Geospace Technologies Corporation (GEOS) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Geospace Technologies First Quarter 2015 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 Mr. Rick Wheeler. Sir, you may begin.

Good morning and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2015 and thanks for listening in 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 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 www.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 first quarter of fiscal year 2015. As a result of current seismic industry weakness, the quarter faced broad challenges where revenues decreased 79% or $80.2 million from last year's first quarter, and compared to net income for the quarter dropped $29.6 million or 123%. Total revenues are largely attributed to a continuing decline in perpetuation of lower market demand for our traditional and wireless seismic exploration products. Revenues in the current quarter from these products totaled $13.4 million compared with last year where higher demand and large orders for these products resulted in revenues of $66 million. In addition, we had no contracts underway during the current quarter for Permanent Reservoir Monitoring or PRM systems. In contrast, we recognized $28 million in last year's first quarter from the Statoil project. Non-seismic revenues were also down slightly, coming down 8% below last year's first fiscal quarter. Lower revenues from our industrial and thermal imaging products account for most of this decrease, although such fluctuations up or down are not in common in this product segment. The product mix of revenues during the first quarter was comprised of mostly low margin items combined within product gross profit margins, rental fleet depreciation, and high unabsorbed fixed overhead expenses, which stem from low factory productivity, full first quarter gross profit is just below breakeven. We expect continued stress on product gross profit margins throughout the fiscal year 2015. As has been reported, many oil and gas companies have significantly curtailed both land and marine seismic exploration spending. The results in contraction in seismic market activity translates directly to reduce needs by our customers for our traditional and wireless products. As we anticipated, revenues for these product lines further declined over the previous quarter, and we expect lower demand for these products to continue for as long as demand remains low for the seismic exploration services performed by our customers. However, we still believe that our products demonstrate the best technical and most cost effective solutions for seismic contractors, particularly in this challenging market where cost and efficiency are paramount. And such, we believe our products in conjunction with our strong customer service positions us most favorably for potential sales in this soft market. Interest in our cableless OBX ocean bottom nodal systems remain strong. The OBX continues to be a bright spot and an otherwise stark seismic instrument market. During the first quarter, over 2,800 stations of our OBX system were utilized in rental programs executed with multiple customers. And rentals underway are expected at various times during the second quarter, totaled over 1,600 OBX stations. We recently learned that the previously announced ocean bottom survey that was to utilize 4,000 stations of our OBX system has been delayed. This customer is now quoting other projects, which if awarded, would utilize most of the equipment within the same timeframe. Separately, we are answering requests from multiple other customers for quotes on the availability of OBX products for use on various other projects extending throughout calendar year 2015. However, there is no certainty on which of any of these quoted projects might turn into firm contracts. In other OBX business, Seafloor Geophysical Solutions or SGS is now seeking funding under our revised business plan calling for significantly less capital. If successful, SGS now intends to rent our OBX equipment rather than purchase it. As a result, we will recognized the $3 million non-refundable purchase deposit received from SGS in fiscal year 2014 as income in our second fiscal quarter. We intend to continue working with and supporting the SGS team and their efforts to efficiently and effectively bring ocean bottom nodal technology to the market. As previously mentioned, there were no PRM contracts underway in the first quarter, and we do not anticipate any significant revenues from PRM systems in fiscal year 2015. We continue to discuss potential PRM projects with oil and gas companies, including some considering PRM systems for the first time. We have learned over the years that the internal development path in decision making process within the oil companies for PRM systems can be complex and takes time to progress. The business dynamics for seismic PRM systems are differentiated from those in the seismic exploration market, although commodity prices have a bearing on every aspect of oil company strategies, PRM systems are part of longer horizon plans geared towards the company’s long term growth and production stability. Such plans are typically less driven by cyclical commodity prices, it should be remembered that the price of oil was around $30 per barrel when we received our first PRM system order from BP for their Valhall field. It is still working today and providing value to BP and it's partners. While we have no contracts today for PRM systems, we are committed to future product development in this area, and we continue in our optimism that PRM systems will remain a large, yet lumpy part of our future business. In adapting the current market conditions, we are taking a decidedly careful and measured approach to the planned construction of our new Pinemont facility. Accordingly, we are proceeding very cautiously on any substantial new building expenditures until we have more visibility into future seismic product demand and PRM contract awards. We now expect capital expenditures for the Pinemont facility in fiscal year 2015 to range between $1 million and $5 million down from our previous forecast of $15 million. We are also adjusting our expected capital expenditures for other property and equipment from $10 million to approximately $5 million to $7 million. And we will continue to evaluate our cost structure in light of changing industry conditions. Already we have reduced factory hours over 60% since last year through personnel reductions and other cost controls, and we expect an additional $6.5 million of wage reductions in fiscal year 2015 through the elimination of incentive compensation payments. However, we have no plans to reduce or cut back our core competency resources, which are vital to the company's future operations. These include key employees and top performers in our engineering, manufacturing, marketing, and support groups in Houston as well as all of our foreign locations. In other news, we were very pleased to announce having received our ISO 9001:2008 Quality Certification on November 28, 2014. Our Quality Management System developed in-house was highly noted for its advanced functionality and tracking capabilities. All of our employees have long focused on delivering and maintaining high standards of quality and safety in our products and operations, and it is very satisfying to receive independently audited validation of these efforts. I'll now turn the call over to Tom, to provide you with further detail and insightful commentary on the company's first quarter financial performance.

