Geospace Technologies Corporation (GEOS) Q2 2018 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies’ Second Quarter 2018 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He’s joined by Tom McEntire, the company’s Vice President and Chief Financial Officer. Today’s call is being recorded and will be made 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 Mr. Rick Wheeler. Sir, you may begin.

Thank you, Erica. Good morning, and welcome to Geospace Technologies’ conference call for the second quarter of fiscal year 2018. I am Rick Wheeler, the company’s President and Chief Executive Officer, and I’m joined by Tom McEntire, the company’s Vice President and Chief Financial Officer. We’ll start the call with my overview of the second quarter followed by Tom’s in-depth commentary on our financial performance. I’ll then offer some final remarks, after which, we will open the line for questions. As mentioned for everyone’s convenience, we will link a recording of this call in the Investor Relations section of our website at www.geospace.com. The information discussed this morning is time-sensitive and may not be accurate on the date one listens to the replay. Also, many of today’s statements can be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about our product markets, 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’re unable to predict or control. Related known and unknown risk, can lead to undesirable results or cause our performance to materially differ from what we say or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings. Yesterday, after the market close, we released our financial results for the second quarter of fiscal year 2018, which ended March 31, 2018. As reported, revenue of $19.2 million for the quarter reflects a notable sequential increase over the prior three months, but signaled a slight reduction from the $20.6 million generated in last year’s second quarter. Similarly, revenue of $33.9 million for the six months ended March 31, 2018, declined slightly from the $35.8 million reported for the same period a year ago. Despite lower revenue in both recent periods compared to last year, we successfully managed to generate a gross profit for the first time in three years. The gross profit was primarily driven by lower inventory obsolescence charges as well as other financial management and cost- reduction efforts that were implemented during these periods. Further evidence of our cost control efforts is exemplified by our lower operating expenses. Excluding bad debt reserves and recoveries, operating expenses compared to last year fell by 15% and 8%, respectively, for the three and six month periods ended March 31, 2018.Together, positive gross profits and lower operating expenses helped narrow the net losses for these periods over last year. Revenue generated during the second quarter from our traditional seismic products totaled $3.2 million. This is a decrease from last year’s second quarter, generally reflecting lower seismic industry demand in this period, for our sensors, connectors and marine products. In contrast, revenue from these products in the first six months of the fiscal year increased over last year, producing $7 million of revenue. Sales in the first quarter of specialty sensors and geophones from our rental fleet was a main driver of the six month year-over-year revenue increase. While fluctuations from one period to another in the sale of our traditional seismic products are typical, we anticipate an overall increase in demand for these products if seismic exploration activities increase. Revenue from our wireless seismic products for the three months and six months ended March 31, 2018, totaled $6 million and $9.7 million, respectively. These figures represent declines of 37% and 39% from the respective corresponding periods last year. It is important to note that the revenue generated during both prior year periods was associated with large OBX rental contracts underway at that time compared with smaller OBX rental contracts in the current year periods. Despite this decline, we believe demand for our OBX marine nodes will continue to increase in future periods based on the number and size of job tenders our customers are currently quoting. And in light of that, we recently entered into a contract with a new customer to rent 9,000 of our OBX nodes for a period of 180 days. We expect revenue from this rental contract to begin near the latter portion of our third fiscal quarter ending June 30, 2018. Our reservoir seismic products generated $2.1 million in the second fiscal quarter. This is almost three times the amount recorded in last year’s second fiscal quarter. Similarly, in the first six months of the current fiscal year, revenue from this segment more than doubled from the same period last year. The revenue increase in both periods is attributed to the sale of borehole seismic tools from our rental fleet, which were utilized in frac monitoring and near-borehole well and reservoir characterization. Revenue in the segment will continue to fluctuate and will not increase in any significant way unless and until we have been awarded a contract to deliver a permanent reservoir monitoring system. Discussions to positively provide such systems are underway with customers, but the decision cycles for these projects are typically long and are not expected to have a commercial impact in the near future. Collectively, our non-seismic products performed very well in the three month and six-month periods ended March 31, 2018. Total revenue from this business segment reached $7.8 million and $14.3 million over the stated time periods. The recent quarter’s revenue is the largest amount received from these products in the last five fiscal quarters while our imaging product revenue remained relatively flat compared to last year’s three and six-month periods, our industrial products experienced significant gains. For the most part, these gains resulted from greater demand for our water meter cables and connectors, and our contract manufacturing services. We believe our continued efforts to expand our presence and product offerings in these markets will continue to show benefit. Extending our efforts to leverage our core technologies within our non-segment – non-seismic markets, we are in early stages of new product development that could significantly expand our presence in the border and perimeter security market. We have long served this industry as a provider of reliable sensor products, but due to the adaptation of our advanced permanent reservoir monitoring systems, our borehole tools and cellular-based wireless data recorders, we expect to provide products, which are both innovative and highly scalable in this growing security industry. In today’s world of tightened security and risk management, we believe these products have great commercial opportunity. So at this point, I’ll turn the call over to Tom for some financial detail.

