Geospace Technologies Corporation (GEOS) Q2 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Geospace Technologies Second Quarter 2019 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. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Thanks, Keith. Good morning, and welcome to Geospace Technologies conference call for the second quarter of our fiscal 2019 year. I’m 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. I’ll start the call with an overview of the second quarter and Tom will then provide an in-depth commentary of our financial performance. I’ll then offer a few final remarks, after which the line will be open for questions. Some of today’s statements may be considered forward looking as defined in the Private Securities Litigation Reform Act of 1995, including 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 various uncertainties and 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 and these risks and uncertainties include those discussed in our SEC forms 10-K and 10-Q filings. As a matter of convenience, as mentioned, we will link a recording of this call on the Investor Relations page of our geospace.com website. Because of the information being discussed this morning is time sensitive it may not be accurate on the date one listens to the replay. Yesterday after the market close, we released our financial results for the second quarter and first six months of fiscal year 2019. As stated increased growth in our oil and gas markets segment specifically our OBX rental market fueled our results for both periods. In fact, the financial results for the three months ended March 31, 2019, reflect our best second quarter performance in the past three fiscal years and posted the highest quarterly revenue by Geospace in four years. Use of our OBX ocean bottom recording systems by our rental customers continues to strengthen and merits continued investment. Approximately 17,000 OBX stations are currently deployed around the world and another 9,000 stations are scheduled for delivery in our fourth fiscal quarter. In addition, steady performance from our adjacent markets segment continues to help mitigate the product demand fluctuations experienced in our oil and gas markets. Despite the slight reduction in revenue from our adjacent markets, we remain confident that this segment will continue along its demonstrated path of overall growth. In the three and six month periods that ended March 31, 2019, combined revenue from our oil and gas market segment increased by over 65% and 53% respectively, compared to the same period as a year ago. As mentioned, rentals of our OBX equipment were the main driver in both periods. In addition, we recently entered into another OBX rental contract with a major international seismic contractor inclusive of a nonrefundable deposit that we utilized an additional 9,000 OBX stations for minimum rentable periods ranging from 150 to 180 days. Delivery of the equipment is expected to occur in the fourth fiscal quarter, at which time the contract is expected to generate revenue at $13 million over its duration. Revenue from our traditional seismic products in the second quarter saw an increase of about 25% compared to the year before primarily due to greater demand for our traditional marine products and repair services. However, over the six months of fiscal year 2019, revenue from these products experienced a decline of just over 3% compared to last year, where the slight reduction is primarily due to lower demand for certain specialty sensors. Since OBX systems are an integral part of our wireless product line, this segment reflected respective revenue increases of 126% and 116% over last year's second quarter and first six months. It should be noted that both periods included a recognition of $1.3 million nonrefundable deposit associated with the cancellation of an OBX rental contract by one of our customers. Negatively impacting both periods were comparative reductions from the previous year in sales and rentals of our GSX land wireless products. Although demand remains relatively weak for our land-based wireless products, we believe demand for our marine OBX products will remain strong for the foreseeable future, and we plan to continue our investment in these products to satisfy the growing market needs and revenue opportunities. Our reservoir seismic products saw reductions in revenue for both the three month and six month periods ended March 31, 2019 compared to last year. The reductions are a direct result of lower sales of our borehole tools and reservoir-related services. We don't expect revenue from our reservoir borehole products, sensors and services to experience any significant increases. However, based on our ongoing discussions with industry users and adopters of permanent reservoir monitoring, or PRM systems, we believe there's potential for revenue from these products in the foreseeable future. Furthermore, we see this potential is greatly enhanced by our OptoSeis fiber optic sensing technology acquired in November of 2018, which extends the domain of available options for our potential PRM customers. We expect an open tender for PRM system to occur later in fiscal year 2019. However, if such a tender were ultimately awarded to Geospace, we believe that revenue earned from such an award would not begin any earlier than fiscal year 2020. Our adjacent markets segment produced $7.3 million of revenue in the second quarter, a reduction of 7% from the same period last year. For the first six months of the fiscal year, revenue from these products reflected a less reduction of just under 3% from the previous year. For both periods, the decreases reflect lower demand for our water meter-related products and contract manufacturing services. In partial offset, demand for our offshore cable and thermal imaging products in this segment saw increases. Despite the quarterly variations in revenue from this segment, we believe demand for our adjacent market products will continue to reflect growth. Revenue from our emerging markets segment is comprised solely of the sales of products and services offered by our Quantum Technology Sciences subsidiary, known as Quantum, which we acquired in July of 2018. Quantum focuses on specialty products incorporating seismic acoustic technology to monitor, protect and secure physical borders and perimeters in both the domestic and international markets. For the three and six month periods ended March 31, 2019, revenue from this segment was somewhat negligible at $46,000 and $134,000 for the respective periods. And due to the recency of our acquisition of Quantum, there are no prior year comparative periods of revenue. As noted, we do not anticipate significant revenue contributions from this segment in the near term. However, we believe our ongoing efforts in the design, manufacture and deployment of this progressive technology for the border and perimeter security markets continues to create an opportunity for meaningful revenue contributions in the future. At this point, I'll now turn the call over to Tom for more financial detail.