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. For the first quarter, we reported consolidated revenues of 21.2 million, compared to revenues of $101.3 million last year. Our net loss for the quarter was $5.4 million or a loss of $0.41 per diluted share compared to last year’s net income of $24.2 million or $1.85 per diluted share. A write down of revenues for each of our product segments for the first quarter of fiscal year 2015 is as follows: Revenues for more traditional seismic products were $7.7 million, a decrease of 62% compared to revenues of $20 million last year. This decrease primarily reflects lower demand for geophones and marine products due to soft industry conditions. The prior year period included large orders for geophones, which accompanied the sale of GSX wireless systems in last year’s first quarter. Revenue for more wireless seismic products were $5.7 million, a decrease of 88%, compared to revenues of $46 million last year. The decrease in revenue was primarily due to the sale of less than 100 GSX channels in the current quarter, compared to 77,000 GSX channels last year. The majority of our wireless product sales for the current quarter included low margin battery upgrades and front end equipment. Revenues from our reservoir seismic products were $2.2 million a decrease of 93%, compared to revenues of $29 million last year. The decrease in revenues was primarily due to the completion of the stat order back in April 2014, which contributed $28 million of revenues last year. Revenues from our non-seismic products were $5.4 million a decrease of 8%, compared to revenues of $5.9 million last year. The decrease resulted from lower sales of our industrial and thermal energy products fluctuations up or down are not uncommon in this product segment, as Rick, indicated earlier a product mix during the first quarter was comprised mostly of low margin items. Low gross profit margins combined with rental fleet depreciation in low factory productivity negatively impacted our first quarter gross profits. We expect our seismic product and gross profits to be under significant story us throughout this year 2015 due to the expected lower manufacturing activity. Operating expenses were $9.9 million a decrease of 14%, compared to operating expenses of $11.4 million last year. The decrease was primarily due to the elimination of incentive compensation expenses, lower labor cost and reduced research and development project expenditures. These expense decreases were partially offset by increased bad debt expenses and non-cash stock based compensation expenses. First quarter investments and profit plant and equipment were $1 million, as Rick, mentioned in light of industry conditions and until have more visibility, we are proceeding more cautiously with any new substantial capital investments into our new Pinemont building. We now expect that 2015 capital expenditures for the Pinemont facility to range from $1million to $5 million versus our previous forecast of $15 million. We have also adjusted down our expected 2015 capital expenditures for other property and equipment from $10 million to approximately $5 million to $7 million, our inventory balance now stands at a $147 million, which we continue to acknowledge is too high, a majority of our inventories consist of finished goods, component parts, and product sub-assemblies awaiting final completion, but even during periods of low product demand like we face today. We will continue to manufacture small amounts of key products in order to retain key personnel and to maintain our manufacturing and assembly competencies. With that said we have managed down our raw material orders to extremely low levels and our focus remains only on essential production activities. At the end of our first quarter we had $212 million of working capital, $15 million of cash in short-term investments and no long-term debt on our balance sheet. Our $50 million credit facility remains untapped at this time resulting in total liquidity of $100 million. That concludes my prepared remarks and I’ll turn the call back over to Rick.

Thanks Tom. Overall it’s clear that our first quarter was negatively impacted by continued lower demand for our seismic products, which is a direct result of greatly reduced activity in the seismic exploration market, and we note that our operations will remain challenged so long as the seismic market remain solid. However, as in similar periods in our past we believe our strong balance sheet and leadership and products and services will help us prevail through these times. This concludes our prepared remarks, so I’ll now turn the call back over to the moderator for questions.

[Operator Instructions] We'll take our first question from Veny Aleksandrov. Please go ahead. Your line is open.

[indiscernible] were manufactured for SGS?

