Geospace Technologies Corporation (GEOS) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies Fourth Quarter 2016 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 open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Good morning, and welcome to Geospace Technologies conference call for the fourth quarter of fiscal year 2016 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 will start the call with a prepared 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 the line for questions. For convenience as mentioned, we will place a replay of this conference call 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 may not be accurate on the date one listens to the replay. Also, many of the statements that we 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. Such statements are based on our current knowledge and perceptions while actual outcomes are influenced by uncertainties and other factors that we are unable to control or predict. These risks and others, 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 filing and Form 10-Q filings. Yesterday, after the market closed, the Company released its financial results for the fourth quarter of fiscal year 2016, which ended September 30, 2016. As we reported, revenue in the fourth quarter was $16.3 million, a decline of 8% sequentially from the third quarter but an increase of 2% in comparison with the fourth quarter of last year. For the full fiscal 2016 year, our revenue fell 27% from last year, marking the third consecutive year of declining revenue as market conditions in our seismic business segment continue to worsen amidst fluctuating oil prices. Although lower revenue was the primary contributor to our net loss of $46 million for fiscal year 2016, there were several other factors contributing to this record loss. With inventories already high for most of our products, our factory activities have been running at a bare minimum and as a result, we’ve not been able to absorb most of our fixed factory overhead costs. These costs combined with impairment charges and depreciation expenses on our underutilized rental equipment have more than offset the gross profits generated on our substantially lower revenues. Other loss factors include a $1 million charge for termination expenses associated with the cost reduction program we implemented earlier in the year, a $7.7 million evaluation allowance against our U.S. and Canadian deferred tax assets and $10.6 million of inventory obsolescence charges associated with products considered to be impaired due to the current market conditions. However, through our continuous efforts to control cost, we were able to soften these losses by reducing our operating expenses for the year while at the same time preserving and maintaining our core research and development activities targeted both new and existing products. At the end of fiscal year 2016, our traditional seismic exploration product revenue was just $13.3 million. This represents a reduction of 56% from last year and sets a historic low for these products. The start [Ph] decline distinctly emphasizes the level to which global seismic exploration activities have diminished during the year. For the most part our seismic customers operating both land and marine environments have ample supplies of these products already deployed with working field crews and/or available at their warehouses. To the extent that seismic exploration activities may increase in the future and more of these traditional products are consumed, we would expect demand for them to correspondingly increase. Revenue generated from our wireless seismic products in fiscal year 2016 was $18.4 million reflecting a decline of $6.7 million or 27% from last year. A large portion of this revenue resulted from our previously announced rental contract with an international seismic contractor utilizing 5000 stations of our ocean bottom OBX Marine Nodal system. This rental contract signed in October of 2015 is anticipated to continue through our first quarter of fiscal year 2017. Sales in rentals of our wireless GSX land based system faced an escalation of the industry challenges it saw last year. During fiscal year 2016, we sold approximately 4,600 additional GSX channels compared to approximately 7000 channels sold last year. We believe these wireless products continue to be the preferred equipment of choice for most seismic contractors however, in light manner of our traditional products most seismic contractors have sufficient quantities of seismic recording equipment to serve their existing project needs in the current market environment. Our reservoir seismic products generated revenue of $2.1 million in fiscal year 2016. This is a 61% reduction in revenue compared to fiscal year 2015 and a decline of 98% from fiscal year 2014. Fiscal year 2016 was the second consecutive year wherein we had no contracts for the manufacture and delivery of permanent reservoir monitoring or PRM systems. As such, revenue for this segment in the fiscal year was comprised primarily of engineering support services and small sales on rentals of seismic portal [ph] tools including repairs and replacement parts. Although we responded to tenders for PRM systems in fiscal year 2016, no contracts were awarded in the industry. And while we are having discussions with clients for potential future PRM systems we nonetheless did not anticipate a PRM system contract to manifest in fiscal year 2017. Despite the fact that each of our seismic product segments exhibited much lower revenue in fiscal year 2016 compared to last year, our non-seismic products experienced considerable growth. Non-seismic product revenue reached $27.7 million in fiscal year 2016, an increase of about $4 million or 17%. While revenue from our imaging products remained relatively flat compared to last year, our industrial products which includes sensors used for non-seismic applications, offshore cables and water meter connectors and cables saw a revenue increase of 36%. To the extent municipalities continue to expanding the infrastructure for automated electronic water meters, we expect this portion of the industrial product segment to further grow even though there is some seasonality to these orders and these products. We also believe that there are additional opportunities in fiscal year 2017 for us to provide some other innovative products and to our known seismic market that will further enhance its growth. At this time, I’ll turn the call over to our CFO, Tom McEntire to provide you with some detailed commentary and insight on the company’s fourth quarter and fiscal year financial performance.

