Geospace Technologies Corporation (GEOS) Q3 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Geospace Technologies Third Quarter 2017 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.

Thanks. Good morning and welcome to Geospace Technologies' conference call for the third quarter of fiscal year 2017. Again, I'm Rick Wheeler, the company's President and Chief Executive Officer, and I'm joined here with Tom McEntire, the company's Vice President and Chief Financial Officer. I'll start the call with prepared overview of the quarter. Tom will then follow with an in-depth commentary of our financial performance. Next, I'll close out the prepared portion of the call with some final remarks, and we will open the lines for questions. For everyone's convenience, we will link a recording of this call in the Investor Relations section of our website at www.geospace.com. Be aware that the information we discuss this morning is time-sensitive and might not be accurate on the date one listens to the replay. Also, many statements made today can be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about the market for our products, revenue recognition, planned operations, and capital expenditures. All such statements are based on our present knowledge and perception, while actual outcomes are influenced by uncertainties, and other factors that we are unable to control or predict. Related 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 2017, which ended June 30, 2017. As stated, our third quarter revenue saw a sequential decline of 31% from the previous quarter, amidst the continuation of low industry demand for seismic instruments and equipment. Such a variation in revenue from one quarter to the next acutely reflects the lumps and timing irregularities often experienced in the sales and rentals of our products. This circumstance is even more pronounced in today's slow market conditions. Despite this reduction, cumulative revenue in the fiscal year's first nine months reflected a 9% increase over the same period last year. While continued low revenue from our seismic segment was a primary driver of net losses reported for both the three-month and nine-month periods ending June 30th, 2017, other major contributors to these losses continue to be large non-cash charges for inventory obsolescence and depreciation on our rental equipment. Revenue from our traditional seismic products totaled $3.6 million in the third fiscal quarter ended that date of June 30th, 2017. While the amount is roughly flat compared to the preceding quarter, it reflects an increase of 43% over last year's third quarter. Despite this improvement, revenue for these products in the nine months ending June 30th, 2017, declined 8% from the same period last year. For the most part, seismic contractors have remained adequately supplied by their existing inventories of these products for the limited number of projects currently underway. Additionally, some contractors, in efforts to preserve cash, are choosing to repair and refurbish many such items that might otherwise be preferably discarded and replaced. Our wireless seismic products generated revenue of $2.7 million in the third quarter, a decrease of 59% compared to the same period last year. Notably, in the third quarter a year ago, revenue was bolstered by a long-term performing rental contract utilizing a larger number of our OBX marine nodes. In contrast, no such long-term rental contract was underway during the current quarter. In spite of lower third quarter revenue for this segment, wireless product revenue in aggregate for the nine months ending June 30th, 2017, increased $5.4 million over the corresponding nine months of the last year. Even though seismic exploration of both land and marine environments have stubbornly remained at record low levels, our wireless reporting systems continue to provide the best value for seismic contractors as the most efficient, effective, and field-supported tools. In the three months ended June 30, 2017, revenue from our reservoir seismic products totaled $1 million. This is a sequential increase of 45% over the previous quarter and an increase of 117% over the same three-month period last year. Moreover, revenue from this segment in the nine months ended June 30th, 2017, grew 28% over the same period a year ago, totaling $2.2 million. The increase in all of these comparative periods is primarily the result of increased sales and rentals of our borehole tools, which are typically used to seismically monitor fracking operations, and to characterize oil and gas reservoirs near the borehole through seismic imaging. Note that we do not expect revenue from this segment to grow appreciably unless and until we are awarded a contract to manufacture and deliver a permanent reservoir monitoring, or PRM, system. Furthermore, no such PRM contracts are expected in the near term. In the three and nine-month periods ended June 30th, 2017, our non-seismic products produced revenue of $6.7 million and $18.9 million respectively. These figures represent a decrease in revenue of approximately 15% and 4% from the respective three-month and nine-month periods last year. As we represented last quarter, revenues from this segment are expected to remain flat through the remainder of the fiscal year. We note that last year's third and fourth quarter revenues benefited from large orders of our water meter connector products due to a surge in their market acceptance. Currently, these products are in a less volatile phase of replenishment sales and incremental growth as seen in our second and third quarters of this fiscal year. Overall, we believe this segment is poised for additional revenue growth in the future as we continue rolling out new products in their respective markets. At this time, I'll turn the call over to the company's CFO, Tom McEntire, to provide additional 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 be providing any specific revenue or earnings guidance during this call. In yesterday's press release for the