Geospace Technologies Corporation (GEOS) Q3 2018 Earnings Report, Transcript and Summary

Good day and welcome to the Geospace Technologies Third Quarter 2018 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 Web-site 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.

Thank you, Keith. Good morning and welcome to Geospace Technologies conference call for the third quarter of fiscal year 2018. I am Rick Wheeler, the Company's President and Chief Executive Officer, and I am joined by Tom McEntire, the Company's Vice President and Chief Financial Officer. We will start the call with my overview of the third quarter, followed by Tom's in-depth commentary of our financial performance. I'll then offer some final remarks, after which we will open the line for questions. Many of today's statements can be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995, and 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 are unable to predict or control. Related known and unknown risks 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 Form 10-Q filings. For everyone's convenience, as mentioned, we will link a recording of this call on the Investor Relations page of our geospace.com Web-site, keeping in mind that the information discussed this morning is time-sensitive and may not be accurate on the date one listens to the replay. Yesterday, after the market closed, we released our financial results for the third quarter of fiscal year 2018, which ended June 30, 2018. As noted, the reported $21.3 million figure for quarterly revenues set a high mark so far in fiscal year 2019 and represented the second time this year that quarterly revenue increased sequentially. Moreover, the current third quarter result reflected a 50% increase in revenue in comparison with last year's third quarter. Looking back over the nine-month period ended June 30 of 2018, our total revenue increased 10% over last year's comparable period. The stated revenue growth has also resulted in our second consecutive quarter of generating a positive gross profit. This brings our year-to-date gross profit for the first nine months of the fiscal year to $5.7 million. Lower inventory obsolescence charges in conjunction with our overall cost reduction efforts helped drive these positive improvements in our gross profits. Unfortunately, as also reported, a significant portion of our third quarter and year-to-date financial results were negatively impacted by a $2.7 million bad debt charge recorded in the third quarter. Virtually all of this charge is associated with the recently filed bankruptcy of one of our customers. However, excluding the impact of these bad debt charges, we point out that our operating expenses in the third quarter and nine months of this fiscal year declined about 18% and 12% respectively. Our traditional seismic products generated revenue of $2.6 million in the third quarter, a reduction of 28% from last year. For the nine-month period that ended June 30, revenue totaled $9.6 million, reflecting a much smaller decline of less than 3% from the similar nine-month period last year. Declining revenue in both periods can largely be attributed to lower demand for our specialty sensors and traditional products used in the marine seismic industry. Third quarter revenue from our wireless seismic products totaled $7.9 million, almost triple the amount reported for the same quarter last year. This revenue increase was almost entirely driven by an increase in OBX rentals. Despite this quarterly increase, wireless product revenue for the first nine months of the current fiscal year declined by almost 6% when compared to last year's equivalent nine-month period. In examining both prior-year comparisons, the variation in current year results over last year reflect increasing rental income from OBX rental contracts, somewhat offset by lower wireless product sales. Our OBX nodal marine system continues to gain expanded use in the ocean bottom seismic market, and based on existing rental contracts and quoting activity, we expect this to continue. Revenue in the third quarter from our reservoir seismic products saw an increase of 83% in comparison to last year's third quarter. And for the recent nine months ended June 30, revenue from these products more than doubled compared to last year. In both periods, higher service revenues along with stronger sales of borehole systems, including downhole tools from our rental fleet, contributed to the increases. Our customers use these products to perform frac monitoring and borehole reservoir characterization services for oil and gas companies. An increase in these activities in recent periods has driven higher borehole product sales. However, we do not expect revenue in this segment to reach the levels seen in years past unless we receive a contract to manufacture and deliver a permanent reservoir monitoring or PRM system. Based on our ongoing industry discussions, an opportunity to be awarded such a contract is unlikely to occur in the next six months to a year. Our non-seismic products generated revenue totaling $8.8 million in the third quarter. This is the highest level of revenue produced by this segment in the Company's history, and represents an increase of over 30% compared to last year's third quarter. For the first nine months of the fiscal year, revenue from these products increased by almost 22% compared to a year ago, reaching $23.1 million. Increasing demand from our water meter products was particularly strong in both periods with modest revenue gains also coming from our imaging products. We are encouraged by the consecutive quarterly growth in our revenues, where recent contributions have resulted from increased commerce in both our seismic and non-seismic business segments. Despite these quarterly improvements, the modest decline in year-to-date revenue from our traditional and wireless seismic product lines is an indicator that there is still a lot of ground yet to be gained in the recovery of the oil and gas seismic industry. Revenue from these two product lines in particular is expected to remain low until depletion of the existing reserves prompts additional focus on seismic exploration activities by oil and gas companies. Despite this concern, we continue to be encouraged by our overall seismic revenue growth that such an industry recovery is underway. At this point, I'll turn the call over to Tom for more financial details.