Thanks, Rick and good morning everyone. Before beginning I’d like to remind everyone that we will not be providing any specific revenue or earnings guidance during the call. In yesterday's press release for the fourth quarter ended September 30, 2016, we reported revenue of $16 million which is essentially flat compared to last year or net loss for the quarter was $12.3 million or a loss of $0.94 per diluted share compared to last year's net loss of $13.5 million or a $1.03 per diluted share. For fiscal year 2016, we’ve reported revenue of $62 million compared to $85 million last year. Our net loss for fiscal year 2016 was $46 million or a loss of $3.52 per diluted share compared to last year’s net loss of $33 million or a loss of $2.51 per diluted share. A breakdown of our seismic product revenue was as follows. Traditional product revenue for the fourth quarter was $2.6 million, a decrease of 60% compared to revenue of $6.5 million last year. Revenue for fiscal year 2016 was $13 million a decrease of 56% compared to last year’s revenue of $30 million. The decrease for both periods reflects lower demand for our land sensor [ph] and the rain products due to lower seismic crew activities. Our GSX and OPX wireless product revenue for the quarter was $5.2 million an increase of 310% compared to revenue of $1.3 million last year. Wireless product revenue for fiscal year was $18.4 million a decrease of 27% to last year’s revenue of $25 million, which includes $3 million of revenue resulting from a purchase order cancellation. These mixed results for fiscal year 2016 reflect the combination of two factor, first, reduce seismic exploration projects and an abundance of unutilized customer owned equipment have resulted in very weak demand for our GSX land wireless systems throughout 2016. Offsetting this to some degree is a growing demand for the rental of our OBX Ocean Bottom Nodal system including the commencement of a large OBX rental contract in our second quarter. For the fourth quarter and full fiscal year, we recognized rental income were $3.9 million and $11.3 million respectively from the OBX rental contract. Reservoir product revenue for the fourth quarter was $300,000 a decrease of 62% compared to revenue of $900,000 last year. Reservoir product revenue for the fiscal year was $2.1 million a decrease of 61% compared to last year’s revenue of $5.4 million. The revenue decline for both periods resulted from lower borehole sales and repairs reflecting diminished seismic borehole activities in the market place. And as Rick indicated earlier, [Indiscernible] for PRM systems were received in fiscal year 2016 nor do we expect to receive any large PRM contracts to manifest in fiscal year 2017. Due to the growth that we’ve experienced in the demand for our non-seismic products, we have separated our industrial product revenue from our imaging product revenue for segment reporting purposes. Our industrial product revenue for the fourth quarter was $5.1 million an increase of 30% compared to revenue of $3.9 million last year. Revenue for fiscal year 2016 was $16.2 million an increase of 36% compared to last year’s revenue of $12 million. These revenue increases are primarily attributable to higher demand and market acceptance for our water meter products, offsetting these increases were lower sales of our offshore cable and industrial sensor products. Imaging product revenue for the quarter was $2.9 million, a decrease 11% compared to revenue of $3.3 million last year. Revenue for the full year was $11.5 million, a decrease of 3% from revenue of $11.8 million last year. Last year's fourth quarter contained on usually large product sale approximately $500,000 which did not reoccur again in fiscal year 2016. Our seismic gross profit margins continue to be under significant pressure due to several factors including a substantial reduction in seismic product revenue, unabsorbed fixed manufacturing cost due to lower factory utilization, increased inventory obsolescence expenses due to high levels of slow moving inventories and the write-down of certain seismic inventories and rental equipment to their expected net realizable value. Until we see significantly improving seismic product demand we expect our seismic product gross profit margins will continue to be under significant stress. Excluding the $1.8 million goodwill impairment charge recorded in last year's fourth quarter, our fiscal year 2016 fourth quarter and full year operating expenses decline 11% and 9% respectively from the comparable periods of last year. The decrease in both periods primarily reflects savings realized from our cost reduction program implemented back in the second quarter. Capital investments into our rental fleet and property, plant and equipment for fiscal year 2016 were $2.4 million. We expect our total fiscal year 2017 cash capital commitments to be approximately $3.5 million with very limited amounts allocated to new rental equipment unless precipitated by increase customer demand for our OBX equipment. In the event such orders do occur we would expect the majority of any rental equipment additions to be of a non-cash nature since they would like be derive from our existing inventory stocks. Our inventory balance now stands in $105 million representing the decline of $41 million over the last two years. Although demand remains weak we expect further inventory reduction throughout fiscal year 2017 as we seek to work off excess stocking levels. Purchase orders continue to remain at extremely low levels and our production activities are focused only on essential task. At September 30, 2016 our balance sheet reflected $38 million of cash and short term investments. We have no long term debt outstanding and borrowing availability under our credit agreement of almost $30 million. In addition, we own seven facilities around the world which are unencumbered with debt. While cash flows were expected to be lumpy throughout fiscal year 2017 and revenue visibility is extremely limited. We again believe our total cash flows for fiscal year 2017 could be around breakeven primarily due to a $13 million income tax refund we expect to receive in our second quarter. We remain committed to cash preservation while we enter this market downturn. That concludes my prepared remarks and I'll turn the call back over to Rick.

