wise, team-wise, I do believe as you start to see business for us grow in Saudi that eventually we'll have to convert to potential local entity there, different pieces. But there's no doubt on our planning phase out looking and what we're doing on a budgeting aspect. We have those scenarios built in. So we're able to execute. It's just a matter of timing for that side.

[Operator]

[Operator Instructions] Your next question comes from Josh Jayne with Daniel Energy Partners.

[Joshua Jayne, analyst]

First question, just going back to the power gen side. I was hoping you could talk about the transaction a bit more. Obviously, the EBITDA and the accretion and the backlog, they all make sense. But Ryan, could you speak a little bit to why these specifically were the right assets and why this was the right time today to get into that business?

[Ryan Ezell, executive]

Yes. So there's a couple of things there. I'm going to go all the way back to, one, when we first agreed to bring in ProFrac as a specific partner with us and we signed a long-term supply agreement. We talked a lot about the potential advantages of having a large partner like what they are in terms of there was an alignment with a technology advanced company focused on that handshake between total cost of ownership, environmental stewardship and technology, right?

There's a similar DNA pattern that we see with an operator like ProFrac in terms of the amount of Tier 4 dual fuel electric fleets, the direction they were wanting to go with their operations. And so this goes back almost 2 years, some of the initial discussions I had with the leadership team there. We provided Veraxes for pilot testing on developing this field testing and operating this equipment and overall development and intellectual property development around it because we were looking at -- we recognized that these were going to be really big potential solutions, most of it to reduce emissions and environmental footprint because the first time we tested the equipment on location or the first big site we did, we prevented 1.2 million gallons of diesel from being burned. And it was all driven towards that direction.

And now you've seen the electrification demands and all things come to the United States where we're seeing globally, you see the transmission and distribution line degradation and age that there's going to be a significant need to help balance this out. It was a natural transition. And for us, it was because the driver of the success of the equipment is around the technology, the automation, integration, the Viper software, different pieces. So it made natural sense for us to discuss with ProFrac acquiring field-proven differentiated patented technology to bring over into our stable and grow it out into other points of the business because there's a lot of other operators like ProFrac that need this equipment. And I think we have relationships with those operators to grow it.

We also sell chemicals to some of the E&P users that can apply these technologies to provide natural gas to data centers or grid power operations, et cetera. So -- and when you look at even last year, you look at -- our stock performed really well on the growth in our data and chemistry businesses combined. But the stocks that outperformed us made transitions in supporting almost an industrialization pivot to supplying grid support. And it was a natural step for us, and I think the timing works well. Despite a little bit of near-term volatility we're seeing in commodity pricing, this shift is to give us a weight or filling that volatility, right, to make it more stable, to make it more predictable and drive data-driven EBITDA.

So I hope that kind of gives a little color about why these bigger assets, because they're differentiated, they're patented, they're driven by decisions, they're driven by our data management. And so we were very familiar and it was easier piece for us than necessarily doing that all organically because we had a great partner to work with on the development side.

[Joshua Jayne, analyst]

No, for sure. That's very helpful. And then the last question that I have is just when we think about -- I think you've talked in the past about being able to change things at an organization when you had a larger budget. And throughout your time at Flotek, it's been sort of on a shoestring budget, minimal cash flow. And then with the results that you're projecting and the free cash flow you're seeing, you're going to definitely have more of an opportunity to grow that way. Could you just talk through with all the balls in the air, the importance of building out the bench across the different subsectors? And just how you're thinking about Flotek over the next couple of years as a full organization and just your strategy and how to execute on all of the different things that you guys have going on, that would be great?

[Ryan Ezell, executive]

Yes. I mean, I think -- and I'll let Bond comment on some of these parts, so I don't get too far out of my skis. But in my opinion, our whole point was we want to get to a point to where the first thing was the past couple of years, stabilize the business, execute on what we told the market we're going to do, grow chemistry, enhance our data business and then get to where we start generating free cash flow. That's a big part.

Now we're getting in a stabilized position to do that. We have definitely a series of ranked in importance and financial impact investments in CapEx and growth that we'll be focusing on to even accelerate that cash flow more. So we will definitely be making -- I would say, in this year, we're going to spend more CapEx than we had probably in the last 3 years combined. And then in '26 that will continue to move as we build more ESDs, more smart filtration, build more XSPCT units because there's no doubt that those businesses are going to grow.

But in the grand scheme of things, building these monitoring units are significantly cheaper than buying big turbines. So I think we're staying in the wheelhouse of where we're significantly differentiated and we'll try to maintain a clear balance sheet because we still don't want to build up a significant amount of leverage on the business. That's just the way we've always looked at it from not only the Board, but also internally.

And Bond, I don't know if you want to...

[J. Clement, executive]

Yes. I mean, that's sort of the beauty of the way we structured the transaction where we're able to utilize these shortfall penalties that, as you guys know, accrue every month, but they only settle annually. So we use the shortfall penalty as part of the initial consideration from a "cash perspective" but also in terms of paying down the debt. And so what we've effectively done is we've traded -- accrued revenue over a 12-month period for monthly recurring realized revenue to the tune of about over $2 million a month. So it's going to give us a lot of dry powder to continue to invest in the business and utilize free cash flow to continue to grow out other parts of the business.

[Ryan Ezell, executive]

And the great thing is, all these assets, we build them based on demand. We've got relatively fast turnarounds. XSPCT and its ROIs are usually less than 4 months. And most of these skids at market rates were payoff periods in less than a year. And so I think it's a great spot for us to be in right now to grow this business.

[Operator]

There are no further questions at this time. I will now turn the call over to Ryan Ezell for closing remarks.

[Ryan Ezell, executive]

Yes. I want to thank everyone again for joining us as we were able to convey, one, our performance in the first quarter 2025, our recent acquisition and our confidence in the future and the vision here at Flotek. We'll be participating in the Louisiana Energy Conference on May 27 through 29 at the Four Seasons New Orleans. So please secure your spot and you can connect with us there. Other than that, thank you for joining us today.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.