third quarter ended June 30, 2017, we reported revenue of $14.2 million compared to last year's revenue of $17.7 million. Our net loss for the quarter was $14.4 million or $1.09 per diluted share compared to last year's net loss of $11.7 million or $0.89 per diluted share. For the nine months ended June 30, 2017, we reported revenue of $50 million compared to revenue of $45.7 million last year. Our net loss for the nine-month period was $37.6 million or a loss of $2.86 per diluted share compared to last year's net loss of $33.7 million or a loss of $2.58 per diluted share. For each of the current year periods, we were not able to recognize any income tax benefits related to our pretax losses in the United States and Canada, which affects the comparability of the fiscal year 2017 results with those of last year. A breakdown of our seismic product revenues is as follows. Our traditional product revenue for the third quarter was $3.6 million, an increase of 43% compared to revenue of $2.5 million last year. The increase resulted from the timing and delivery of orders for our specialty sensor products. Revenue for the nine months was $9.8 million, a decrease of 8% compared to $10.7 million last year. This decline reflects lower demand for a broader range of our sensor products due to lower seismic crew activities. Our GSX and OBX wireless product revenue for the quarter was $2.7 million, a decrease of 59% compared to revenue of $6.6 million last year. This decrease resulted from a large OBX rental contract that was active during last year's third quarter. Revenue for the nine months was $18.6 million, an increase of 41% compared to $13.2 million last year. This increase resulted from higher OBX and GSX product sales and to a lesser extent, an increase in our wireless rental revenues. Reservoir product revenue for the third quarter was $1 million, an increase of 117% compared to revenue of $500,000 last year. Revenue for the nine months was $2.2 million, an increase of 28% compared to $1.8 million last year. The increase in both periods was primarily due to a higher demand for our borehole products in our reservoir monitoring services. We reiterate that this segment will continue to contribute insignificant levels of revenue until we're engaged in a contract for the delivery of the PRM system. Now, moving on to our non-seismic product segment, a breakdown of their revenue is as follows. Industrial product revenue for the third quarter was $3.9 million, a decrease of 23% compared to revenue of $5 million last year. Industrial product revenue for the nine months was $10.3 million, a decrease of 8% compared to $11.1 million last year. Last year's revenue for the third and fourth quarter, both benefited from large orders of our water meter products due to the surge in their market acceptance. As Rick just indicated, we're now in a less volatile phase of replenishment and incremental growth as seen in our second and third quarters of this fiscal year. Imaging product revenue for the third quarter was $2.9 million, a slight decrease of 2% compared to about $2.9 million of revenue last year. Revenue for the nine months was $8.7 million, an increase of 2% compared to $8.5 million last year. We believe these changes relate mostly to the timing of customer orders and do not represent any particular trend in our customers' demand for these products. Consolidated gross profit margins in our seismic business segment continue to be under significant pressure due to several factors, including unabsorbed fixed manufacturing cost due to low factory utilization, inventory obsolescence expenses, and depreciation expenses on underutilized rental equipment. Until we see significantly improving seismic product demand, we expect our seismic product gross profit margins to be challenged. Third quarter and year-to-date operating expenses declined 5% and 6%, respectively, from last year. These declines reflect cost reductions and changes in the amount of bad debt expenses. Regarding our income taxes, we are not able to recognize any income tax benefits related to our U.S. and Canadian losses due to the uncertainties surrounding our ability to utilize these losses as well as other deferred tax assets to offset future taxable income. The income tax expense we reported for the three months and nine months ended June 30, 2017, resulted from two things; first, the ongoing recognition of tax expense for income taxes that we paid in prior years resulting from the intercompany sale of rental equipment; and second, the recognition of a valuation allowance against foreign tax credits for revenue earned outside the U.S. Cash investments in our property, plant and equipment, and rental equipment were $600,000 and $300,000, respectively, through the third quarter. Total fiscal year 2017 expected cash investments into our property, plant and equipment are expected to be about $1 million. And additional cash investments into our rental equipment are expected to be negligible. At June 30, 2017, our balance sheet reflected $53.5 million of cash and short-term investments. We had no long-term debt outstanding and the borrowing availability under our credit facility was $26 million. Primarily as a result of the $12.8 million income tax refund we received in our second quarter, we continue to expect fiscal year 2017 cash flows to be positive. Our credit agreement is scheduled to expire in May 2018. Based on recent discussions with our bankers and given the current depressed state of the seismic industry, we may not be able to renew our credit facility upon its exploration in May 2018, or if renewed, any new credit agreement will likely result in reduced borrowing availability and stricter liquidity covenants. We currently do not expect the need to borrow from the credit facility prior to its expiration in May 2018. However, we can make no assurances in this regard. We remain committed to cash preservation while we endure this market downturn. That concludes my prepared remarks and I'll turn the call back over to Rick.

