Geospace Technologies Corporation (GEOS) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies’ Third 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. At this time, all participants have been placed in a listen-only mode and the floor will be opened 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. Good morning, and welcome to Geospace Technologies conference call for the third quarter of our 2019 fiscal 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 third quarter and Tom will then offer some in-depth commentary on our financial performance. I’ll then make 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 awareness, while our actual outcomes are influenced by uncertainties and other factors that we cannot control or predict. Both known and unknown risks can lead to undesirable results or performance differences from what we say or imply today. Such risks and uncertainties include those discussed in our SEC Forms 10-K and 10-Q filings. As mentioned, for convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. But note that information discussed this morning is time sensitive and may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released our financial results for the third quarter and first nine months of fiscal year 2019. As noted, growth and customer demand continue to decline for the rental of our wireless OBX ocean-bottom seismic recording systems, which lead to notable increases in revenue in the reported periods. For the three months and nine months ended June 30, 2019, the revenue increases amounted to 7% and 21%, respectively, when compared to the equivalent periods last year. Moreover, revenue achieved its highest level for a third quarter period since fiscal year 2014. And for the nine-month period, revenue reflects a three year run of consecutive increases. Although, demand for both our traditional and wireless land products within the oil and gas market segment has yet to improve, we are nonetheless very pleased to announce the receipt of an order for 5,000 stations of our recently introduced wireless GCL-1 Land recorder, which we expect to deliver to a European contractor in our fourth quarter. Our compact GCL recorders function entirely without wires or connectors and define the absolute pinnacle of quality, reliability and ease of operations for land-based seismic surveys. For the three months ended June 30, 2019, products in our oil and gas market segment generated combined revenue at $14.4 million and for the same ended nine-month period, revenue was $44.1 million. These figures reflect respective increases of 17% and 39% over the same three and nine month periods a year ago and are a direct result of expended rentals of our OBX marine nodal recording systems. Within this segment, traditional seismic product revenue totaled $2.2 million in the third quarter. This is a decrease of 17% from last year as a result of comparatively lower revenue from customer product repairs. In the reported nine-month period, these products produced total revenue of $8.9 million, a decrease of 7% compared to last year. The decrease was primarily driven by lower sales over the nine months of specialty sensors, but was partially offset by higher demand for traditional marine products and a greater amount of support services. Our wireless seismic products generated $11.9 million and $32.8 million in revenue for the three and nine months ended June 30, 2019. These figures reflected respective increases of 50% and 87% over the comparative periods last year. As mentioned earlier, the increases are the result of substantial growth and rental revenue from our wireless marine OBX ocean-bottom nodal systems. At the end of June, we had approximately 28,000 OBX stations in our rental fleet where most were utilized in performing rental contracts with various seismic contractors. Based on discussions with, both existing and new customers wanting to secure long-term rental equipment for additional OBX stations, we are evaluating the possible need to further expand our OBX rental fleet to satisfy this rising demand. Note that the increase in revenue over the nine-month period was partially offset by a reduction in sales of our wireless land-based GSX products. Revenue from our reservoir seismic products totaled $447,000 in the third quarter, a decrease of 76% from a year ago. Revenue for these products totaled $2.4 million for the nine months ended June 30, 2019, a decrease of 46% from the previous year. In both periods, the reductions were driven by lower sales of borehole tools and fewer reservoir-related services. We do not expect significant revenue from these products unless and until we are engaged in a contract to deliver a permanent reservoir monitoring, or PRM system. In November of 2018, we extended our PRM product offerings through the exclusive acquisition of OptoSeis fiber optic sensing technology, which we believe enhances our opportunities for potential PRM contracts. There are no such contracts currently up for reward, but based on our ongoing technical discussions with companies expressing interest in utilizing our technology, we believe a tender for our PRM system is likely in the foreseeable future. Note that if a PRM contracts were awarded to us, we would not expect to earn any revenue from it until fiscal year 2020 or possibly later. Third quarter revenue from our adjacent market segment totaled $8.2 million, a reduction of 6% from last year primarily due to lower demand for graphics imaging equipment and water meter cable and connectors products. Revenue from this segment over the nine months ended June 30, 2019, totaled $22.1 million, a decrease of 4% from last year. The decrease is attributed to lower demand for our water meter-related products, but was partially offset by increases in industrial sensor and thermal film sales. We don’t believe these slight reductions in revenue occurring in these periods for our water meter and certain other adjacent market products reflect a long-term trend in the demand for these products. Instead, we believe this segment continues to pose growth opportunities and increase stable revenue for the company. Revenue from our emerging market segment totaled $11,000 and $145,000, respectively, for the three and nine months ended June 30, 2019. Now this market segment consists solely of products and services offered by our Quantum Technology Sciences subsidiary, which focuses on specialty products, utilizing seismic acoustic technology to monitor and protect and secure physical borders and perimeters in both domestic and international markets. Note that we acquired Quantum in July of 2018, so we have no prior year revenue comparisons. We do not anticipate significant revenue contributions from Quantum in the immediate future. However, we do believe our ongoing efforts in the design, manufacture and deployment of this progressive technology are creating opportunities for meaningful revenue in the future from these novel solutions. 