Geospace Technologies Corporation (GEOS) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies Third 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. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Rick Wheeler. You may begin, sir.

Thanks. Good morning, and welcome to Geospace Technologies conference call for the third quarter of fiscal year 2015, and thanks 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 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 the line for questions. Also, as a matter of convenience and previously mentioned, we will make a replay of this conference call available in the Investor Relations section of our website at www.geospace.com. Let me caution that the information we will discuss this morning is time-sensitive, and therefore, may not be accurate on the date one listens to the replay. Secondly, many of the statements that 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 our current perceptions, expectations and knowledge. But actual outcomes are influenced by uncertainties and other factors that we are unable to control or predict. These and other risks, both known and unknown, can lead to undesirable results or cause our performance to materially differ 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 third quarter of fiscal year 2015. The depressed market conditions that began in 2014 have continued without relief through the third quarter where revenues totaled $19.8 million, a decline of $21 million over last year's third quarter. For the 9 months ended June 30, 2015, the company reported revenues of $68.9 million compared to $210.6 million for the same period last year. The decline in revenue for both periods is directly attributed to the pronounced decrease in demand for our products in today's seismic market, coupled with having no large contracts currently underway with a manufacturer of permanent reservoir monitoring, or PRM systems. With these lower revenues, losses were incurred for both the quarter and the 9-month period of $8.6 million and $19.2 million, respectively. Revenues for traditional seismic products in the third fiscal quarter were $6.3 million, a decrease of $3.6 million from last year. For the 9 months ended June 30, the segment had revenues of $23.6 million, a reduction of $19.7 million over the same period last year. In both periods, the reduced revenues are a direct reflection of the very broadened activity that exists in the current seismic exploration market. The difference in revenue year-over-year for the 9-month period is also accentuated by uncommonly large geophone orders seen in last year's first quarter. Our wireless product revenues in the third quarter were $6 million, a decrease of $6.2 million from last year's third quarter. For the 9 months ended June 30, 2015, wireless product revenues totaled $23.8 million compared to $70.3 million for the same period last year, a decrease of $46.5 million. These declines are, again, a direct result of reduced demand for seismic equipment in today's market. We note, however, that, in contrast to the declining overall seismic market, utilization of our OBX marine nodal systems continued to increase in the third quarter. Various customers deployed over 3,700 OBX stations from our rental fleet on a variety of projects throughout the quarter. Rental revenues have sequentially increased in every quarter of this fiscal year, mostly from increasing rentals of the OBX marine nodal system. The number of successful high data quality surveys achieved by our OBX customers is steadily growing. From this, we remain encouraged about the future of our OBX product line. However, project delays and cancellations of some jobs as reported by our customers demonstrate that this specialized ocean-bottom seismic market still shows risk and volatility. Revenues from our reservoir products in the third quarter totaled $1.2 million, a decrease of $12.1 million compared to last year's third quarter. For the 9 months ended June 30, reservoir product revenues were $4.5 million. This compares with $80.7 million in the same 9-month period of last year, a reduction of $76.2 million. While lower demand for our borehole and other general reservoir products was a contributor to the reductions in these periods, the largest component of the decreases was the absence of any PRM system contracts during the current fiscal year. In contrast, last year, the 3 months and 9 months ended June 30, 2014, saw revenue contributions from the Statoil PRM order of $6.7 million and $61.7 million, respectively. Despite having no contracts in hand, we continue discussing future PRM systems with potential customers, and we believe that our vast leadership, experience and past successes in PRM technology for well over a decade keep us well positioned to secure future PRM contracts. In the third quarter, our non-seismic businesses continued down the path of improved performance. Third quarter revenues for this segment were $6.1 million, a 21% sequential increase over the second quarter, and an increase of $0.9 million over last year. For the 9 months ended June 30, 2015, revenues and operating income for our non-seismic businesses were $16.5 million and $2.3 million, respectively, each reflecting an increase over the same period last year. These modest improvements are largely a result of broader acceptance and adoption at some of our industrial product lines. At this time, I'll turn the call over to Tom to provide you with more detailed commentary and insight on the company's third quarter financial performance.

