Earnings Labs

Geospace Technologies Corporation (GEOS)

Q4 2014 Earnings Call· Fri, Nov 21, 2014

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Transcript

Operator

Operator

Welcome to the Geospace Technologies Fourth Quarter and Full Year 2014 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Tom McEntire, the company's Vice President and Chief Financial Officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your question following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Rick Wheeler

Analyst

Good morning. Welcome to Geospace Technologies conference call for the fourth quarter and year end the fiscal year 2014 and thank you for listening today. I am Rick Wheeler, the company's President and Chief Executive Officer, and I'm here with Tom McEntire, the company's Vice President and Chief Financial Officer. I'll start off the prepared portion of the call with an overview of the quarter and the year, and Tom will follow that with an in-depth review and commentary of our financial performance. I'll then close out the prepared portion of the call with some final remarks, and we will open up the line for questions. Also, as a matter of convenience, we will make a replay of this conference call available in the Investor Relations section of our website at geospace.com. Let me first caution that the information we will discuss this morning is time-sensitive, and therefore may not be accurate on the date when one listens to the replay. And secondly, many of the statements we will make today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. By example, this includes statements about the market for our products, revenue recognition, planned operations and capital expenditures. These statements are based on management's current perceptions, expectations and knowledge. Actual outcomes are influenced by uncertainties and other factors that we are unable to predict or control. These and other risks, both known and unknown, may create undesirable results or cause our performance to differ materially from what we may express or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and Form 10-Q filings. Yesterday after the market closed, the company released its financial results for the fourth quarter and year end of fiscal year 2014. For the full fiscal…

Tom McEntire

Analyst

Thanks, Rick, and good morning, everyone. Before I begin, I would like to remind everyone that while our discussions today may include estimates of future cash flows and other events, we will not provide any specific revenue or earnings guidance during this call. As Rick just mentioned, we reported revenues for our fourth quarter of $26.3 million compared to revenues of $68.3 million last year. Our net loss for the fourth quarter was $1.8 million or $0.14 per diluted share compared to last year's net income of $13.7 million or $1.05 per diluted share. The decrease in revenues and earnings was a direct consequence of the completion of the Statoil order back in April 2014, where we recognized $38.1 million of Statoil contract revenue on last year's fourth quarter. In addition, the current year fourth quarter reflected low product demand across our seismic and non-seismic product segments. In particular, demand for our traditional and wireless products has fallen in direct association with reduced capital spending by our customers due to the diminished exploration activities across most sectors of the seismic industry. To the extent that oil and gas companies continue to reduce exploration spending, we expect demand for these products to remain soft into the future. In this regard, we expect our traditional and wireless product revenues could decrease further, although we anticipate some shifting of revenues from sales to rentals. For the full fiscal year 2014, sales and rental revenues from our traditional seismic products were $52 million, an increase of 5% compared to revenues of $50 million last year. This increase reflects higher demand for our geophone products, primarily in connection with the sale of two large GSX wireless systems in our first quarter. Due to the soft market conditions discussed earlier, we are expecting sales of our…

Rick Wheeler

Analyst

Thanks, Tom. Undoubtedly much of the seismic exploration industry has additional challenges ahead as oil and gas companies continue to be less focused on exploration. Nonetheless, many oil companies were facing decline in production and oil equivalent output and without follow-up of seismic enhanced recovery and new reserves for replenishment, such as condition is unsustainable. Our goal is to continue to create value for our customers with the technology products we provide as the market goes through these challenging times. While we are clearly in a period of pressure on our operations, our balance sheet is very strong and we believe we are in a good position to work through the correction in oil and gas exploration and production activities. This concludes our prepared remarks, so, I'll now turn the call back over to the Erica, for questions.

Operator

Operator

[Operator Instructions] And our first question comes from Joe Maxa from Dougherty & Company. Please go ahead.

Joe Maxa

Analyst

Thank you, good morning. Obviously a tough environment, suggests that traditional and seismic revenues are going to be soft this year. Are you indicating you see the decline obviously year over year, but also from your Q4 levels? Or is that a pretty good number we should think about, in that ballpark?

Rick Wheeler

Analyst

Well it's really hard to say Joe, but as it is right now, we definitely see a soft market, the extent to which it will last is really not clear. But yes, we do expect the next quarter to certainly face challenges.