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 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 third quarter ended June 30, 2019, we reported revenue of $23 million compared to last year’s revenue of $21 million. Our net loss for the quarter was $3.7 million or $0.27 per diluted share compared to last year’s net loss of $4.8 million or a loss of $0.36 per diluted share. For the nine months ended June 30, 2019, we reported revenue of $67 million compared to revenue of $55 million last year. Our net loss for the nine months was $8.8 million or $0.66 per diluted share compared to last year’s net loss of $19 million or $1.43 per diluted share. A breakdown of our oil and gas product revenue was as follows: our traditional product revenue for the third quarter was $2.2 million, a decrease of 17% compared to revenue of $2.6 million last year. This decline was primarily caused by lower demand from our customers for equipment repairs. Traditional product revenue for the nine months was $8.9 million, a decrease of 7% compared to last year’s revenue of $9.6 million. This decrease reflects lower demand from our specialty sensor products and equipment repairs and was partially offset by higher demand for our marine products and revenue from product support services. Our wireless product revenue for the quarter was almost $12 million, a 50% increase compared to revenue of $7.9 million last year. Wireless product revenue for the nine months was $33 million, an 87% increase compared to last year’s revenue of $18 million. In both periods, the increase resulted from higher rental demand for our OBX systems. Partially offsetting last year’s nine-month revenue growth was a decline in demand for sales of our land-based wireless products. Our reservoir product revenue for the third quarter was $447,000, a decrease of 76% compared to last year’s revenue of $1.9 million. For the nine months, reservoir product revenue was $2.4 million, a decrease of 46% compared to last year’s revenue of $4.6 million. These decreases resulted from a decline in demand for our borehole products and lower revenues from reservoir support services. Moving on to adjacent markets segment. Our industrial product revenue for the third quarter was $5.4 million, a decrease of 5% compared to last year’s revenue of $5.7 million. Industrial product revenue for the nine months was $13 million, a decrease of 7% compared to $14 million last year. These decreases stem from lower demand for our water meter products and were partially offset by increased demand for our industrial sensor products. Imaging product revenue for the third quarter was $2.9 million, a decline of 8% compared to last year’s revenue of $3.1 million. Imaging product revenue for the nine months was $9.1 million, an increase of 1% compared to revenue of $9 million last year. We consider these changes in revenue to be normal and nonindicative of any particular trend in customer demand. Our gross profit for the third quarter was $7.6 million, an increase of 62% compared to last year’s gross profit of $4.7 million. For the nine months, gross profit was $21 million, an increase of over 360% compared to last year’s gross profit of $5.7 million. These increases resulted from the significant rise in OBX rental revenue caused by the high utilization of our expanding OBX rental fleet. In addition, we’ve seen a decline in underutilized factory overhead costs due to high manufacturing productivity, resulting from our OBX production. Despite these increases in factory utilization, we expect our consolidated gross profit margins from the sale of our land-based traditional and wireless oil and gas products to remain weak until we see a significant improvement in their demand. Operating expenses for the third quarter were almost $11 million, an increase of 11% compared to $9.8 million last year. Operating expenses for the nine months were $29 million, an increase of 15% compared to last year’s operating expenses of $26 million. Last year’s third quarter includes a $2.6 million bad debt charge attributable to a customer who had just filed for bankruptcy protection. Excluding this $2.6 million bad debt charge, consolidated operating expenses increased $3.7 million and $6.3 million respectively for the three months and nine months ended June 30, 2019. These increases were caused by incremental operating costs associated with our recent acquisitions of the Quantum and OptoSeis businesses. These acquisition-related expenses for the three months and nine months ended June 30, 2019, were $2.1 million and $5.5 million, respectively, inclusive of the intangible asset amortization expenses of $400,000 and $1.2 million, respectively. The balance of the increased operating expenses relate to acquisition-related legal cost, personnel wage increases, increased bad debt expenses and other general expense increases related to the expansion of our business operations. Cash investments into our rental equipment and property plant equipment were $29 million and $1.4 million respectively. Because of the significant demand for our OBX rental equipment, we expect our total fiscal year 2019 cash investments into our rental fleet to be about $35 million. We estimate total fiscal year 2019 cash investments into our property plant equipment will be approximately $2 million. Our balance sheet at the end of the third quarter reflected $16 million of cash and cash equivalents. We had no long-term debt outstanding, and the available borrowings under our credit agreement were $23 million. Earlier this month, we sold one of our Houston facilities for $8.6 million. After deducting selling expenses, we expect to report a gain from this transaction of approximately $7 million in our fourth quarter ending September 30, 2019. This facility was not strategic to our ongoing operations. We continue to own other real estate holdings in Huston 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. Demand for both our traditional and wireless land based products remains muted due to the lower amounts of seismic services requested from our onshore customers. However, demand for our ocean bottom OBX marine nodes is the highest it’s ever been. The current focus of many E&P companies is to discover new reserves and extensions near their existing offshore infrastructure. And the superior image quality and operational efficiencies provided by the OBX help turn this goal into a reality. As such, we believe demand for our OBX nodes will remain high for some time to come. And we will continue to prudently invest in the choice opportunities this may present. Independently, our broadening of PRM products with OptoSeis and our deeper penetration into border and perimeter security markets through Quantum, each represents strategic diversifications that create new sets of opportunities and potential financial rewards. We believe several of these opportunities could manifest in the very near future and that our strong balance sheet gives us ample means to accomplish their success. So with that said that concludes our prepared remarks. And I’ll now turn the call back over to Brie for questions.