Thanks, Rick, and good morning, everyone. Before I begin, I would like to remind everyone that we will not provide any specific earnings or revenue guidance during our call this morning. In yesterday's press release for our second quarter ended March 31, 2019, we reported revenue of $26.1 million compared to last year's revenue of $19.2 million. Our net income for the quarter was $707,000 or $0.05 per diluted share compared to last year's net loss of $4.7 million or a loss of $0.36 per diluted share. For the 6 months ended March 31, 2019, we reported revenue of $44 million compared to revenue of $33.9 million last year. Our net loss for the six month period was $5.1 million or $0.38 per diluted share compared to last year's net loss of $14.2 million or $1.07 per diluted share. A breakdown of our oil and gas product revenue is as follows: Our traditional product revenue for the second quarter was $4 million, an increase of 25% compared to revenue of $3.2 million last year. This revenue increase was primarily caused by higher demand for our marine products and an increase in repairs and services revenue. Traditional product revenue for the 6 months was $6.8 million, a decrease of 3% compared to revenue of $7 million last year. This decrease primarily reflects lower demand for our specialty sensor products. Our wireless product revenue for the quarter was $13.6 million, an increase of 126% compared to revenue of $6 million last year. Wireless product revenue for the 6 months was $20.9 million, an increase of 116% compared to revenue of $9.7 million last year. In both periods, the increase resulted from higher rental demand for our OBX systems and was partially offset by a decline in demand for sales of our GSX products. Both periods of fiscal year 2019 include $1.3 million of revenue from the recognition of a nonrefundable deposit resulting from a customer's cancellation of a rental contract. Reservoir product revenue for the second quarter was $1.1 million, a decrease of 49% compared to revenue of $2.1 million last year. For the 6-month period, revenue of reservoir product revenue was $2 million, a decrease of 26% compared to revenue of $2.7 million last year. The decrease for both periods was primarily due to a decrease in demand for our borehole products and also from a decline in service revenue. Moving on to our adjacent markets product segment. Our industrial product revenue for the second quarter was $4.1 million, a decrease of 13% compared to revenue of $4.7 million last year. Industrial product revenue for the six month period was $7.7 million, a decrease of 8% compared to $8.4 million last year. The decrease in revenue for both periods was primarily attributable to lower demand for our water meter products and a decrease in contract manufacturing service revenue. These decreases were partially offset by an increase in demand for our offshore cable products. Imaging product revenue for the second quarter was $3.1 million, a slight increase of 1% compared to revenue of $3.1 million last year. Imaging product revenue for the six month period was $6.2 million, an increase of 5% compared to revenue of $5.9 million last year. The revenue increase in both periods resulted from higher demand for our film products. Our gross profit margins for the second quarter were $10.4 million – I’m sorry, our gross profit was $10.4 million, an increase of over 400% compared to gross profit of $2 million last year. The six month period gross profit was $13.4 million compared to last year’s gross profit of only $1 million. The increase in gross profit for both periods resulted from a significant increase in wireless product rental revenue caused by the high utilization of our OBX rental fleet and a decline in unutilized factory cost caused by higher OBX manufacturing activity. While our factory utilization has recently increased due to the demand for the rental of our OBX marine nodal products, we expect our oil and gas product gross profit margins to remain low until product demand increases significantly for our landbased traditional and wireless seismic products. Operating expenses for the second quarter were $9.3 million an increase of 29% compared to $7.2 million last year. Operating expenses for the six month period were $18.5 million, an increase of 17% compared to last year’s operating expenses of $15.9 million. These increases were primarily due to incremental operating costs associated with our recent acquisitions of the Quantum and OptoSeis businesses. For the three month and six month periods ended March 31, 2019, operating costs related to these acquisitions were $1.8 million and $3.3 million respectively. These costs include the intangible asset amortization expenses of $400,000 and $800,000 for the three month and six month periods ended March 31, 2019, respectively.Cash investments into our rental equipment and property plant and equipment were $20.4 million and $1 million respectively. Because of the significant demand for our marine OBX rental equipment, we expect fiscal year 2019 cash investments into our rental fleet could be $30 million or more. We estimate total fiscal year 2019 cash investments into 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 in fiscal year 2019. Our balance sheet at the end of the second quarter reflected $14 million of cash in short-term investments. We had no long-term debt outstanding and the available borrowings under our credit agreement were $26 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, and I'll turn the call back over to Rick.