I'm afraid, that didn't come through. Veny, can you repeat the question, we just heard your last few words.

I'm sorry. Okay, my first question is on the OBX side. How many stations do you have in inventory right now, and if you can remind us how many did you manufacture for SGS?

SGS was about 2,300 as I recall, maybe a handful more than that, but in that range. Our inventory right now is probably on the order of about 4,000 or so OBXs.

Yeah, in the rental fleet.

In the rental fleet, correct. And the 4,000 that's got postponed, did you get any advance payments for that contract from the client, or no they just walked away from the contract?

No, they haven't walked away from the contact, but now in an answer to your question, we don’t have a prepayment on that contract, but they are busy trying to find other work for it for their backlog.

Okay. And my next question is on the PRM. I know that it's a long-term project for the majors or for BNP companies. But can you give us the big picture without giving us clients, and how many bids there are right now going on around the world that are not going to happen into next year, but there's interest on six, seven, ten seasons?

I don't believe there are any bids or tenders actually officially out and being negotiated at this point. The discussions right now are confidentially held and has to remain confidential in the agreements we have, but there is a list of those that have already installed PRM systems in their various fields. Some of those are even ones that we didn't do, but we’re now in discussions with or having discussions about our capabilities in the nature of our system. And some have never installed the PRM system, but are looking forward to what those systems can do in managing the increased productivity of those fields.

Thank you so much, appreciated.

We'll take our next question from Joe Maxa with Dougherty & Company. Please go ahead.

The $3 million that you will recognized from SGS, does that fall through the revenue line as well?

We believe so Joe. Not exactly certain on that, but I believe that's the right geography on the income statement.

Okay, all right. Clearly, gross margin is going to be pressured through the year. What about OpEx, is there kind of a base level you can guide us to where you think that will be a ballpark right number?

Joe, probably the first quarter number is a good number going forward. There's going to be some fluctuations up and down, but that's probably a pretty good runway.

Okay. So the $6.5 million is already in - that you’re taken hold on incentives was already taken out in Q1, so we shouldn't see that impact.

Yeah, that's right. Reflected in Q1.

Okay. And I noticed the rental revenue was down quite a bit from lets say the average of last year in Q1, is that indicative of what you're thinking may happen the rest of the year or do you see, do you think you'll see some of these orders where you can maybe get back up to those levels?

Well certainly rentals as product sales are going to be challenged here. The contractors as they don't have as much work in their backlogs, their need for equipment be it rental or new purchased equipment is reduced. So when you've got contractors that in fact are stacking crews and warehousing equipment, even their rental demands are reduced during those times. What we expect to see is that as things recover that there won't even be a lag with respect to our sales in a sense that contractors will first be pulling out some of their equipment out of the warehouses, and then they’ll likely be looking to rent equipment as things continue to pick up until they feel comfortable and safe in capital expenditures for more equipment. So at that point, we would probably expect rentals to go up and actually -- may be even to levels that approach what they were before or even higher as they begin making decisions on capital purchases which would come later.

Okay. Great, that was my next question. So that’s very helpful. On what are your thoughts on the outlook, so the way it sounds, I mean top line, I know you’re not giving guidance, but $21 million for the quarter, I mean that we could see those numbers until this thing picks back up or perhaps even a little lighter if I’m hearing correctly?

We’re not giving guidance, but yeah I don’t really disagree with that.

Right, just hopefully that’s kind of set the expectations out there. The last thing I want to ask and jump back is, clearly sales are lower, does that also -- is the gross margin pressure also coming from any significant pricing pressure from competition as everyone is trying to get whatever they can out there?

Well that pricing competition always exists, but that’s not the biggest issue there. The unabsorbed overhead costs are really probably one of the larger components to reducing those gross profits.

Okay. Thanks a lot guys.

And we can take our next question from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you, I actually wanted to kind of continue down that same path relative to cost of goods, and I’m not even sure if the question is relevant, so bear with me, but in the September quarter, you had about $5 million less revenues than you did, pardon me this quarter you had about $5 million less revenues than you did last quarter, and yet your cost of goods was about $1 million higher, and so I am not looking at percentages, just looking at dollars and trying to understand the interaction and dynamics of that sequential comparison?

Sure it’s a good question. you know the thing to keep in mind is that the particular mix of products that were sold in this quarter were ones where the gross profit margins were already significantly lower than many of our other products. So to that end they did not start off with a lot of room in gross profits. So that combined with the lower revenues combined with those being lower margin products or why you are going to see cost of good proportionally higher. In addition to the lower productivity in the factory and first quarter as compared to the fourth quarter of last year.