[Operator Instructions] Operator Instructions] We will take our first question from David McColl with Fort Washington. Please go ahead.

Good morning, guys. Hope, everyone doing well today.

Yes. Thank you, David.

So when I look back at the previous quarterly announcements on May 2 and kind of compare in contrast with last night’s announcement – so in May you said that management believes that an open tender for our PRM system may occur later in fiscal year 2019. And last night, you said that management believes a tender for a PRM system is likely in the foreseeable future based on ongoing discussion. So I definitely find this change very interesting. And I’m wondering if you could provide some additional color on, maybe, the PRM market as a whole. So I’m wondering here is – do you seeing it improving in general? Or would any potential PRM contract – do you see it more as a one-off item and not a signal that demand is improving?

Very good questions. The PRM market, as you’re probably aware and having studied that, is – it’s a very niche market. There aren’t lots of PRM systems out there. They’re very important with respect to those fields that they’ve been installed on. But we have nine of those systems and there’s probably another three or four systems that have been installed. There certainly was an increase in demand before that was basically terminated when the price of oil fell, about five years ago or so. But we are seeing an increase going back because there is a significant return on that investment based on their long-term plans. We are seeing an increase in those discussions as it worth. The reason – we did say in 2019, which we have one more quarter to go, that we were anticipating a tender within that time frame, but as all things go, there are delays that come about in those – putting out those tenders that we are really not in control of. It’s still possible that, that tender could come out within fiscal year 2019, but we still expect one, even if it’s not in that specific time frame to come out to shortly thereafter, if that’s what it turns out to be. We do believe that the demand will increase in a stable oil pricing environment. And we also see that because the oil companies are focused on trying to find new reserves, both new and extensions to existing reserves nearby their current infrastructure, that’s going to further accentuate the benefits that permanent reservoir monitoring systems can offer because they’ll be tying back to those pieces of infrastructure that are already in place.

Perfect. I appreciate that. And maybe just a follow-up here. So we’re obviously seeing a decent amount of kind of health and recovery in the offshore seismic space globally. And I’m assuming the PRM would be in the context of the offshore. Except the fact that Rick, you mentioned that the onshore business remains muted as E&Ps in the Permian kind of refocus and try to fix maybe some of the mistakes, I'll say, for the onshore business. Do you see an increase in inbound for that at this point in time? Or is that just something that you're going to just to wait and see if it's sort of comps? Not saying you're not going to do anything, but that you're not actively or aggressively pursuing there?

Well, the only pursuit that we've we put in place is the introduction of new instrumentation for that market in our GCL. But I think in our view, we're driven by what our customers need. And the current level of activity, exploration and imaging activity that's going on at this point, the contractors have enough equipment for the most part to accomplish that. We're aware of a very huge survey that Dawson was and I believe still is involved in, quite an impressive operation. But they have the equipment necessary to perform those activities at this point in time. So really from our point of view, it's a matter of when the seismic exploration and other reservoir imaging aspects improve enough to where there's more demand for our equipment. And of course, as time goes on the equipment has to be replaced. There's a certain attribute that takes place, but we're prepared for that with the products that we have that represent the next generation capabilities within that sort of instrumentation.

Okay, perfect. Thank you.

Our next question will come from Chris Sakai from Singular Research. Please go ahead.

Just a question on your reservoir products. To save cost, would you ever consider putting that -- putting it on – that signal on pause or on hold?

It's a very integrated operation within our core competencies. So there would really be not benefit or even a strategic point in trying to do that.

Okay. And then with the $7 million that you'll get from the sale of the property, what do you plan on doing with that money?

Yes hi Chris, this is Tom. That's going to go into our bank account and will likely be reinvested in more OBX rental equipment. At least, that's the plan for now.