Thanks, Tom. I missed the industry challenges that continue to affect our oil and gas market segment. We're very pleased that our second fiscal quarter reflected net profitability as well as the highest recorded quarterly revenue in four years. Unmistakably, lingering challenges remain for our oil and gas market segment, where some product components are more affected than others. In this environment, we will continue to cautiously leverage identified improvements in the market as exemplified by our investments in OBX rental equipment to take advantage of increased demands for ocean bottom marine seismic surveys. We also believe our continued diversification efforts in the adjacent and emerging market segment is a strategy that has already shown effective results, and that future product developments in these markets will create further opportunities in both current and future fiscal years. This concludes our prepared remarks, and I'll now turn the call back over to Keith for questions.

[Operator instructions] We'll take our first question from David Nierenberg with Nierenberg Investment Management.

If anybody is a hockey fan, I would say that your comments today suggested you have multiple shots on goal.

Well, we're doing our best.

And the best way to win is to take shots on goal, particularly when things are propitious. So I wanted to ask you if you could unpack for me some aspects of the multiple shots on goal because I see several things, I would like to get your comments on. In the near term, from a macro point of view, it looks like offshore exploration is coming back after a four or five year drought. Secondly, I believe and I'd like to hear you amplify on this please that I believe that your OBX system has important competitive advantages against other modalities, which have been used in the past that, I think, may be enabling you to gain market share in that space. Then in the medium term, your comments about PRM are a lot more encouraging today than they have been in years. So I'd like to give you the opportunity to amplify on that. And then, finally, over the longer term, given all the controversies about security and borders, I'd like to hear your thoughts about the long-term prospects for perimeter monitoring businesses as well. Multiple shots on goal. Thanks, again, for being in the black, again.

All right. We'll try to address those questions and if I forgotten any components of it, you can remind me. I think you're right. We're seeing as well, looking historically over 2018 and even in 2017, that the marine part of the industry is recovering certainly more significantly than the land side. As we understand it and examine it, about -- well actually over 80% of discoveries last year were offshore. So that's very much in line with what we're seeing from an industry demand with respect to our equipment and the needs for it. The OBX does have competitive advantages and actually it's the ocean bottom knows as a general science and discipline offer some data quality improvements that aren't necessarily available from towed streamers, as they can record the full earth motion and give better imaging capabilities. And as such, we're seeing the overall industry, in general, is accepting those and preferring them and the fact that the contractors seem to have improved their efficiencies and using this kind of equipment compared to other cabletype ocean bottom systems that were quite expensive to use that is increasing this demand. So we're continuing to pursue it because of all those lined up issues as it were. On the PRM side, the Department of Reservoir Monitoring Systems definitely proposed an advantage and always have and certainly the industry is aware of that now, but with capital expenditures being very much throttled back in early, in these more recent years, there's they've kind of fallen back to more of the traditional way of doing that through multiple surveys every year where those mobilization costs get repeated. But nonetheless, we are having more conversations now and our acquisition of the OptoSeis technology has enlarged those discussions with some broader audiences as well that seem to have a preference for that type of technology. So in that sense, we do feel encouraged more so than it has been in more recent years with respect to opportunities for PRM work. On the border and perimeter security side, that's an ever evolving market and the technologies that we offer through our Quantum subsidiary are really enormous game changers with respect to how that monitoring has been done in the past and the capabilities that offer. There's a lot more intelligence and reliability in the data gathering that occurs there and staring those that need to react to such things. Those products are still very much in development that have made extremely good forward progress and are beginning to see the overall acceptance conceptually within those realms. So we're very excited about that, but it's going to take some time for those to manifest into revenue.