Joe Maxa

Analyst

And along with that, how are you positioning your operating expenses? Are you going to be able to reduce these levels given the, perhaps, long, drawn-out downturn?

Rick Wheeler

Analyst

Well, at this point you know, we clearly review all of those expenses on an ongoing basis but quite honestly, we don't want to dismantle much of what we have put together that would require us to try to reassemble all of that, when things get better. So we won't be prudent about those efforts as we go forward but R&D is fundamental aspect of our business and what we do and it has been our culture since we’ve been in existence. So much of that will remain.

Joe Maxa

Analyst

But how about on the SG&A side? I think, compared to where your revenues were last time equal levels, SG&A was down, was significantly lower.

Rick Wheeler

Analyst

Yes but even there, we've had to raise our self to a different level with respect to our safety cultures, with respect to our quality endeavors, we are pursuing some ISO certification for quality levels which require certain infrastructures to be in place. So we'll take a look at that. But again, I don't know that you’re going to see us go backwards.

Tom McEntire

Analyst

Yes, Joe, this is Tom. Something that's going to go down is obviously the incentive compensation related to the SG&A line, that's going to be reduced significantly and that was probably in the $3 million range in fiscal year 2014. So incentive compensation – we're doing what we can to trim things, but a big part of what we do is we sell technical equipment and we need our sales people, we don’t want to lose them during this time. And we're not going to be trimming R&D. So I wouldn’t look for any major cuts, but in certain areas we will have cuts.

Joe Maxa

Analyst

I see. Okay. And so, given the softness in the business, margins will be under pressure, OpEx, you could have a difficult time being profitable for this year unless you do see that revenue pick up meaningfully. Fair?

Rick Wheeler

Analyst

Sure. It's always a challenge.

Joe Maxa

Analyst

Okay. And then I'll just ask one more on - you mentioned increasing competition on the wireless side. Can you give us a little more color on what you're seeing out there? And is that pressuring your pricing?

Rick Wheeler

Analyst

Well there's a lot out there trying to jump into the markets. It certainly dilutes activities with respect to one’s endeavors, whether or not many of these products pan out on the new fronts, it's not necessarily the best time to try to come in with a me too sort of product. But nonetheless it does draw attention to our customers and does put pressure on pricing and it makes us have to be very conservative about what we do. So those pressures are something that we anticipate. There is no way you can put out a product of the caliber that we have out in the market, and not see that sort of competitive pressure. But there are still many, many attributes about our system that make it unique and better than the alternatives even within the wireless space. So we're just going to attack those problems the way one would always do in a business environment.

Joe Maxa

Analyst

All right, great. Thanks a lot.

Operator

Operator

And our next question comes from Veny Aleksandrov from FIG Partners. Please go ahead.

Veny Aleksandrov

Analyst

Good morning. A little bit more detail, if I can ask, on the wireless side. Yes, revenues went down. Margins went down, as well, in total. But how much was these - and Tom talked about three components. How much was it because of the sale of three components versus single components, how much was it pricing pressure? Can you give us a little bit more details on the margins?

Tom McEntire

Analyst

Veny, the gross profit margins are really down not because of the type of wireless product we sold, but it's because of volume. We need sales volume to cover our fixed manufacturing costs and so that's just kind of a natural trend that’s going to happen when you have reduced sales. So I am not sure I, totally understand your question.

Veny Aleksandrov

Analyst

Okay. If we talk about inventory, how much of the $145 million of inventory right now is wireless and how much is OBX, if I can approach it that way.

Rick Wheeler

Analyst

Yeah. We don't give that information out, but it's a fairly substantial amount of wireless inventory in the mix. So, we have plenty of wireless inventory in our stock room right now ready to go to work.

Veny Aleksandrov

Analyst

Okay. And in terms of OBX, when in your prepared remarks you said that there is interest and there are people who can get OBX systems, are you getting any closer in terms of your talks to clients? I know that you've been talking about this for a while and you are in negotiations and you are following some potential contracts. Are we getting quotes?

Rick Wheeler

Analyst

Well, yes, we're getting quotes. We announced the one for the 4,000, that particular contract. The discussions are really ongoing with various contractors and there seems to be a plethora of jobs out there that the oil companies are wanting this technology to be applied to. It's just one of those things we've been seeing this increase and reporting it to you for a long time, and you see the fruition on these events in a patiently exercised manner such as what we just did with these 4,000. We're moving along with contractors. I can't tell you that we have contracts that we’re going to sign tomorrow. But we’re in discussions with contracts that could be signed soon.