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 third quarter ended June 30, 2018, we reported revenue of $21.3 million compared to last year's revenue of $14.2 million. Our net loss for the quarter was $4.8 million or $0.36 per diluted share compared to last year's net loss of $14.4 million or $1.09 per diluted share. For the nine months ended June 30, 2018, we reported revenue of $55.2 million compared to revenue of $50 million last year. Our net loss for the nine-month period was $19 million or $1.43 per diluted share, compared to last year's net loss of $37.6 million or $2.86 per diluted share. A breakdown of our seismic product revenue is as follows. Our traditional product revenue for the third quarter was $2.6 million, a decrease of 28% compared to revenue of $3.6 million last year. Revenue for the nine months was $9.6 million, a decrease of 3% compared to revenue of $9.8 million last year. The decline in both periods reflects lower demand for our specialty sensor and marine products. Our wireless product revenue for the third quarter was $7.9 million, an increase of 294%, compared to revenue of only $2.7 million last year. Most of this increase was driven by rental revenues from our OBX nodes. Revenue for the nine months was $17.6 million, a decrease of 6% compared to $18.6 million last year. The slight decline in revenue in the current year-to-date period primarily results from lower sales of our wireless products. We expect wireless rental revenue to continue to be strong into our first fiscal quarter of next year primarily due to ongoing large rental contract which began late in our third quarter. Reservoir product revenue for the third quarter was $1.9 million, an increase of 83% compared to revenue of $1 million last year. Revenue for the nine months was $4.6 million, an increase of 103% compared to $2.2 million last year. The increase in both periods is attributable to stronger sales of our borehole systems including tools from our rental fleet. We reiterate that this segment will continue to contribute insignificant levels of revenue until we are engaged in a contract to deliver a PRM system. Moving on to our Non-Seismic product segment, our industrial product revenue for the third quarter was $5.7 million, an increase of 47% compared to revenue of $3.9 million last year. Industrial product revenue for the nine months was $14.1 million, an increase of 37%, compared to revenue of $10.3 million last year. These increases are attributable to higher demand for our water meter products as well as higher revenue contributions from our contract manufacturing and industrial sensor products. Imaging product revenue for the third quarter was $3.1 million, an increase of 8% compared to revenue of $2.9 million last year. Imaging product revenue for the nine months was $9 million, an increase of 4% compared to $8.7 million last year. These increases were caused by higher demand for our thermal film products. As Rick just indicated, one of our customers filed for bankruptcy protection late in the third quarter. Due to the uncertainty surrounding the outcome of this situation, we recorded a $2.6 million bad debt charge specifically for this matter, representing the vast majority of our third quarter bad debt expense. Excluding the impact of all bad debt charges and recoveries, operating expenses for the third quarter and nine months decreased by 18% and 12% respectively compared to the prior year. These declines in our operating expenses reflect our recent workforce reduction, the lower stock-based compensation expenses, and reduced research and development project costs. Cash investments into our property, plant and equipment were $1 million through the end of the third quarter. We estimate fiscal year 2018 cash investments in our PP&E will probably be about $2 million. Cash investments into our rental equipment were $2.5 million through the third quarter, and we expect total cash additions to be approximately $4 million by the end of the fiscal year. Most of this cash was spent converting our OBX inventory components into finished modules, which were then transferred into our rental fleet. In this regard, the value of our year-to-date non-cash inventory transfers into our rental fleet increased to approximately $24 million. These additions to our rental fleet primarily reflect increased rental demand for our OBX products, and to a lesser extent the replenishment of GSX land-based rental equipment sold to our customers last year. At the end of the third quarter, our balance sheet remained solid with $40 million of cash and short-term investments. We had no long-term debt outstanding and the borrowing availability under our credit agreement was approximately $22 million. 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 the call back over to Rick.

Thanks Tom. As we announced earlier this week, our acquisition of Quantum Technology Sciences represented a strategic effort to further expand Geospace's core seismic engineering and manufacturing competencies into the border critical infrastructure and perimeter security markets. We believe Quantum's extremely unique seismic analytic software technology and existing products are rapidly gaining recognition in these important industries. In future course, our jointly planned efforts include the blending of our technologies to incorporate Quantum's innovative analytic solutions with our highly ruggedized large channel count PRM data acquisition system designs. As we accomplish this, we expect to provide new products along the way of incomparable functionality for markets focused on homeland security and the protection of borders and critical infrastructure. As Tom stated, our balance sheet at the end of June remained debt free and included approximately $40 million of cash and short-term securities as well as almost $22 million of borrowings available under our credit facility. After the $4.4 million cash down-payment related to the acquisition of Quantum, we believe our remaining liquidity and debt-free status continue to reflect an extremely strong financial position. We also believe that this financial strength in conjunction with a calculated exploitation of broader markets for our seismic technologies provides a significant opportunity for the Company's growth and diversification in the coming years. This concludes our prepared remarks and I'll turn the call back over to Keith for questions.