So that lower level of productivity has that actually impacted the dollars of cogs or is that impacting more the percentage, gross margin percentage?

Well it’s actually below I am not sure how to answer that. Its fixed dollars if you will think of it that way, which has a high impact on the percentage when the revenue goes down.

Understood, and continuing on this the same thought process how much of anything can you do to take out of the cost of goods line from what we have seen in the December quarter?

How much we do, what to take what out now?

Remove cost out of the cost of goods line.

Well higher margin products would certainly make the ratio to revenues a lot more favorable, but as far as fixed costs I mean they are fixed costs so there’s, not a whole lot you can do with it.

I mean Bill we’re not we don’t have any plans to dismantle machinery and sell buildings and kind of dismantle what we built up over the last 15, 20 years. So we’ve got a factory that is underutilized and while it’s under utilized we are going to have these dynamics going forward.

Understood and so basically the lay offs that you all have needed to have you have done those and so we are kind of on a go forward basis and as you said you really need some high margin orders as opposed to low margin battery upgrades.

Right, yeah. That's it.

That is helpful. Thank you.

And we will take our next question from Georg Venturatos with Johnson Rice. Please go ahead.

I think we covered the cost structure side, obviously correct me if I am wrong what certainly seems like 1Q is pretty good run rate in the reductions that you have talked about are reflective there. Going forward, obviously on the engineering side you want to maintain that level. Is there any sense that one of the pieces that you mentioned the marketing side has a little more room to may be, be reduced if the environment gets a little tougher?

I don’t think we are really heavy weight on that as it is George. So those guys are busy doing what they can to keep our head above water so no, I don’t really see that in the short term here at all.

Okay. Fair enough. And then as it relates to OBX certainly you see some continued rentals in the second quarter. Wondering just across the board you seeing any new customers enter into that grouping and secondarily expect GSX significantly more challenging, but any commentary there in terms of quoting levels or conversations would be helpful?

Sure. Well there is a few customers that they don’t have much experience yet. That are getting involved in those discussions, but the market itself is a relatively small and niche market even though it is one that seems to be as much as you can be insulated from some of the reduced seismic exploration activity that’s going on. In general some of the quotes that we have as we mentioned are extending actually well into calendar year 2015, even into the later part of the year, which are actually not in this fiscal year. So these potential jobs that are out there that are being bid on are ongoing.

Okay. That's helpful. Last one from me as it related to the 4000 station previous rental that was delayed any more detail you can provide us in terms of what your conversations have been surrounding that project delay? Are your expectations that this is pretty likely not go, through, do you think it will and then secondarily are the projects that you talked about maybe using the portion are those cannibalized what they have for the 4000 stations or no?

Well it would utilize the ones that they are looking at putting tenders out for now would utilize the same devices that would have been put on this what is now delayed project. It’s not really a cannibalization, but it certainly the same equipment. As far as the outcome and the forecast of what this job that was delayed may look like, clearly we only see through our customers eyes they are telling us it has been delayed, but not that it is cancelled, but it has been delayed to a later date. So that’s all we really know.

Okay, I appreciate. Thanks a lot Rick.

[Operator Instructions] We'll take our next question from Hamed Khorsand with BWS Financial. Please go ahead.

Just want to start it off with the commentary on the rental. You were saying in your prepared remarks that it looks like its just short term rental is that just a matter of the market right now?

Are you talking about in general rentals or…?

In general, yes.

Well we are seeing rentals actually somewhat decline simply because as mentioned the contractors their needs for equipment have been greatly reduced and are likely not to improve until we see seismic exploration activity also improve so that they have more backlog and a need for equipment.

Hamed our rental generally range from 30 days to 180 days so anywhere in between if that helps.

Okay. But you said on the prepared remarks it sounded like its mostly 30 day kind of rentals right now. Is that the case?

Well only the shorter ones. I would not say they are falling.

On average they probably fall less than 90 days.

All right. Then relying on your past experiences what's your feel as to the kind of current market condition is it just a normal typical downturn. You think it's going to be a longer period this time around or shorter period can you just provide some color based upon your experiences?

I am going to be honest. I mean there is, these things, each one of these downturns that I have seen sort of has its own personality and its own dynamics. And there is a lot of indecision actually in the oil companies now. It was such a rapid decline in oil prices that I think the oil companies were greatly taken by surprise. And so some have delayed even there perception of how they are going to deal with their capital expenditures going forward. You are going to have to see some of the volatility stabilize a little bit and its not clear how long they may take in the geopolitical issues don’t help occur that any sooner. In general, fundamentally many of these oil companies did not find as much as oil as they produced last year and many of them as well their productions actually down some were better, but some were down from prior years. So right now they are selling stuff, they are selling stuff off the shelf. Their shelf stock is going down at some point that has to change it’s not a sustainable condition.