Veny Aleksandrov

Analyst

Okay. Thank you. And last question on the OBX rental that you just announced, can it turn into a sales order like you used to do with the GSX or can it be extended?

Rick Wheeler

Analyst

No, that rental certainly can turn into a sale. It's a long term rental and there is every opportunity for that to turn into a sale, and we have discussed that with the customer.

Veny Aleksandrov

Analyst

Thank you so much.

Operator

Operator

Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead.

Bill Dezellem

Analyst

Thank you. Relative to the permanent reservoir, historically the company has had, it seems, a lot of interest in the permanent reservoir product. But the press release today seemed to indicate that maybe there's something different now with that level of interest. Would you provide a bit more historical backdrop relative to what you're seeing today also, please?

Rick Wheeler

Analyst

Actually I don't think we see a change in interest, to be quite honest. The actual word of these tenders to which have been few and far between in the last decade, have mostly fallen on us to provide equipment for. And there are spans of time that historically if you're looking in that perspective, have occurred between these. But activity with respect to those oil companies that are talking to us, is actually the highest it's ever been.

Bill Dezellem

Analyst

And to what degree did your success with Statoil increase the interest level that you're seeing from these other oil companies? And can you shed a little bit more light on that record level of interest you're currently experiencing?

Rick Wheeler

Analyst

Well, definitely the success of the Statoil project has peaked additional interest. With each success that we have in that regard, that interest focuses more attention on our technology which we welcome. We pointed out that within the industry there are half of dozen or so and actually we've learned of some new fields that are potentially being considered for PRM systems. Those discussions take a while, it's an investment the oil companies have to plan for. There maybe some tenders that might come out in 2015, but we certainly don't expect any systems to be delivered within that timeframe.

Bill Dezellem

Analyst

And if there were tenders that came about in 2015, would those be from customers that you have already supplied PRM to? Or would you anticipate that they would be new and in addition to that? To what degree is your new facility a swing factor in the decision metrics of your customer?

Rick Wheeler

Analyst

I don't know if I can answer the last part of that question, I mean clearly, having additional capacity is going to vote in our favor. With respect to whether it’s new customers or old, it can be both. We are in discussions with both old and new customers.

Bill Dezellem

Analyst

Thank you.

Operator

Operator

[Operator Instructions] We'll go next to Mark Brown from Global Hunters. Please go ahead.

Mark Brown

Analyst

Hi guys, good morning. I was wondering just on the GSX rental numbers approximately what utilization did you see for the rental fleet in the quarter? Or perhaps just what was the trend in terms of activity?

Tom McEntire

Analyst

Yeah Mark, Tom. We don't give out the utilization number, but it's low. This is historically a slow time of the year for us and we are beginning to get into our more active part of the year with Canadian winter kind of starting up, and so that's a generally when we have the highest utilization is in - our second fiscal quarter which ends in March, but the September quarter is traditionally low.

Mark Brown

Analyst

Okay. Got it. And just curious, the consolidation that we're seeing continue to take place in amongst the contractors, what kind of effect does that have on your business?

Rick Wheeler

Analyst

Well it's certainly symptomatic of shrinking market with respect to our product, so that consolidation provides equipment pooling. The thing is, is that all of this equipment particularly legacy cable systems eventually have to be replaced or dealt with. And in most respects we believe we're very well positioned in that situation where someone has to make a choice, do I buy more of this stuff or do I buy wireless equipment? So that consolidation clearly has an impact, very readily observant but it's a type of thing you expect during this type of market cycle.

Mark Brown

Analyst

Okay. Understood. And then on the Seafloor Geophysical Solutions status, it sounded encouraging, but do you have a sense of when you would expect a go or no-go decision on that from them?

Rick Wheeler

Analyst

No. As we said, we really don't have a direct knowledge of when - and even if this will succeed. The fact that they have as reported to us receive some additional funding to extend their endeavors, we certainly find that as an encouragement, that things are on the right track. But we really don't have direct knowledge.