And we'll take our next question from Bill Dezellem with Tieton Capital. Please go ahead.

I also have a group of questions. First of all, would you talk about R&D and why that was up $1.6 million or so versus a year ago?

Sure, Bill. I mean, the acquisition of Quantum and OptoSeis certainly increased R&D expenses as a function of operating expenses and are largely responsible for those increases that you see. Clearly, some of our other endeavors with respect to the OBX and enhancing that product and our new wireless products were all a part of that, but I believe those reflect to the primary increases that you see there.

That's right.

And then, I was a little surprised to see SG&A down versus the December quarter. Would you talk to that, please?

Bill, I guess, I’m lost for comments as to exactly what’s driving that. The G&A costs are mostly people costs and they’re fixed and we have some variable expenses for legal fees and other things that tend to go up and down. But in terms of what exactly is driving that, I don’t have an answer for you.

Then I will jump to another question. And that’s relative to the OBX, what region or regions of the world are you seeing the most potential? And I’m asking this question admittedly less in the spirit of Geospace and more in the spirit of just where on the globe is the interest and exploration picking up a little bit?

It’s actually in virtually every region. Even deep water is seeing an elevated interest in this where it’s feasible to do. So quite honestly, Bill, it’s not localized in any particular international waters, it’s global.

And that does that include U.S. Gulf of Mexico?

As far as I know, yes. Gulf of Mexico is also certainly a place where the ocean bottom nodes have seen a preference in their use.

And kind of in that spirit what would say is the market split between traditional streamers being used today and ocean bottom cables from you or I suppose any competitors, I don’t know who they would be, but how’s that split look?

Unfortunately, Bill, I actually don’t have available information for you to tell you that split between say the towed stream or traditional methods in the ocean bottom nodes. We have seen evidence that some of the streamer side work is increasing and we noted that in the slight increase we saw in some of our traditional products which spanned some marine products that are used in that industry. But clearly, for us, as instrument providers, the increases that we see most pronounced are with the ocean bottom-type equipment.

Thanks for that. I’m actually going to push just a little bit more, if I may. And -- so I’m less interested in the exact percentage split and as much trying to understand is it a -- does OBX have a modest market share or a really large market share?

Well, I think some of the surveys under right now are considerable important ones. So again, I couldn't give you an actual, even guestimate or percentage, but I can tell you that their market share is certainly seemingly increasing at this point in time. And that these areas where they’re being surveyed some of those have been the ambition of surveys for a number of years but only now coming to fruition I guess because the technologies maturity. But moreover, I really can’t -- I wish I could, but I’m not -- I wouldn’t tell you something that I don’t know is correct.

That said is fine. Thank you very much. And certainly appreciate time you have taken.

Thanks, Bill.

We'll take our next question from Chris Sansone with Sansone Advisors.

Congratulations on the ocean bottom. It's picking up. The results are great. Question about the third quarter. Where you stand inventory-wise with respect to your OBX stations? And is it possible that you have additional deployments in the third quarter?

Yes. I believe we disclosed the quantity of units that are in our fleet right now and it's about -- I think, it's 23,000 units or more that were there as of March 31. Not all of those are deployed because some of those are being built for future deployments. We do have a few going out in the third quarter, but the biggest bulk of our OBXs will be delivered on that large contract that we talked about in the fourth quarter, the 9,000.

Okay. Great. And then any sense for how that business is looking in fiscal 2020 in the sense of demand for rental units is more? Will we see similar types of demand and deployment next year?

I don't know that we try to prognosticate that far in the future, but what I can say is that if this interest holds from the geophysics point of view of this type of data and there's all evidenced that it will and the contractors continue to demonstrate efficient operations using this type of equipment. This market has various ways that it can unfold. It can continue to remain the rental market in a healthy environment. You might even see sales of these types of products to the contractors in these markets. So it's yet to be determined. And it's -- there is quite a bit of optionality in how this industry can unfold in two years.