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

Thank you. I had a couple of questions. First of all, relative to the reservoir monitoring business, it seems as though your enthusiasm has lessened if you think it's unlikely that you're going to be getting an award over the next 6 to 12 months. Is that a correct read of at least the current conditions of that market, and if so, can you talk about what customer discussions have led to that lower level of enthusiasm?

The customer discussions that we had ongoing are similar to others that we have done in the past, Bill. Those are all very long time cycles with respect to anything ever coming to fruition. So, with that in mind and our prior experience, it's not really a lack of enthusiasm. I think it's just an element of reality with respect to the oil companies as they prepare their budgeting going forward. And just in an objective manner, we don't expect anything to actually come about within that period that we mentioned.

So you're not finding then that the higher oil prices that we have now is leading to the upcoming budgetary cycle, building a little bit of enthusiasm for an order in there, from kind of what you are hearing from your customers?

No, we do think that the oil prices is having an impact on more forward-looking aspects in that regard, but the time cycle on these is just such that that somewhat makes them unlikely within the six-month or 12 month period in terms of an actual award.

Rick, that's really helpful. Thank you. And then relative to the industrial business, talk a little bit about the long-term sustainability and/or the ability to grow that business. If I remember right, it's water meter related. Kind of how are you viewing that and maybe even what are you doing there, is it cables or is it sensors, would you talk us through that please?

Yes, the water meter cables and connectors is the larger part of that growth, and as I just said, it's primarily unique cables and connectors that are used for the automated water meters in municipalities that you see going in a lot these days. The designs we have there are very unique and patented and very robust with respect to being waterproofed and suitable for that application, and as time goes on, they become more and more of a standardized component in that industry for use. There are some other products that we are trying to gain some inertia on out in that market, that we'll basically try to leverage those relationships that are being formed out there. But we also have other components within our Non-Seismic segment that are growing. As you know, we do some contract manufacturing to try to keep some of our work centers busy and some of our overhead absorbed, and those efforts as well have increased in that same time period.

Great. Thank you.

We can go next to Damon Benedict with Nierenberg. Please go ahead. Your line is open.

So, if I look at your operating loss excluding the bad debt charge, kind of still roughly $2.5 million, and I think your quarterly D&A rate is something like 3.5. So, could you just please confirm for us that EBITDA this quarter excluding bad debt would have been about positive $1 million?

Actually the calculation that I did on the back of a napkin was a little higher than that. But yes, it certainly is positive.

Okay, great. Thank you. And you mentioned sort of the uncertain outcome on the charge you took. Can you speak qualitatively to any potential chance of recovery there?

Damon, this is kind of a tricky situation because this bankruptcy filing happened very late in the third quarter, and we're monitoring it with our attorneys, that I think there are some complexities that could enter into, whether there is an ultimate payout or not. And so, we're just trying to take the conservative road and it won't be worse than what we have accrued for.

Okay, great. Separately on Quantum, congrats on this deal, it seems like a fairly low risk proposition given your $4 million upfront payment, but sounds like it could have some great upside if things go well. So, I'd love seeing that and wanted to hear you speak a little more in simple terms just about the use case for Quantum's algorithms and how it helps its customers use their employees more efficiently and that sort of thing?

Their algorithms are very unique in the way that they detect, locate and classify the types of activities that are being seismically detected. That's a significant capability, and when you couple that with what we can do with respect to designing these large-scale data acquisition systems and you apply that technology, it's just a remarkable capability that it could provide for monitoring these sorts of things. So yes, we are very excited about this. We think that it's going to be a significant opportunity for revenues in the future and products that quite honestly are very unique and don't exist right now.

So, existing solutions in the market, do they not do as good a job identifying what is causing sensors to be tripped and Quantum does a better job identifying that?

That's exactly right. That's exactly right. And most of these systems in the times past, and our sensors have been used in that market for quite a long time in respect to some of those more simplistic approaches and systems, but they are so resource-intensive that at a point it comes time for humans to sort of analyze and examine what's going on, and we aim to correct that.

Great. It seems like a sensible acquisition, so congrats on that. Thank you.

Gentlemen, it appears we have no further questions. I'll return the floor to you, Mr. Wheeler, for any additional comments.

All right, thank you, Keith, and thanks to all of you who decided to join our call today. We look forward to speaking with you for our fourth quarter conference call in November. So, thanks a lot and goodbye.

And this will conclude today's conference call. We thank you for your appreciation. You may disconnect at any time. Have a great weekend.