Mark Brown

Analyst

Okay. And then just one more question, just more macro on the seismic market in general. You mentioned that customer appetite is typical of cyclical lows. What leading-edge indicators do you look for in terms of when we might start to see an uptick in orders? Clearly - what, with regard to oil price, would make you feel comfortable? Do we need see it stabilized? Do we need see it start to improve? How do you think of these leading-edge indicators?

Rick Wheeler

Analyst

That's a very good question but it's one that's very difficult to answer. Oil prices definitely have an impact and if prices go up, that clearly is somewhat of a leading indicator. But the fact is that seismic exploration has to go on whether oil prices are up or down. In the end, again we talked about unsustainable conditions where output productions are continuing to decline. Fundamentally, I think that leading indicators are really hard to just completely pinpoint, but certainly oil prices would be one. Seismic acquisition is the easiest thing to curtail and the easiest thing to start back-up. So it can start very quickly. What you will probably expect to see though is our customers are the ones that will first benefit from those upticks. And so more backlog as the contractors see that uptick, we'll then through a delayed mannerism affect us and increase our backlog.

Mark Brown

Analyst

Well, that's very helpful. And thank you very much.

Operator

Operator

Our next question comes from Joel Luton from Westlake Securities. Please go ahead.

Joel Luton

Analyst

Hey, guys. Just a real quick question, what was your EBITDA for the quarter?

Tom McEntire

Analyst

Yeah Joe, that was $3 million for the quarter and $76 million for the year.

Joel Luton

Analyst

Okay. Thank you.

Operator

Operator

Our next question comes from the side of Hamed Khorsand from BWS Financial. Please go ahead.

Hamed Khorsand

Analyst

Hi, good morning. The first question I had is regarding inventory. Is it possible to actually shut down manufacturing and just run inventory down to levels of two years ago? Or why are you keeping inventory so high?

Rick Wheeler

Analyst

Well, part of the inventory is near finished goods. We would never shut our manufacturing down because we would lose a lot of expertise with respect to how we go about building our components.

Tom McEntire

Analyst

If we shut it down we would be letting go with a lot of very valuable people that have a lot of knowledge of the processes of how to build the products. But the high inventory level isn't really the result that we're just producing tons of inventory everyday. Our manufacturing lines are down to very slim production just to keep the - know how going and keep the process going for the people that are involved in it. So there is a very limited amount of inventory being manufactured.

Hamed Khorsand

Analyst

Okay. What's the risk that you would have to take impairment charge any time soon?

Rick Wheeler

Analyst

I don't think it'd be real high. The products that we have in the OBX are ones that have significant interest at this point and certainly a large part of that inventory. So, those can - those are not specific to anyone customer, specialized, PRM systems, our very custom designed within each field. That's not really the case with the components in our inventory at this point in time.

Tom McEntire

Analyst

We review the obsolescence of our inventory regularly every quarter. And so we try to stay on top of that, we take provisions for products that we think are losing value or not able to sale. And so, we’re always doing that. It’s not something we’re waiting for some future large charge to take care of.

Hamed Khorsand

Analyst

Okay. And then last topic was, can you characterize this quarter comparing it to the September quarter for us? Usually the winter season is strong, like you said previously, so how does it compare given the current climate? Are you seeing some uptick in business or is it really the same thing as you guys experienced in the September quarter?

Rick Wheeler

Analyst

Well, I mean, there will be some additional uptick through the winter, but, again we still expect demand for our products to be softer than normal even through that uptick in the winter.

Tom McEntire

Analyst

Our visibility is still very limited right now. We can't see very far ahead and our backlog is down at pretty low levels right now.

Hamed Khorsand

Analyst

Okay. Thank you.

Operator

Operator

[Operator Instructions] We'll take a follow up question from Bill Dezellem. Please go ahead.

Bill Dezellem

Analyst

Thank you. I wanted to continue down the permanent reservoir path. And you'd mentioned that you have, I think you may have said, a record number of customers that are prospective customers discussing fields with you. I guess that would imply you have a record number of fields that are being discussed also. Is that correct?

Rick Wheeler

Analyst

Well, some of these are discussing more than one field but it's typically a one-to-one ratio, and in many cases - certainly with previous customers they maybe sharing discussions on more than one field. So, if you're asking about the number of fields versus the number of customers, the numbers of fields is higher than the number of customers simply because of that.