Okay. And the last topic I want to touch on was you are guys still developing any new products or you just trying to take advantage when the market returns to have something new that might be ahead of the competition?

Sure that's our method of operation.

Can you comment how much R&D will be spent this year?

I think what you’ve been seeing is likely going to be what you’ll see going forward.

Okay. All right, that's it from me. Thank you.

We'll take our next question from Rahul Bhat with JPMorgan. Please go ahead.

Good morning, gentlemen. Just a couple of question, I am sorry if you've already covered this earlier in your call, but just to get my head around the huge fall in the seismic product demand, is it more, are you seeing more fall, is it coming through pricing or is it just volumes that have just fallen off?

It’s primarily volumes the need for this equipment has just been reduced because the market activity, wherein that equipment is utilized, it has greatly fallen.

Okay. And is this, can you provide any additional color on, which, is there any difference or is it just fallen across the board?

It seems pretty much across the board.

Okay. And do you think, from your experience into past cycles when demand does come back, do you think it’ll lead to like increase competition and pricing pressures?

Of course, that’s always the case.

Okay. So going forward, you think margins would be under severe pressure and, I missed the earlier question, is [indiscernible] how long do you think the downturn will last, and could you just please repeat any, if you gave any guidance duration?

No, we didn’t, because we ourselves can't predict that, there’s nothing in the cards that would let us do that.

Okay. I understood. Perfect, gentlemen. Thank you.

We'll take our next question from Ken Sill with Global Hunter. Please go ahead.

Thanks for taking my call. So, things are pretty dismal. I did see one piece of news pop across the wire and that was the SAEX announced that they've gotten some ocean bottom survey work, $45 million in revenue for them - is that a potential customer for you guys for selling systems. And just another question is, is there a repair and replacement cycle for the OBX sensor at some point might pop out even if things stay soft?

Well SAEX is one of our customers and clearly they represent someone that we could work with if it turns out to be such on those jobs. So SAE is a valued customer, and we work with them on a constant ongoing basis. As far as repair and replacements, in reality, the OBX is mainly seeing a rental market. So any repair and replacement is on our end with respect to keeping our rental fleet in good working order. At some point, we do expect sales to occur, certainly with work to be done out there it’s certainly in the best interest of those using the equipment to own it from a cost perspective but that's not what we're seeing right now. We're seeing more of a rental market manifest.

How much lead time, or is it pretty short in terms of somebody coming to you saying, we need to rent some sensors, what would be a typical somebody comes to you and you’d rent them out and how would that take to turn in the revenue?

Well, I mean as far as how the lead time in terms of equipment availability or…?

Ken, we generally get an order from a customer and we would sign a rental contract probably a couple of weeks before we deliver. And depending on the terms of the contract, that rental could start immediately or if it's the one half way across the world, there might be some lead way before the rent starts. So it really starts when it begins to get utilized.

Yeah, so there's just not a lot of, when you say you don't, what’s going to happen, you could get an order in tomorrow and you could be seeing revenues before the end of this month or within a few weeks?

That happens quite a bit in our world. Yes

Okay. Well, I’ll leave it there. You guys seem to be doing what you need to do. You can’t control commodity prices. You can control your cost. So, we’ll all muddle through this. Thanks.

[Operator Instructions] And we’ll take our final question from Scott Bundy with Moors & Cabot. Please go ahead, please.

My first question was answered. The second question is, given the size of the business footprint that we have in the Russia, is that something that we need to think about in terms of resolving giving the decline and what's going on in Russia?

That's a very good question. Interestingly we haven't seen that have a major impact on us other than there's some favorable foreign exchange elements that have resulted from that. But from an operational point of view, which I think you're asking about, it's - the operations over there are progressing normally. Clearly they're going to see some price pressure with respect to raw materials that they go through, but many of their things are sourced locally. So, it remains to be seen exactly how this will turn out in the long run, but, so far so good with respect to how that Russian facility is performing.

Thank you.

It appears that we have no further questions. I’ll turn the floor back over to Mr. Rick Wheeler, for any additional or closing remarks.

Thanks Keith and we would like to thank everybody that listened in and joined us today. We look forward to speaking with you during our second quarter conference call some time in May. Thanks again, and goodbye.

Thank you. And this does conclude today's teleconference. Please disconnect your lines at this time. And have a wonderful day.