Thanks, Rick, and good morning everyone. Before I begin, I would like to remind everyone that we will not provide any specific revenue or earnings guidance during this call. In yesterday's press release, for our third quarter ended June 30, 2015, we reported revenues of $19.8 million compared to revenues of $41 million last year. Our net loss for the quarter was $8.6 million or a loss of $0.66 per diluted share compared to last year's net income of $3.8 million or $0.29 per diluted share. For the 9 months ended June 30, 2015, we reported revenues of $68.9 million compared to revenues of $211 million last year. Our net loss for the 9-month period was $19.2 million or a loss of $1.48 per diluted share compared to last year's net income of $39 million or $2.95 per diluted share. A breakdown of the revenues from each of our product segments is as follows: our traditional seismic product revenues for the third quarter were $6.3 million, a decrease of 36% compared to revenues of $10 million last year. Revenues for the 9-month period were $23.6 million, a decrease of 45% compared to revenues of $43 million last year. The decrease for both periods reflects lower demand for our geophones and Marine products due to the soft industry conditions. In addition, as Rick just indicated, last year's first quarter included large orders for geophones. Third quarter revenues from our GSX and OBX wireless seismic products were $6 million, a decrease of 51% compared to revenues of $12 million last year. Wireless revenues for the 9-month period were $23.8 million, a decrease of 66% compared to revenues of $70 million last year. These results reflect declines in both product and rental revenues and are a direct result of reduced demand precipitated by soft industry conditions. Although wireless rental revenues declined, we are pleased to note that rental revenues from our OBX marine nodal systems increased in both the quarter and year-to-date periods of 2015. Reservoir seismic product revenues for the third quarter were $1.2 million, a decrease of 91% compared to revenues of $13 million last year. Reservoir product revenues for the 9-month period were $4.5 million, a decrease of 94% compared to revenues of $81 million last year. The decrease in revenues for each of the periods ended June 30, 2015, was primarily due to the absence of any PRM contracts in the current year. Compared to PRM system deliveries to Statoil and other customers totaling $7 million and $71 million for the 3-month and 9-month periods of last year, respectively. For the third quarter, non-seismic product revenues were $6.1 million, an increase of 17% compared to revenues of $5.2 million last year. Revenues for the 9-month period were $16.5 million, an increase of 4% compared to revenues of $15.9 million last year. The revenue increase for each period resulted from increased demand for our industrial products. Our seismic segment gross profit margins continue to be unfavorably impacted by a number of factors, including significantly lower product and rental revenues, unabsorbed fixed manufacturing cost due to low factory utilization, fixed depreciation expenses from our rental equipment during periods of low utilization, a sales mix containing a concentration of significantly lower-margin products primarily caused by substantial reduction in revenues from our wireless and reservoir products, increased warranty cost due to manufacturing flaws, and increased inventory obsolescence expenses due to high levels of slow moving inventories. Should current industry conditions persist, we expect our seismic product profit margins to be under significant stress for the remainder of the fiscal year and into the future due to the factors that we just cited. In addition, continued negative industry conditions could lead to asset impairments in the future. Operating expenses for the third quarter were $9.1 million, a decrease of 8% compared to operating expenses of $10 million last year. Our operating expenses for the 9-month period were $29 million, a decrease of 13% compared to last year's operating expenses of $33 million. The decrease in each period was primarily due to the elimination of incentive compensation expenses and was partially offset by increased bad debt expense. Total capital investments in our rental fleet and property, plant and equipment for the 9 months ended June 30, 2015, were $5.8 million. These difficult times that required us to cautiously evaluate any new capital projects as we seek to preserve cash and reduce our asset base. In that regard, we expect our total fiscal year 2015 capital investments to be approximately $7 million. Our inventory balance now stands at $131 million, representing a decline of $15 million since the beginning of the fiscal year. Although demand is weak, we are working diligently to bring about further reductions in our inventory levels. Purchase orders for raw materials remain at extremely low levels and our production activities continue to be focused on essential tasks. At June 30, 2015, our balance sheet reflected $45 million of cash and short-term investments, an increase of almost $2 million since the March quarter. Looking forward, we currently expect to utilize about $3 million to $5 million of cash in the fourth quarter. That concludes my prepared remarks, and I'll turn the call back over to Rick.