Bill Dezellem

Analyst

And let's shift to the size. Are you finding that, given the successes that you have had, that the size of the fields that are being discussed are different than the size in the past?

Rick Wheeler

Analyst

They still vary in size but there is an attribute of growth in the field size in many of the discussions. But really it's sort of an inherent thing you should expect, as this technology was developed and put in place going back a decade, there are certain proof of concepts and trials and certainly those things have panned out. So the larger fields were in low production rates and declines represent the biggest games that one could have certainly become more in focus with some of these projects. But there are also smaller projects that come into focus as well.

Bill Dezellem

Analyst

Rick, let's shift to actual dollars. What would you say the range is in terms of size of revenues relative to cabling fields that you're looking at?

Rick Wheeler

Analyst

Probably the best way to analyze that is just to look at our history with the fields that we've installed. Those are numbers that are readily out there and representative of how that goes with respect to field sizes and that sort of thing.

Bill Dezellem

Analyst

And, so, today you would be discussing fields that go up to the size of the Statoil order then?

Rick Wheeler

Analyst

Sure. Remember, that was two fields. But, and there are other factors, the station spacing of the sensors has a big impact on the fields equipment costs and all, but the sizes certainly get to that level as well.

Bill Dezellem

Analyst

Rick, I'll take the bait. Are customers looking to increase spacing or decrease spacing? And presumably a decreased spacing would mean higher revenue to Geospace?

Rick Wheeler

Analyst

Yes. I mean that's obviously more equipment in that regard, more sensors are involved. Historically customers have wanted tighter spacing because it gives them higher resolution, it's like pixels in a camera, in a picture. There are methodologies to increase that pixelization imaging through sources as well and so you see a combination of both of those activities.

Bill Dezellem

Analyst

So, then, to make sure I'm clear, the implication of that is, even if the field sizes in terms of square miles were identical over time, it seems to you as though your revenue per field would be going up because the spacing between sensors would be increasing and more equipment that you would be providing.

Rick Wheeler

Analyst

If that were the case, I can't guarantee you that the trends will always be to increase station spacing because there are methodologies of approach in the Geophysical surveys that can - and in particular circumstances not in all but in particular circumstances, can give you similar image quality through additional source efforts. But I really wouldn't want to say specifically that that's going to be a trend. But I think you’ll see both, you’ll see some in both directions.

Bill Dezellem

Analyst

And then one additional question in this arena. Commodity prices - is there any reason for lower oil prices to either increase or decrease the size of the fields that your customers might be interested in cabling?

Rick Wheeler

Analyst

There certainly could be a relationship to that, but that would be within the period of the oil companies to decide whether capital is best placed.

Bill Dezellem

Analyst

Great. Thank you.

Operator

Operator

And we'll take our next question from Scott Bundy with Moors & Cabot. Please go ahead.

Scott Bundy

Analyst · Moors & Cabot. Please go ahead.

Rick, regarding OBX how important is battery life to that product?

Rick Wheeler

Analyst · Moors & Cabot. Please go ahead.

In many cases it's extremely important. Particularly in the deepwater surveys, in that case, the deployment efforts require precision and it can take a longer amount of time to get the equipment deployed. So, battery life throughout that process and the retrieval process can be very important.

Scott Bundy

Analyst · Moors & Cabot. Please go ahead.

And if we extended battery life of the product for those people?

Rick Wheeler

Analyst · Moors & Cabot. Please go ahead.

We have a product that will last 100 days. That's approaching one-third of a year, recording full time continuously at the ocean bottom.

Scott Bundy

Analyst · Moors & Cabot. Please go ahead.

And as a result of having that product, have you seen more inquiries for OBX?

Rick Wheeler

Analyst · Moors & Cabot. Please go ahead.

Yes.

Scott Bundy

Analyst · Moors & Cabot. Please go ahead.

Thanks.

Operator

Operator

And at this time, there are no further questions. And I would like to turn the call back over to Mr. Rick Wheeler, for any additional or closing comments.

Rick Wheeler

Analyst

All right. Well, thank you Erica. And I would certainly like to thank everyone for joining our call today. We hope you'll join us for our next conference call which we expect to be on February 5, 2015. Thanks a lot, and goodbye.

Operator

Operator

We would like to thank everybody for their participation in today's conference call. Please feel free to disconnect at any time.