Thanks, Rick, and good morning, everyone. Before I begin, I’d 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 second quarter ended March 31, 2018, we reported revenue of $19.2 million compared to last year’s revenue of $20.6 million. Our net loss for the second quarter was $4.7 million or $0.36 per diluted share compared to last year’s net loss of $11.5 million or $0.88 per diluted share. For the six months ended March 31, 2018, we reported revenue of $33.9 million compared to $35.8 million last year. Our net loss for the six-month period was $14.2 million or $1.07 per diluted share, compared to last year’s net loss of $23.2 million or $1.77 per diluted share. A breakdown of our seismic product revenue is as follows. Our traditional product revenue for the second quarter was $3.2 million, a decrease of 12% compared to revenue of $3.6 million last year. This revenue decrease generally reflects lower seismic industry demand for our sensor products as well as our connector and marine products. Revenue for the six months was $7 million, an increase of 12%, compared to revenue of $6.2 million last year. The increase reflects strong demand for sales of our specialty sensors and geophones from our rental fleet during the first quarter. Our wireless product revenue for the second quarter was $6 million, a decrease of 37% compared to revenue of $9.6 million last year. Revenue for the six months was $9.7 million, a decrease of 39% compared to $15.9 million last year. These declines in revenue were the result of large rental contracts underway during the prior year periods. We expect wireless revenue from rental contracts to increase in the coming quarters, primarily due to a recently executed large rental contract expected to last for six months. Reservoir product revenue for the second quarter was $2.1 million, an increase of 192% compared to revenue of $706,000 last year. Revenue for the six months was $2.7 million, an increase of 20% compared to $1.2 million last year. The increase for both periods is attributable to sale of borehole tools from our rental fleet. But we reiterate this segment will continue to contribute insignificant levels of revenue until we are engaged in a contract for the delivery of a PRM system. Moving on to our non-seismic product segment, our industrial product revenue for the second quarter was $4.7 million, an increase of 43% compared to revenue of $3.3 million last year. Industrial product revenue for the six months was $8.4 million, an increase of 31% compared to revenue of $6.4 million last year. The increase for both periods was primarily attributable to higher demand for our water meter products and contract manufacturing services. Imaging product revenue for the second quarter was $3.1 million, a slight decrease of 2% compared to $3.2 million last year. Imaging product revenue for the six months was $5.9 million, a slight increase of 1% compared to $5.8 million last year. We believe these small changes in revenue were normal and do not reflect any particular trend in the demand for our imaging products. As Rick mentioned, excluding the impact of bad debt reserves and recoveries, our operating expenses for the second quarter and six months decreased by 15% and 8% respectively. These cost decreases reflect the results of our recent workforce reduction and lower stock-based compensation expenses. Cash investments into our property, plant and equipment were $495,000 through the end of the second quarter. We estimate fiscal year 2018 cash investments into our PP&E will be approximately $3 million. Cash investments into our rental fleet were $1.6 million through the second quarter. And we expect total cash additions to be approximately $4 million by the end of the year. Our non-cash transfers of inventory to our rental fleet were $8 million through the first six months. And we expect these transfers to increase to approximately $20 million or more by the end of the fiscal year. These increases to our rental fleet are a result of the replenishment of GSX rental equipments sold to customers and increased demand for the rental of our OBX products. At the end of the second quarter, our balance sheet remained solid with $41 million of cash and short-term investments. We had no long-term debt outstanding and the borrowings under our credit facility were almost $28 million, the borrowing availability. In addition, we reiterate that our various real estate holdings in Houston and around the world are owned free and clear without any leverage. That concludes my prepared remarks, and I’ll turn it back over to Rick.