But I would say from our general perspective, we're investing more capital in this OBX market because we believe the long-term outlook looking into next year looks good. And the majority of the rental contracts that we sign have 180-day minimum rental terms. And one of the ones that's going on right now is even beyond the 180 days and they're continuing to keep the nodes for future work that they have lined up. So I think we're pretty bullish on what the market is, but as Rick said, it can change quickly.

And to Tom's point, the duration of these contracts -- all of these contracts have abilities to be extended beyond their contractual lengths of time.

And Chris, the number of nodes we had at the end of the quarter was 22,000.

Okay. Great. And then last question is regarding the unincumbered proprieties that you have overseas, you said there are unincumbered, is that to imply that you guys might be considering selling those properties and any estimates [indiscernible] sense of how much those properties are worth and what's the use of [indiscernible].

I don't -- we're not really implying anything. We're just letting you know that that's dry powder. And if we had to do something to create some liquidity, if we were unable to gain that liquidity elsewhere, we could certainly leverage those facilities.

[Operator Instructions] We can go next to Chris Sakai with Singular Research. Please go ahead.

Hi everyone, good morning. I just had a question on the March 27 press release regarding the customer who canceled the OBX rental contract due to business delays. Was that customer a repeat customer? Had they been, had they done business with you before? And what are the chances that, that customer will do business with you in the future?

Well, I can't reveal too much about the customer as far as its history with us as it were, but I can tell you that they are continuing to have discussions with us as they continue to formulate the business opportunities they were trying to put together at that time that they ran into trouble on. So contracts and surveys and opportunities have a lot of timing variables that are associated with not only capital but also mother nature and weather, where some of these regions of the world can only be explored during certain times of the year just because of the seasonal variations of the weather. So much of that had a part, I think in their need to cancel. But again, I can't reveal too much about the customer.

Okay thanks, and also, for your borehole products what would be a big driver there as far as growth going to next quarters?

Sure. In that particular product category, the reservoir seismic products, which is where the borehole tools and those products exist also in that product category are our permanent reservoir monitoring systems. Now those are not borehole-type systems, those are ocean bottom systems that are laid often entrenched on the ocean bottom to permanently instrument the areas of these reserves so they can monitor how they change as they produce from them. So because those products have a good revenue history in times past and because of those fall into that product category, that's where we're saying that there are the possibility of increased revenues for those products, not necessarily in the borehole which we don't think shows much chance of large scale improvement.

But how come you don't see much improvement with the borehole?

Well, there's a saturation point. I mean, there's a certain amount of work that needs to be done in monitoring fracking and doing a borehole type seismic investigations and all thatso there's a certain limit to the need for that. So I think the market itself just sort of defines that.

We'll take our next question from private investor, Benny Alexandroff [ph]. Please go ahead your line is open.

Hey Benny it’s good to hear you.

So good to -- follow again. Thank you. Couple of questions. First, Tom said that margins are going to remain well on the wireless. And two, demand for GSX improved. How much do you need utilization of the GSX fleets improve from here for margins to move?

Yes, Benny, I was really referring to product sale margins and not rental margins. And so right now, the market is saturated with channels that are not being utilized fully. And so until there’s a demand for more new channels in the market for GSX or some of our even newer wireless products, we’re expecting our product margins to remain low until that occurs.

Thank you. And my next question is on the OBX sales. I remember that’s a couple or three years ago, there was a lot of talk for potential OBX sales. And you said that the market needs to get healthier for us to get OBX sales, but are there any talks, anything that might happen in 2020 that you’re looking at?

There are certainly discussions. And I think all the contractors that are doing well in this type of survey are examining the higher utilization that the number of opportunities that are presented to them puts forth. So, largely the decision to buy this equipment is driven by their expectation and potential backlog of utilization of the type of equipment. And given the increased activity there those discussions may take better route.

Thank you so much and look to talk to you again.

You too,

And it appears we have no further questions. I will return the floor to Rick Wheeler for any additional or closing remarks.

Thank you, Keith. And thanks to everyone that joined our call today. And we look forward to speaking with you in our third quarter conference call sometime in August. Thanks and goodbye.

This will conclude today’s Geospace Technologies Second Quarter 2019 Earnings Conference Call. Please disconnect your lines at this time. Have a wonderful day.