Thanks, Tom. In conclusion fiscal year 2016 saw demand for our seismic products fall to unprecedented lows. Throughout the year oil and gas companies continually revised capital budgets further downward and in many cases seismic exploration activities seem to have been disproportionately impacted by these cuts. As direct evidence of this, the count of active seismic marine vessels and land crews alike has dramatically diminished from that of prior years. From all indications, fiscal year 2017 is likely to see a continuation of these circumstances. While underlying statistic change from one month to the next most energy watchers and independent analysts do not believe a balance in crude oil supply and demand will be achieved in the near term. Such a condition will further perpetuate low oil and gas commodity prices and volatility and seismic exploration investment by oil and gas companies will likely remain minimal during that time. Meanwhile producing fields will continue to decline and depleted reserves will go without being replaced. In the longer term perspective this is not sustainable and a resumption of seismic exploration and reservoir monitoring will be necessary to address the deficits that result from this paralysis. Our products are design to bring real innovation and value to our customers and the seismic industry as a whole, and we believe we are well positioned to continue in this tradition when the industry recovers. Our strong balance sheet reflects the $37.8 million of cash and short term investments and along with $29.6 million available under our line of credit; our total liquidity tops $67 million. By prudently managing our costs and focusing on our customer success and the products they need and deserve, we are preparing for an industry recovery that will inevitably occur. Now this concludes our prepared remarks. And I'll now turn the call back over to Leo for questions.

The floor is now open for questions. [Operator Instructions] We'll take our first question from Mark Brown of Seaport. Your line is open.

Hey, guys.

Hi, Mark.

Just wanted to ask about the commentary around PRM orders, that you're not expecting any contracts to materialize for next year, it’s still long ways away before we get to the end of next year, I'm just curious why you felt that outlook was really that bad that you not even building any expectation into your guidance?

That's a very fair question, Mark. The reason is because generally those negotiations on tenders and the establishment of the technical aspects associated with those projects entail takes a length of time that would typical precluded from happening in fiscal year 2017, even though some discussions might be going on now, it just historic view of how long those negotiations and design projects take.

That makes sense. I guess just generally it seem that your outlook for all the segments of your seismic product lines were pretty cautious I guess I would say. But what would you have to see in terms of oil prices or whatnot, and I know part of the problem is many of your customers are focused on protecting their own balance sheets and paying out dividend and that sort of thing even it would make logical sense for them to invest in some of the PRM or the OBX products. And I just curious what's the roadmap for what would stimulate new orders to materialize again?

Well, certainly an increase in oil price would stimulate more spending within the oil and gas companies, where in the seismic exploration activities would pick up, that's really the base issue. Regardless of where prices go and where they stay eventually the reserves that are being depleted and produce now are going to have to be replaced. The problem is that supply is now are exceeding what the demand quantities are and so there are just not in the mood to explore. You've got some of the replacement reserves in more than several decades or falling below what they produce. So, oil prices will help, but in the end you're just going to have to replace these reserves one way or the other.

Okay. That makes sense. And I guess one more question just on your non-seismic businesses, which ones you think would grow the fastest and maybe which you have the higher margins and you mentioned the couple of the applications industrial and imagining and water metering [ph] and that sort of things.

Well, we don't really reveal the margins on the various components of the segment, but the water meter section has been exhibiting the fastest growth, that something that a lot of municipalities are moving towards is automatic meter reading and the connectors and cables that we make for that industry are very robust and serve a very good purpose within that market. So that has exhibited lot of growth, but we do anticipate some potential growth not only in that area but in perhaps some of the other components as well.

Okay. Well, thank you very much.

[Operator Instructions] Our next question comes from Matt Dhane of Tieton Capital

Thank you. I wanted to ask about the – what appears to be an acceleration of inventory obsolescence. I was curious, would you expected to continue at these higher levels or even accelerate potential further here going forward?

Good question, Matt. Our expectation is that in this type of market if next year, fiscal year 2017 looks like fiscal 2016 we could experience this level of inventory obsolescence again.

Okay. I wanted to shift to OBX rental contract. You said you expect that to go through Q1, does that imply your expense to last throughout the full first question or just part of it? And then secondarily is there potentially even extend into Q2 or beyond that potentially?

Well, we expected to go through full timeframe of the first quarter. There are always possibilities of an extension, but that's not some we're relying on or have real expectations of.

Great. Thank you.

And at this time, I'd be happy to return the conference over to Mr. Rick Wheeler for any concluding remarks.

Well thanks, Leo. And thank to everyone that joined our conference call today and we appreciate it and we look forward to speaking with you during our fiscal year 2017's first quarter conference sometime in February. So thanks again and good bye.

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