Thanks Tom. Over the last several years, prolonged pullbacks in upstream spending by oil and gas companies and relegated seismic exploration activity to its barest of minimums. Unmistakably, this has posed immense challenges for virtually all seismic contractors and suppliers. For some, the challenges have proven overwhelming, leading to failed businesses, bankruptcies, and other uncertainty of the future. In such an extraordinary environment, Geospace has kept focus on navigating the course that preserves and promotes its pillar strengths of financial stability, core technology development and extensive customer support. On the financial side, our balance sheet continues to remain absent of any long-term debt. And after receiving a $12.8 million income tax refund in our second quarter, our cash and short-term investments now stand at over $53 million. In addition, we have $26 million available from an untapped credit facility that will expire at the end of May 2018. And as said, a renewal or replacement of this credit facility beyond this date would likely include less favorable terms than the present arrangement. But in any case, we have no plans at the present time to borrow funds. All in all, this financial strength gives us the ability and confidence to continue investing in new technology developments as the seismic industry moves through this difficult cycle. On the technology front, our advanced research and development efforts have culminated in the recent introduction of novel wireless seismic equipment that complements our existing products with features and functions not found in any other seismic instruments. In full consideration and support of our customers, these new wireless products are designed to be side-by-side compatible with our existing equipment. Very importantly, this not only protects the investments our customers have already made in our equipment, but also extends the value our products have created for them. Simultaneously, these new products provide supplemental solutions to other problems that can help improve our customers' operations and other unique aspects. While an improvement in seismic exploration activity seems rationally inevitable, the timing of such turnaround does not appear to be imminent. In the meantime, we're confident that by continuing to focus on our core financial, technological and customer-centric strengths, we optimally position ourselves for advantage in the forthcoming industry recovery. Now, this concludes our prepared remarks, and I'll now turn the call back over to the moderator for questions.

[Operator Instructions] And we'll take our first question from Matt Dhane with Tieton Capital. Please go ahead, your line is open.

Thank you. I was hoping to have you folks further discuss the statement in the press release, the novel seismic equipment that you recently introduced. What additional details and color can you give around that?

Sure. Some of these products, one of them of particular note, actually has cellular data capabilities and cloud connectivity. So, in that sense, it provides unique means of monitoring, both status and seismic data at a distance as it were to examine noise conditions or other things that one might need to observe. In addition, one of these products is the first in the world to have absolutely no connectors on it, whatsoever. It's a completely wireless device. Both charging and data retrieval operations are done wirelessly. It has a battery built inside of it. So, it makes deployment and operations about as trouble-free as they could ever get. In addition, we have some extended evolutionary aspects with respect to our existing products, which have inserted batteries into some of the already existing equipment. So, these things offer new opportunities that should provide additional streamlining in at least certain situations.

And what response have you gotten from your customer base around these to date, Rick?

Technologically, we've got a very good response. Of course, the industry is in a situation right now where capital expenses kind of on the back burner. And that's something that we expected to phase. But I think it's important to note that even though the industry is suffering in this regard that our intention is to continue to put technology out there that makes this evermore an improved situation and certainly to support our customers in that regard.

And are these products available for rent currently then as well?

No, they're not. We don't have a rental fleet of these components at this point. But again, demand is going to be the big key there with respect to when the industry is prepared to use these new products. But there's certainly a lot of interest in them.

And if there was demand, you would build the rental fleet or have rental equipment accordingly, I assume?

