Geospace Technologies Corporation (GEOS) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies first quarter 2019 earnings conference call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Mr. 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 place in a listen-only mode and the floor will be open for your question following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Mr. Rick Wheeler, President and Chief Executive Officer. Sir, you may begin.

Thanks Tony. Good morning and welcome to Geospace Technologies' conference call for the first quarter of our 2019 fiscal year. Again, 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 this call with my overview of the first quarter and Tom will then provide an in-depth commentary of our financial performance. I will then offer a few final remarks and after that we open the line for questions. Some of today's statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about 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 we cannot predict or control. Both known and unknown risks can lead to undesirable results or differences in performance from what we say or imply. These risks and uncertainties include those discussed in our SEC forms 10-K and 10-Q filings. As a matter of convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. However, the information discussed this morning is time-sensitive and may not be accurate on the day one listens to the replay. Yesterday, after the market closed, we released our financial results for first quarter of fiscal year 2019. For the three months ended December 31, 2018, we were pleased to see revenue reach $17.9 million, thus reflecting an increase of 22% over the same period last year. This represents our best first quarter revenue performance in the past three fiscal years. The higher revenue in conjunction with cost reduction efforts implemented last year led to a 37% reduction in our operating loss compared to last year's first quarter. Revenue from our oil and gas markets segment totaled $11 million in the first quarter, an increase of 37% from the corresponding year ago period. This offers some encouragement that the deep depression in oil and gas seismic services activities experienced in the last several years may be emerging from its deepest throes. Notwithstanding this improvement, not all product categories in our oil and gas market segment benefited equally. By example, revenue generated in the first quarter from our traditional seismic products saw a reduction of almost 27% compared to the same period last year. This indicates that during the period, most seismic contractors had adequate supplies of these products to carry out their existing seismic programs. In total contrast, revenue from our wireless products more than doubled in the same year-over-year three-month comparison. The large increases the result of high rental demand for our cableless OBX marine nodal systems. Demand for these systems have outstripped our available capacity and is ever-growing. And for this reason, we are increasing our capital investments in our OBX rental fleet to take optimum advantage of the presented market opportunities. In the first fiscal quarter, our reservoir seismic products contributed $937,000 in revenue, derived mainly from our borehole products. This is an increase of 52% over last year. We believe permanent reservoir monitoring or PRM systems have the potential to generate much larger revenues from this product category and discussions with oil and gas companies interested in the installation of such systems have become more active in recent months. Furthermore, we believe our acquisition of the OptoSeis fiber optic sensing technology greatly extends our product offerings and opportunities to serve this market. Presently, we believe an open tender for a PRM system could come out in our 2019 fiscal year. However, we would not expect to record revenue, even if awarded such a contract until subsequent fiscal years. Revenue from our adjacent market segment totaled $6.6 million, setting a new record of first quarter performance for these products. Although the industrial products portion of this segment experienced a slight decline in seasonal demand from the year before, we continue to believe that overall demand for these products is expanding. Our emerging market segment contributed $88,000 in the three-month period ended December 31, 2018. We do not expect this new segment to make significant revenue contributions in the near term, but we are hard at work in the development and progression of these products in the expectation of future revenues. At this point, I will now turn the call over to Tom for more financial detail.

