Octave Intelligence (NASDAQ:OCTV) reported second-quarter results in its first earnings call as an independent public company, with organic annual recurring revenue growth and expanding SaaS revenue offset by lower perpetual-license sales and delayed public safety contracts.
Chief Executive Officer Mattias Stenberg said ARR reached $1.143 billion at the end of the quarter, up 7% year over year on an organic constant-currency basis. The result was in line with the company’s expectations and at the midpoint of its full-year ARR growth outlook. Recurring revenue grew 6% organically, while SaaS revenue increased 21%.
Revenue Declines as Perpetual Sales Fall
Total second-quarter revenue was $398 million, down 4% on a reported basis and down 1% organically in constant currency. Chief Financial Officer Ben Maslen said reported revenue reflected a 4% drag from businesses divested in the second quarter of 2025, partly offset by a 1% currency benefit.
The company attributed the organic revenue decline primarily to its shift away from perpetual licenses and toward recurring-revenue models. Stenberg said the strategy is intended to increase customer value over the life of a relationship. Recurring revenue represented 69% of total revenue on a last-12-month basis, up from 65% a year earlier, as Octave works toward a medium-term target of 75% recurring revenue mix.
Revenue was also about $5 million below Octave’s expectations because several perpetual-license deals in its Protect public safety business did not close during the quarter. Stenberg said the company believes the delayed deals could close later in 2026 or early in 2027, but noted that public safety contracts have lengthy sales cycles and less predictable timing.
Maslen said the company has not lost those opportunities, describing them as a handful of primarily Americas-based public safety contracts with associated services. “Our view on the likelihood of winning them has not changed at all,” he said, though Octave elected to remove the deals from its outlook because the window for closing them in 2026 has narrowed.
Margins, Cash Flow and One-Time Impairments
Gross margin rose 260 basis points from the prior year to 77%, benefiting from prior divestitures of lower-margin businesses and reduced professional-services revenue. Adjusted operating income was $116 million, translating to a 29% adjusted operating margin, compared with 31% in the year-earlier quarter.
Maslen said the lower margin reflected costs associated with becoming an independent public company, including listing, audit and insurance expenses. It also reflected a lower level of capitalized research and development spending as Octave transitions more of its portfolio toward SaaS and continuous development cycles. R&D capitalization was about 7% of revenue in the second quarter, compared with 8% a year earlier.
Adjusted net income was $0.36 per share, based on 268.4 million diluted weighted-average shares outstanding.
On a GAAP basis, Octave recorded a $464 million non-cash impairment charge tied to the launch of its new brand and the write-down of legacy brands. It also recorded a $1.7 billion goodwill impairment charge after its valuation as a newly public company fell below the carrying value on its balance sheet. Maslen said the charges were one-time, non-cash items related to the separation from former parent Hexagon and did not affect liquidity or the company’s outlook for operating cash flow.
Octave ended the quarter with more than $304 million of cash and cash equivalents and $644 million of gross debt, for net debt of $340 million. It generated $125 million in operating cash flow and $93 million in free cash flow during the quarter, representing a 23% free-cash-flow margin.
Product, AI and Cross-Selling Efforts
Stenberg said Octave is working to integrate what had been separate product groups into a common platform spanning its Design, Build, Operate and Protect workflow environments. Build was the strongest-growing environment during the quarter, while the other three also recorded organic recurring-revenue growth, according to management.
The company is also expanding AI capabilities. Stenberg said Octave Assist is delivering more than 2 million assists per day inside customer workflows, while Octave Aria, a multi-agent framework, remains in private preview and is tracking toward a planned release. The company launched Octave CoLabs in July to work directly with customer teams on agentic workflows using their own data. Five marquee customers have signed up, including Bechtel and Fluor, and three are already live.
Octave has not yet finalized its AI monetization model. Stenberg said the company is currently focused on increasing usage and demonstrating customer outcomes, rather than deciding whether AI will be priced as a product feature or tied to outcomes.
On the commercial side, more than 100 customers added another Octave solution during the quarter, and Stenberg said those expansion deals were larger on average than a typical new-customer sale. The company also reported new customer wins across data centers, brewing, offshore wind, manufacturing and transit.
Guidance Updated for Delayed Deals
For the third quarter, Octave forecast total revenue of $400 million to $410 million, representing organic constant-currency growth of 2% to 4%. It expects recurring revenue of $285 million to $290 million, up 3% to 5% organically in constant currency, and an adjusted operating margin of about 27%.
For full-year 2026, the company reiterated its ARR outlook of $1.185 billion to $1.205 billion, representing 6% to 8% organic constant-currency growth. It also maintained expectations for approximately 30% adjusted operating margin and approximately 20% free-cash-flow margin.
However, Octave reduced its full-year total revenue outlook to $1.635 billion to $1.665 billion, or 0% to 2% organic constant-currency growth, from prior guidance of 3% to 4% growth. Full-year recurring revenue is expected to be $1.14 billion to $1.15 billion, up 5% to 6% organically in constant currency.
Management said the reduced total-revenue outlook reflects the removal of delayed public safety perpetual deals rather than broader macroeconomic weakness. Stenberg said the company’s medium-term objectives remain unchanged, including ARR growth above 10%, total revenue growth of 6% to 8%, adjusted operating margin of about 30%, and 300 to 400 basis points of free-cash-flow margin expansion.
