NV5 Global, the infrastructure, geospatial, and building technology powerhouse, just released their Q1 2024 earnings. On the surface, it's a story of solid organic growth, impressive cash flow, and a confidently raised guidance. But dig a little deeper, and there's a hidden narrative that could be signaling a fundamental shift in NV5's business model – a shift with potentially explosive implications for future profitability.

Most analysts are focusing on the headline numbers: 8% organic growth, a 73% jump in operating cash flow, and the promising performance of the infrastructure and geospatial segments. These are all undoubtedly positive indicators. However, tucked away in the transcript (see below), almost as an afterthought, are repeated mentions of "recurring revenue."

Recurring revenue – the holy grail of predictable and stable income – isn't typically associated with a company like NV5, which has built its reputation on providing diverse engineering and consulting services. These are traditionally project-based, with revenue fluctuating depending on the size and timing of contracts.

But Dickerson Wright, NV5's Executive Chairman, subtly reveals a deliberate strategy to transform this model. He notes that their recent acquisition, VIS, generates a staggering 80% of its revenue from recurring software subscriptions. He then goes on to highlight the growth of recurring revenue streams within their Building Technology Group, specifically in the areas of audiovisual services and data center work.

The Shift to Recurring Revenue: A Game Changer for NV5?

While the current percentage of total revenue attributed to recurring sources is relatively modest (estimated at around 10%), the implications of this shift are profound.

1. Mitigating Cyclicality

Recurring revenue provides a cushion against the cyclicality that has historically plagued some of NV5's businesses, such as real estate transaction services and construction quality assurance. These segments, highly sensitive to interest rate fluctuations, have experienced downturns in previous quarters. A steady stream of recurring revenue could significantly mitigate these cyclical dips, ensuring more predictable and stable overall performance.

2. Expanding Profitability

Recurring revenue typically commands higher margins. As NV5 continues to cultivate these streams, we could witness a substantial expansion in profitability, potentially driving EBITDA margins beyond the 17% mark that Ed Codispoti, NV5's CFO, alluded to in the Q1 2024 Earnings Call.

3. Transitioning to a Technology-Enabled Solutions Provider

The focus on recurring revenue hints at a broader evolution in NV5's approach – a transition from simply providing services to becoming a technology-enabled solutions provider. This is evident in their growing emphasis on data center work, where they're not just designing and commissioning facilities but also offering energy efficiency monitoring and power delivery solutions, often on a subscription basis.

The Numbers Speak Volumes

Let's assume NV5 successfully grows their recurring revenue base to 25% of their total revenue over the next three years. With their projected revenue reaching close to $1 billion in 2024, this would translate to approximately $250 million in predictable, high-margin income. This could significantly boost their valuation, attracting investors seeking stability and growth potential.

Hypothetical Revenue Growth

This table illustrates hypothetical revenue growth with a focus on recurring revenue streams.

The Bigger Picture

Here's the hypothesis: NV5 is quietly, but strategically, transforming its business model, weaving recurring revenue into its DNA. This subtle shift could be the catalyst for an unprecedented surge in profitability and sustained growth, placing NV5 in a league of its own. While other analysts are fixated on the current quarter's performance, they may be missing the bigger picture – a picture that could redefine NV5's future and reward investors who recognize this hidden gem.

NV5 Global, Inc. (NASDAQ:NVEE) Q1 2024 Earnings Conference Call May 8, 2024

(Transcript of the Q1 2024 earnings call is included here)

Financial Data

Recurring Revenue Growth

"Fun Fact: NV5's Geospatial Solutions segment played a key role in mapping the entire state of Kentucky using oblique imagery, marking the largest project of its kind to date. This achievement highlights NV5's capabilities and expertise in the geospatial domain."