Thanks, Tom. During the first six months of our 2018 fiscal year, we’d seen oil prices increase to their highest level in more than three years, albeit considerably less than record highs experienced in 2014. Although crude storage figures have fluctuated, efforts by OPEC and other aligned nations to reduce oversupply through managed production are having a stabilizing effect. Many oil companies are now achieving positive cash flows largely through tightly constrained spending in conjunction with higher oil prices. Nevertheless, there remains a hesitancy to increase spending, given the history of how costs have spiraled upwards in the past. By far, exploration for new fields has taken the brunt of this spending resistance, but we are encouraged by an apparent loosening in this triangle hold on exploration funding. This is important in light of increasing analysis, warning of future supply storages, if the prior trend were to otherwise continue. As Tom said, our balance sheet remains strong with no debt and almost $41 million of cash, cash equivalents and short-term investments. In addition, our available credit facility places our total liquidity at more than $68 million. As the seismic market takes on recovery, we believe our support and dedication to our customers’ needs for both new and existing technological products favors us. And in full complement, our financial strength demonstrates a level of stability to our customers that significantly de-risks their choice in using our technology. Together with expanding our technology footprint and our non-seismic business segment, we believe we are very well positioned for the future. This concludes our prepared remarks. And I’ll now turn the call back over to Erica for questions.

Thank you. [Operator Instructions] And we’ll go first to line of Bill Dezellem from Tieton Capital.

Thank you. A group of questions to start with the OBX contract. Would you discuss the size of this contract on a – from a financial perspective versus the 5,000-node contract that you had before?

Yeah, Bill. I’d like to, the details of these contracts are confidential and so in terms of the revenue generation and pricing and whatnot, that’s something that we are not at liberty to discuss.

To try to make that question somewhat answerable, would you be able to scale it relative to the other one? I mean, on the surface, I would say 9,000 nodes versus 5,000 nodes is 80% greater, but I know there could be nuances that I don’t appreciate.

I don’t really think there’s any nuances. The pricing is standard; our pricing has always been the longer the contract goes the better right that we’re willing to give. And so link the time has a lot to do with it, and the number of nodes have a lot to do with it. But I’m not at liberty to really give you more details on that.

Okay. That is helpful, Tom. Because if I recall correctly, the 5,000-node contract that you had was also for the six-month window. Is that correct?

I think it actually went to the long…

Yeah. I think it had a minimum term of that length, Bill, and then it went longer than that.

And so in the case where you have a contract, say that it is originally contracted for six months and then it goes longer, but you do give preferential pricing for longer contracts. Does that imply that, that first 5,000-node contract would have had pricing that was beneficial, assuming something greater than six months, if your original contract rate was for six months, did that day rate, if I may call it, that would have continued?

Well, there are certainly discounts that we offer our customers for long-term rentals as Tom mentioned and if they extend those rentals, I mean, we’re going to work with them long – pricing on that. So it’s not really just a concrete situation. There is a lot of fluidity in this that works for us and the customers.

That’s helpful. Thank you. And then may we shift to PRM business? You did reference in the release that you do have discussions ongoing. Would you please characterize what you are experiencing on that front relative to, say, conversations over the last couple of years, please?

Well, I mean, they’re in their early stages of these discussions. So they’re not near something that’s going to come to fruition anytime soon. I mean, there’s been a lull of significance if you examine the history of the PRM systems globally over the last five years or so. So it’s hard to really predict how those conversations will progress, and when or even if they’ll become more accelerated in those discussions. We’re just happy to be having the discussions. It does show that there is interest and an understanding by those who we’re talking to of the utility of that product for helping them recover more oil. So the fact that they’re examining that in general and recognize the technologies benefit is, at this point, what we’re focusing on.