Thank you 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 our call this morning. In yesterday's press release for our first quarter ended December 31, 2018, we reported revenue of $17.9 million compared to last year's revenue of $14.6 million. Our net loss for the quarter was $5.9 million or $0.44 per diluted share compared to last year's net loss of $9.5 million dollars or $0.72 per diluted share. A breakdown of our oil and gas product revenue is as follows. Our traditional product revenue for the first quarter was $2.8 million, a decrease of 27% compared to revenue of $3.8 million last year. This decrease primarily reflects lower demand for our specialty sensor products. Our GSX and OBX wireless product revenue for the quarter was $7.3 million, an increase of 101% compared to revenue of $3.6 million last year. The increase in revenue primarily represents OBX rental revenue resulted from large contracts executed in fiscal year 2018. This rental revenue was partially offset by decline in sales of our land wireless products. Our reservoir product revenue for the first quarter was $937,000, an increase of 52% compared to revenue of $618,000 last year. This increase in revenue resulted from higher sales of our borehole products and was partially offset by lower repair and service revenue. Moving on to our adjacent markets product segment. Our industrial product revenue for the first quarter was $3.6 million, a decrease of 3% compared to revenue of $3.7 million last year. Decline in revenue was primarily attributable to lower demand for our water meter products and was partially offset by higher revenue contributions from our contract manufacturing services. Imaging product revenue for the first quarter was $3.1 million, an increase of 11% compared to $2.8 million last year. This revenue increase was primarily due to higher demand for our equipment and film products. Our gross profit for the first quarter was $3.1 million. This compares to a gross loss of $1 million in last year's first quarter. The improvement in gross profit resulted from an increase in our rental revenue and a related increase in factory utilization from higher production of OBX stations. Our first quarter operating expenses increased by $516,000 or 6% compared to last year's first quarter. The increase resulted from incremental operating expenses associated with our recent acquisitions of the Quantum and OptoSeis businesses including the intangible asset amortization of $362,000, legal fees of $249,000 and $1 million of personnel cost these acquired businesses. These increases were partially offset by $453,000 decrease in bad debt expense, a $335,000 decrease in severance expense and a $183,000 decrease in stock-based compensation expense. Our first quarter cash investments in our rental equipment and property plant and equipment were $10.2 million and $717,000 respectively. Primarily as a result of the significant demand for our Marine OBX rental equipment, we believe fiscal year 2019 cash investments into our rental fleet could be $30 million or more. We estimate total fiscal year 2019 cash investments in our property plant and equipment will be approximately $3 million. As a result of these cash investments, we expect our consolidated cash balances to decline significantly throughout fiscal year 2019. Our balance sheet at the end of the first quarter reflected $27 million of cash and short-term investments. We had no long-term debt outstanding and the available borrowings under our credit agreement were $21 million. In addition, we own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. That concludes my prepared remarks. I will turn the call back over to Rick.

Thank you Tom. The first quarter has provided a relatively good introduction to the 2019 fiscal year, marking it a fourth straight quarter of positive gross profits. Provided that oil and gas companies continue getting back to the business of exploring for new reserves and managing existing reserves through seismic imaging, promises of an improved climate in 2019 for the seismic industry will take further hold. For Geospace, these market circumstances are driving increased demand for our wireless OBX products and we are extending our ability to meet that demand through additional investment in these products. In conjunction with leveraging the recognized improvements in our oil and gas market segment, we believe it remains critical to continue our diversification efforts in our adjacent and emerging markets. As our 2019 fiscal year unfolds, we will continue our tandem focus on these multiple paths to success. This concludes our prepared remarks and I will now turn the call back over to Tony for questions.

[Operator Instructions]. Our first question comes from Bill Dezellem with Tieton Capital. Please go ahead. Your line is open.

Thank you. That's Tieton Capital. And I would like to actually talk a little bit about the OBX, if you would please. First of all, would you discuss the type of water locations that OBX is resonating with your customers? And what geographies around the world that is being used most? If there is any area that's seen a higher level of activity?

Sure. I can tell you that the majority of utilization is for our, what we call, the shallow water OBX, which is capable of going down to about 750 meter of depth in water. There are some areas where they are using it that are very near that. And so there is a transition that occurs on occasion to needing our deep water unit which will go actually over 3,000 meters in depth. But the primary utilization is of the 750 meter units. In reality, the utilization is across the globe. There aren't any specific areas. It's being used in the North Sea. It's being used near Asia. So it's not necessarily a prevalence of one area or another. So geography isn't really entering into it very much.