Thanks, Tom. Around the globe, we've seen demand for seismic exploration services reach historic low levels and there is no simplistic forecast for when increased levels of demand might return. To the extent that current market conditions in the seismic industry persist, demand for our seismic equipment products is expected to remain at corresponding low levels. Until seismic exploration activity returns to more conventional norms and/or manufacturing for new PRM contracts begins, our profits will continue to be hard hit by depreciation of unutilized rental equipment and fixed factory overhead cost left unabsorbed by our minimal manufacturing operations. Given that seismic exploration and reservoir management are necessary components for a stable and sustainable energy market, endurance through this down cycle and a strong emergence and thereafter are our focus objectives, we believe that our strong balance sheet and continued development of industry technology are the key elements that will allow us to achieve these objectives. This concludes our prepared remarks. So I will now turn the call back to Aaron to issue some questions.

[Operator Instructions] Our first question comes from Joe Maxa with Dougherty & Company.

So I was wondering, on the OBX side if you're seeing that demand for the rental continue here in the fourth quarter as you had a pretty strong rental quarter, all things given last quarter. And then also if you're getting any interest, any type of activity or there are maybe some purchases on any of your wireless stuff?

Well, certainly, the indications are both from what you've seen in the last quarters and the quoting that we've got outstanding, certainly indicates a higher interest in the OBX and an ongoing continuation of that increase. But as we mentioned, that's still a very volatile situation there. It's always the case very easy to withdraw some of these contracts when they're offered. But yes, we're definitely seeing an increased interest currently, projecting into the fourth quarter, but no guarantees.

Okay. That's primarily with the OBX underwriting [indiscernible]...

Yes, yes, that's the OBX. And then there's always the potential of sales for our wireless equipment, but things are tough right now with respect to people's capital budgets and what they're willing to spend. And as we say, that's why demand for our products is somewhat low at this point.

And we will take our next question from Bill Dezellem with Tieton Capital.

I actually have a group of questions. First of all, I just wanted to clarify what I think we just heard you say relative to your rental revenue in the September quarter. You are, from what you see now, thinking that it will be up versus the June quarter, is that correct?

Well, I can't predict that. I'm just saying that indications are that particularly in the OBX interest has increased, and we have quotes outstanding now, but all of that is extremely volatile, Bill. And so no, we couldn't predict that, per se.

Understood, and then you did reference in the release that you saw some OBX project cancellations. Were any of those some of the big ones that you had been hoping for? And can you characterize those cancellations, please?

Well, some of those cancellations are ones that are going to be retendered, as we understand. Some are larger than others. In fact, we mentioned that 3,700-or-so of the OBX were out this quarter, and that's sort of been an ongoing increase. And many of the jobs that we're quoting are actually much larger than that.

And those that you are quoting that are larger, what's the estimated time frame? And is the estimated time frame even relevant because things are so fluid right now?

Things are so fluid that it almost isn't relevant. And actually, many of these quotes do extend to the next fiscal year.

That's helpful. And let's talk about the cash. Tom, you had mentioned that you thought you would burn $3 million to $5 million of cash in the fourth quarter. What will that cash be used on?

Bill, it will be used to probably to most likely payroll and supplies and perhaps, some raw materials to the extent that we might need some, but mostly for operating expenses.

And so I guess what I'm trying to get my arms around is that you mentioned in your remarks that you are working to bring inventory down, which should generate some cash. And here, in the most recent quarter, you were able to generate a little bit of cash. And so I'm trying to grasp if the inventory reduction is going to be less than what it was in the June quarter? Or what the other swing factors might be that would change you from a cash flow generation to a little cash burn?

Yes, I can't really predict the exact type of inventory that we're going to buy and how much we would be able to bring the inventory down. But most of it's for operating expenses, Bill. We've got cash operating expenses every day.

[Operator Instructions] I believe we have a follow-up from Bill Dezellem with Tieton Capital Management.

If others won't ask questions, I'll come in with a couple of more. The PRM conversations that you have been having, would you say that the likelihood of an order in the next 12 months has increased or decreased from how you would have characterized those conversations 6 months ago?

Well, I mean the likelihood of an order is really contingent on -- among other things, things that we don't control, whether or not CapEx budgets are redefined by some of the oil companies. I mean, we've seen, if you look, you've seen many of the EMP companies actually reflect changes in their budgets, almost on a monthly basis sometimes. But we still think that there's very good chances of one of these PRM contracts coming through.

And would you like to handicap it, whether it's higher or lower likelihood than you thought maybe 6 months ago?

No, that would be too speculative on my part. I think that the risks are still there, but the opportunities are also still there.

Great. And then I actually would like to ask the exact same question for OBX, not rental, but the outright order. Relative to the conversations that you've been having, so likelihood, higher or lower with order in the next 12 months?