Great. Thank you. And then if we may shift to the border and perimeter security market opportunity that you referenced. Go ahead and I’ll let – lets you start, and I may have some specific questions. But would you discuss that in as much detail as you can, please?

For sure, our sensors have been used in that industry for quite a long time, but there is certainly a lot more focus in today’s world with respect to the overall general security in managing those sorts of things that we believe we can actually provide products, that there really aren’t much in the way of equivalent out there that have been presented to that market so far. We have a significant scope of opportunity with respect to our PRM systems and being able to make such large systems functional. So there’s plenty of opportunity for scalability of both the small arrangements, which entail the sensor type markets, where we’ve been servicing those, but now that we’re committed to integrating some of the other systemic components around those, we think that the opportunities are going to really be something that can be beneficial to us.

From a practical perspective, are you talking about the U.S.-Mexican border and being able to detect the vibration from footsteps, is that what this bottom line will boil down to?

Well, it’s a lot more complicated than that, but there are significant opportunities there. We think that we can provide a technology that’s useful in that regard.

I don’t know if there’s enough time here to discuss it. But if you could share kind of how it’s more detailed or complicated than detecting footsteps, would be happy to listen?

Well, sure. I mean there is vehicle traffic, there is tunneling, there’s all kinds of aspects of perimeter breaching that occurs in all places. There’s also commercial opportunities, where you’re trying to protect resources and make sure that you got those things under control. Homeland Security has a lot of agenda items in order to keep our society safe. So to that extent, there’s – it’s not just footsteps on the ground.

And have you had conversations with the prospective buyers of such equipment and receive some early indication of they are thinking about this?

We have had conversations. And we’re also in conversation with various consultants within the industry. From those discussions, we firmly believe that we have some products that are currently under development that can be very useful and very opportunistic. So yes, we have.

And the timeline that you might see a first order?

The cycle time on these sorts of sales are not short either, just like the PRM systems in some sense. These are well thought-out systems that you go through quite a bit of betting. So the timing is not going to be immediate. But it’s worth our shareholders understanding that we’re committed to this endeavor and that we think we have a technology that’s going to be able to penetrate that market with benefit.

Thank you both for the time.

Thank you, Bill.

Thank you. [Operator Instructions] Apologize, we do have one question, we’ll go to David Nierenberg from Nierenberg. Please go ahead.

Good morning.

Good morning, David.

Good morning, David.

Thanks for a quarter of impressive sequential improvement. A couple of questions about cash. The first is just want to make sure I’m putting my numbers together right. We say that our loss from operations was about $5.2 million, but when I add back to that various non-cash items like rental equipment depreciation, PP&E deprecation, stock-based compensation expense, inventory obsolescence and add that back into the operating profit line, I wind up with you guys making a profit from – a cash profit, if I can put it that way, from operations of between $400,000 and $500,000. Am I reading this correct?

David, I don’t have your worksheet in front of me, but it sounds correct, yeah.

That’s a nice place to be, reflecting the combination of improving revenue and cost reduction. And I think what’s also notable is that four years into a prolonged, even historic downturn, you guys are making discretionary investments in growing accounts receivable, growing equipment inventory and rental inventory and making the R&D investments in the perimeter security products. So when guys as conservative as you are willing to make those kinds of investments, I would say, those actions speak louder than words about the confidence which you have in the future of the company.

We appreciate that David. Certainly, we are optimistic with perspective what we see in the future and we’re going to be continuing our conservative management.

Well, we’re happy with what you’re doing. We appreciate your work. Keep it up.

Thank you, David.

Thank you. I’m seeing no further questions; I would like to turn the floor back over to Mr. Wheeler for any additional or closing remarks.

All right. Well, thank you, Erica. This concludes our call and I want to thank everyone who joined us today. We look forward to speaking with you for our third quarter conference call some time in August. Thanks, and good bye.

We would like to thank everybody for joining today’s conference. This does conclude today’s conference. Please disconnect your lines at this time and have a wonderful day.