And Rick, following up on that water depth, do most of the shoots tend to be in the, I am going to call it deeper water range of that shallow water OBX? So as opposed to it being in under hundred 20 meters of water, you really are in water that's rather deep?

The majority are not near that transition depth of 750 meters, but they are typically deeper that 10 or 20 meters. Go ahead.

I am sorry. I interrupted.

No, I was just going to say that the prevalent use is in shallower waters, but not real shallow waters. Although they are used there in that circumstance.

So the unit is being used in more open water rather than swamp areas?

For the most part, I think so, yes. There is [indiscernible] in those areas, but if you just want to statistically look at coverage areas, I would say that's true.

That's helpful. Thank you. And what interest are you hearing from your customers buying the OBX units as opposed to renting?

Well, certainly, that conversation is always had but in the minds of the contractors it's driven by the level of utilization they would have for that equipment. Clearly, with these increased demands, it goes without saying that those utilization numbers are going up. Our entire fleet in essence is being utilized. So it's much more likely that these conversations will get more serious about a purchase of these products. But we will just have to wait and see.

Thank you. And then lastly, the inventory obsolescence jumped versus the September quarter. That surprised us, given that the business seems to be improving. Can you talk about what seems to be opposing dynamics there, please?

Yes. Bill, this is Tom. Not any specific inventory item, per se, 8 but just general reserve that we felt was necessary based on the overall aging of our inventory. We have some inventory that's still old and continues to age and we felt like we need more reserves. So we put them there. So it's not going to necessarily trend down in a smooth line. There is one of the some blips here and there. But we hope that this is the higher of the blips.

Thanks Tom. And so that sounds like that was one of the more subjective obsolescence numbers this quarter rather than the more formulaic that you have often had?

Well, there is always a lot of subjectivity into it. Yes, we have a formula for calculating it, but there also has to be a lot of inputs into what the formula spits out. So it's always a lot of subjectivity.

Thank you Tom.

[Operator Instructions]. And we will take our next question from Robert Maltbie with Singular Research. Please go ahead. Your line is open.

Morning, Tom and Rick. I arrived a few minutes late, so apologies if you covered these already. A couple of questions. Regarding backlogs, did you speak to how they were shaping up? And also I was trying to understand your non-core seismic business versus or including adjacent market segment and it was quite a good quarter, product revenue wise. Could you speak to year-over-year progress in the adjacent markets segments?

Sure. From a backlog point of view, in our core seismic oil and gas seismic markets, where we are seeing the pressure for backlog is the OBX system. That's our marine nodal systems. At present, our entire fleet is, in essence, spoken for and out for rent and we are in progress of extending our capital investments in those so that we can take further advantage of those markets. Regarding our adjacent markets, you are exactly right. I mean it was a good quarter for those. We have seen a steady improvement and increase in those markets. What those markets really represent is our manufacturing and technologies that we developed primarily in our oil and gas seismic products that we have been able to take into other industries where they solve similar problems in alternate industries. A large portion of that has to do with smart water meters that are being installed in a lot of municipalities and it is a nice tidy connector that is waterproof that's easily field deployed for those sorts of units and that market has seen an ongoing increased growth. Now, in this quarter and there is a seasonality to some of those particular products. We did see a dip. But overall, we still believe that there is an increasing overall demand for those products.

Thank you.

Thank you. Next, we will move to Damon Benedict with D3. Please go ahead. Your line is open.

Hi guys. Congrats on the nicely improved results.

Hi Damon. Thank you.

Question about the OBX rentals. Can you remind us what the cash on cash return would be from renting those out?

Well, as we mentioned earlier in an earlier announcement last year, two of those contracts are expected to generate over $20 million in revenue, just on those two alone. Now we had another contract that we had entered into for 9,000 of those units actually the quarter before, I believe. And those are currently contributing to existing revenues. Going forward, those other two contracts and yet some others that are in negotiations that we are likely to land are going to add to those numbers.