I think right now, the focal element on the OBX still remains mostly in interest of rental. The contractors, while there is activity out there, and it's continuing to increase in terms of opportunities for surveys on ocean bottom, it's really an issue for the contractors of rolling those up into consecutive jobs. And you know that's difficult to do, but that's the primary stimulus for looking more towards purchases, it's always possible because many of these contractors are doing well about securing some of these jobs, but I can't really give you a number of probabilities on that.

Great, thanks. And actually, I'm going to circle back to PRM for a moment. Given that it has been a while since you have had an order and the size of these orders can be quite large, are you sensing at all that there's a log jam taking place? And is there any chance that you have the strange scenario where you may end up not being able to accept multiple orders?

Well, of course, that could happen. I can tell you now there's not a log jam, as far as that goes. But timing on these are such that each of the oil companies that we might be discussing this with sort of have their own time frames, and there is the chance that, that can happen. But if you'll recall, I mean the Statoil job, we actually pulled that in from the original time frames that they had originally looked at simply just through the use of overtime and that sort of thing. I don't see a log jam at this point.

Our next question comes from Ken Sill with Seaport Global.

Has there been any change in oil company decision-making with the recent decline in crude? I'm assuming it's just put more uncertainty in the market, but I was wondering if you noticed any change in the tone of it?

Well, there's a lot of change in the oil industry. I mean, as I mentioned, we -- you see them revise their capital budgets sometimes a third and fourth time. So I think there's still a lot of examination by the oil companies as to their best approach. Everyone's trying to guess what sort of duration some of this might extend through. So certainly, there are changes. But then again, they've got to do business, and so to some extent, there's coming back to realities of what needs to be done to protect their assets.

Okay. I mean, it's a tough time, but we're all aware of that.

And we will take our next question from Jon Burke with Amica Insurance.

A question on the cash burn element. If we look -- if we just assume there's no change in current macro conditions and if we look forward for the upcoming year, outside of the first quarter payment that was made for bonuses for the prior year, is there anything -- would there be any material change in the kind of the cash burn going forward?

John, that's a good question. We think we can sustain at this level of averaging about $1 million a month or less. Going into next year, we expect to receive a big income tax refund. We're going to carryback a loss in our U.S. tax return and get a refund. That will supply a lot of cash in the third quarter of next year. So overall, next year we think we're fine.

Okay. All right. $1 million a month there's no problem. A couple of more on -- Tom, you mentioned the factors that are hurting the gross margin, one of them being warranty expense. Was that just one of many, or is that material? Was there kind of a higher-than-expected return of equipment?

It wasn't really a return of equipment, it's equipment that had some flaws that we're in the process of repairing right now. And so yes, it was higher than normal. I think we had about $1.9 million charge to warranty expense in the quarter, which is unusually high for us.

But it's a singular event, it's not an ongoing event.

Yes, yes.

Okay, and that's whatever the issue was, either mechanical, technological, that's -- you guys have surrounded it and fixing it and fine going forward?

Right. Exactly. Yes.

And then the last one, Tom. Again, on your comments, you mentioned the possibilities of asset impairments in the future. Is that more of an accounting where the assets are underutilized for so long that they have to be written down? Or -- I don't remember in the past you've made that statement on calls?

Yes. Well, it certainly is an accounting exercise that we do go through an impairment analysis quarterly, and we look at it. And as we continue in this type of market, and the longer we're in this market, the longer we expect to be in this market, the higher the risk that impairments of a much larger magnitude than what we take every quarter. We're always booking inventory reserves and receivable issues and things like that, but it could be greater than that if this is going to be long-lasted in our rental equipment and inventories and things are not going to have any demand. So yes, we look at it quarterly, and we're just throwing that out there that it's a possible reality.

Okay, is there a definition around it as far as I can look back or is it a look forward, I guess?

Yes, there's a cash flow analysis that you have to put together and make assumptions about the utilization of your assets and how much cash you will derive. And from a goodwill standpoint, you would discount that back to the present value and look at those things. So yes, it's a fairly in-depth exercise.

[Operator Instructions] At this time, there are no additional phone questions. I'd like to turn the program back over to Mr. Rick Wheeler for any additional remarks.

Thank you, Aaron, and we would like to thank everyone for joining our call today. We look forward to speaking with everyone during our fourth quarter conference call in November. Thanks, again, and goodbye.

Thank you. This does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.