We certainly would.

All right. Thank you.

[Operator Instructions] We'll go next to Michael Cox with [Indiscernible] Investments. Please go ahead.

Guys thank you. Just a couple of quickies. There was a call maybe somewhere in the six to 18 months ago range, where you guys intimated that the -- in a reduced revenue environment, that your monthly cash burn was in the -- $1 million a month range. Is that still sort of the best back of the envelope estimate for where you sit, given the revenue run rate?

Yes, we're not really talking about that number, because it fluctuates significantly based on the type of product mix in terms of our revenue. So, we have rental revenues versus product sales. There is a completely different cash flow. So, yes, we are at a cash burn rate, but we're not going to publish a number as to what the monthly amount is.

Okay. The -- you -- I understand the challenge on the credit facility. And obviously, you've never used it, sort of, [Indiscernible], but it has been something, given in this release, you taut in terms of the liquidity. How comfortable are you letting that just go in May of the next year? And what's sort of -- what's the contingency plan in that environment?

Well, we're not really thinking about that letting it go. We're just letting everyone know that if we do renew it, it's likely to be a significantly lower amount. And so we're going to negotiate with our bank and we're going to look at other alternatives and see what's out there. But the likelihood right now is that a future facility, if we have one at all, would be less than $30 million.

Okay, okay. A couple of more. With CTG's bankruptcy and you mentioned it reflected industry-wide pain in the moment, are there practical implications in terms of your competitive positioning relative to everyone else in seeing the challenges that others are facing?

Well, I'm not quite sure how to answer that. But I -- let me -- what I would say is our strategy has really been to continue in what has, in essence, brought us to where we are today as a leader in seismic instruments. I think we've demonstrated that by even in this situation, having pushed technology yet one more step further with some of these new products that we've made available.

All right. Okay.

You may not be seeing that in other quarters.

That's fair. A lot of these guys don't do nice call like you guys. So, it's harder to tell. I just didn't know at the grassroots level what you're seeing, the differentiation spread. Perhaps maybe just last one. Schlumberger talked about in their call about plans to double their mature reservoir management business. I know -- heard you guys talking about that sort of being one of the sweet spots for PRM. Is there -- has Schlumberger ever been a partner with you guys? Can you talk that? And do you expect to perhaps -- when they see it in terms of an increasing opportunity to help manage people mature sales fields also correlating to an increasing opportunity for PRM?

Well, we've had just -- we have worked with WesternGeco when -- so this was back in earlier days of PRM systems with BP, which they're now owned by Schlumberger. We'd be more than happy to work with them in that regard. And certainly, that would represent a reasonable cooperation. We don't have any discussions with them at this time on any particular elements that might be going forward.

Okay. But it is that sort of mature field that's increasingly and greater and greater rates of decline at sort of is the sweet spot of where PRM is most applicable, is that right?

Historically, that's absolutely right. There are more technicians that actually want to begin that sort of permanent reservoir monitoring activity much earlier in the field. But historically, it has been in the more mature fields, where they are really in need of that in more desperate ways.

Got it. Thank you guys.

[Operator Instructions] We'll go next to David Nierenberg with Nierenberg Investment Management.

Hey guys.

Hey David.

Hi David.

Thank you for keeping the show on the road and for maintaining a terrific balance sheet. Also thank you for sharing with us your expectations about the line of credit. I just wanted to supplement what you said about that by noting that in addition to banks, which provide lines of credit; there are other firms which also provide financing against accounts receivable and inventories. There may be non-bank banks, but they're also useful sources of credit for companies which need it. And I would also note that to the best of my knowledge, your real estate is completely unencumbered by debt, so that in addition to the $53.5 million of cash that you have, even if that line of credit with the bank were not renewed or were smaller, there are plenty of other useful and valid backup sources of credit availability for this company should you need them.

David, those are all excellent observations and all true.

Hang in there.

[Operator Instructions] And it appears we have no further questions at this time. I'll return the floor to you, Mr. Wheeler, for any additional or closing remarks.

All right. Well, thanks, Keith, for moderating our call. And we thank everyone who joined this call today. We look forward to speaking to you for our fourth quarter conference call later this year. Thanks and goodbye.

And this will conclude today's program. Thanks for your participation. You may now disconnect and have a great day.