And can you give us any sense for what sort of improvement you might see in operating cash flow? I mean you are positive this quarter before CapEx. I am imagining, that would only get better as you get some of the profit contribution from these new $30 million investment hitting the field. So it would be nice to get some sort of rough sense for what that could do?

Yes. Damon, this is Tom. And it stands to reason that as the rental revenue increases, which we expect it to in the coming quarters, that that operating cash flow will also continue to increase.

Okay. Great. And then on the GSX side, a little bit slower there still. To see recovery there, is it really more about activity picking up or is there a substantial size of unutilized capacity you have already sold sitting out there that would need to be utilized first before you would see your revenues increase there?

I think you need to see overall activity pickup there. I mean there may be some unutilized assets that some of the contractors have but for the most part, I think they are pretty much using what they have. You did see that as our traditional products, which really comprises mostly sensors, at least with respect to the landside as you are discussing, there wasn't a lot going on in that particular segment. And that does indicate that they pretty much got what they need to take care of the jobs that they have. On the wireless side with the GSX, we know they are using that equipment and they are using it effectively. It's always going to be operationally more efficient than the old cabled systems, but you are going to have to see some increased activity before you see that market pickup from our point of view.

Okay. And on the potential PRM tender, really nice to hear you could see some activity there. Would this be, from what you know, an existing customer? Someone that's been in this market before? Or someone new?

This would definitely be a customer that has been in the market before and there is not a long list of those. So you give you can begin guessing who they might be.

Okay. All right. Thanks very much. Congrats again.

All right. Thanks Damon.

Thank you. Our next question comes from Chris Sansone with Sansone Advisors. Please go ahead. Your line is open.

Hi guys. Good morning. Good quarter.

Hi Chris.

Good morning.

Regarding the 9,000 stations that you delivered for rental last quarter, can you about what's the duration of that business? How long does that rental contract last for?

It's actually 5,000 that we just delivered this last quarter and it's a six-month minimum rental.

Okay. Thank you. And then you talked about your CapEx budget for this year. I know last year you discussed $30 million budget. Are you seeing more demand now where you think that that budget actually needs to be more than the $30 million you had originally mentioned in that press release?

Right now, we feel like the $30 million is ample. But a lot can happen between now and the end of the year. So that could change. It could go up. But we feel like $30 million is ample for what we know now.

Okay. And then in your 10-Q, you report how many stations you have in your rental inventory? Could you give us a sense for as we exit FY 2019, ballpark, how many stations you think after the $30 million spend and then what you have now, how many stations you will have in your rental fleet?

It's going to be somewhere between 20,000 to 30,000 stations in the rental fleet.

So it's 20,000 to 30,000 additional from when you exited --

I am sorry. It will be 20,000 to 30,000 total. That's a big range. But I don't want to try to get too narrow on it right now.

Okay. And is that $30 million CapEx, is that entirely geared towards the OBX product?

Not all of it, but a vast majority of it is.

Okay. And then my last question is regarding the inventory obsolescence write-offs. If the land based business were to come back, are those products at this point permanently impaired or can you reintegrate those products and use whatever work in process or whatever else is that you are currently impairing?

Yes. To the extent that we have reserves against our land based products and in fact, we do, they are not impaired from a functional standpoint. They can still be used. They are still workable and some of the components can be integrated elsewhere. But it's not like to o have a shelf life.

Okay. Great guys. Good quarter. Thank you very much.

Thanks.

Thank you. And it appears we have now further questions at this time. I will turn the call back over to you, Mr. Wheeler, for any additional or closing remarks.

Thanks Tony and thanks to everyone who joined our call today. We look forward to speaking to you in our conference call for the second quarter in May. Thanks and goodbye.

Thank you. This does conclude today's Geospace Technologies first quarter 2019 earnings conference call. You may now disconnect your lines at this time and have a wonderful day.