Okay, alright. Great, thanks.

Our next question will come from Bill Dezellem with Tieton Capital. Please go ahead.

I have a group of questions relative to GCL. First of all, if a contractor has GCL – or pardon me GSX, and they were to purchase GCL nodes, would they be able, on the same survey, to use the two and integrate them? Or would they be side by side or would they need separate?

That's an excellent question, Bill. And the fact is that it somewhat depends on the configuration of how they use the GSX. But for the most part, they are side-by-side compatible. To the extent that those customers that have our GSX equipment are utilizing our GS-ONE geophone sensors, for example, it's an exact side-by-side comparative capability that the two have. There is some amount of, sort of, a deconvolution aspect of, sort of, reprocessing of data that compensates for sensor responses. One could actually use the GCL side-by-side, any equipment, including GSX equipment, if they were using some other brand or type of geophone-type sensors. But for the most part, they're completely side-by-side compatible in a data context. From an operational context, they are exactly on par with the GSX. The same amount of QC information, the same manner of which QC information is gathered from these devices is exactly the same.

So for example, Dawson could incorporate if they needed to replace some GSX nodes due to natural wear and tear, they could buy the GCL?

There would be things they have to – and we would both have to consider with respect to the types of sensors that they might be using in that situation. But there could easily be some possibilities where maybe that could occur.

Understood. So let's talk about this specific GCL order. How it came about? And how it's going to be used, please?

Okay. Well, I mean it came about simply from our revealing of the product, to be quite honest. At some of these conventions and shows associated with the seismic industry, we revealed this new product. And it certainly looked like it was going fit the use case of this particular company. And we've been into some discussions with them for a while and some tests and trials. And they're very much looking forward to using this equipment. In this particular case, I think it's a geothermal-type application, not familiar with all of the details or wouldn't be able to reveal the – even those that I am aware of. But it's nonetheless, what you would consider a typical land seismic imaging use case.

And is this a repeat customer? And if not, whose equipment were they using previously?

This is a repeat customer. We have done business with them before with some other sensors and wireless equipment. But they are relatively new to us, but we have done business with them before.

And the prospect for them purchasing additional equipment?

Really, just have to see. I mean this is a situation where they have some contracts that they're going to be fulfilling using this equipment. And we'll see where that takes them.

And did this come about reasonably quickly? And the reason I ask is you've been cautioning investors that there really are not a lot of land of seismic prospects out there.

And I would continue with that caution.

And then one additional question on that front. The price tag for this or the revenue we should – will expect?

Well, we're not going to really tell you all that.

Bill, that's between us and the customer. And I don't think our customer wants us to divulge that.

Understood. Let me shift, if I may, to OBX. How many additional OBX units are you looking to manufacture in fiscal 2020, or adding for fiscal 2020?

Bill, we expect to be up over 30,000 – you're talking about fiscal 2020?

Yes. But you may…

By the end of this year, this fiscal year, which is fiscal year 2019, we expect to be over 30,000. With respect to fiscal year 2020, that's a number that we're still working on, and we're still gauging interest that customers have in long-term contracts. So it's not a number we're ready to put out just yet.

So you're 28,000 now by the end of next month, you're hoping to be at 30,000. Just for a point of a range to help us understand the magnitude of demand you're experiencing. I mean could we see this rental fleet go from 30,000 to 40,000? Or are we talking 30,000 going to 60,000?

Well, we don't have actual, specific numbers. I don't have anticipation that it's going to double in that sense that you're looking at there. But we do see – we already are in situations where we're having to turn away certain opportunities because just the timing won't allow us to be able to fulfill them. But as we examine the overall space with respect to the request for quotes and the commitments that various customers are looking to make and willing to make, we're definitely expecting that we'll have to increase the number. But I don't see it doubling or anything along those lines.

Sure. Okay. And one additional question. The rental revenues were down $3.5 million or so from last quarter. Would you please discuss that?

Yes, Bill, good question. The second quarter is our big quarter in Canada and it's seasonal. And we did about $2.5 million of rental revenue in Canada in the second quarter. And if you will recall, we also recognized revenue related to deposit, a nonrefundable deposit that a customer put down, and they had to cancel the contract due to timing and other issues. And so between those two items, that's almost $4 million. And that kind of stems the break between Q2 and Q3.

Great, thank you both.

[Operator Instructions] We'll take our next question from David Nierenberg with Nierenberg Investment. Please go ahead.

Good morning guys.

Hi, Daivid.

Good morning.

I'd just like to pursue a couple of things you said in answering Bill's questions. Tom, It sounded like – I heard you say that you're already having to turn away OBX opportunities, which you cannot fulfill, which sounds like both good news and bad news in terms of sending the business to a competitor. Could you please elaborate on what you meant by that comment?

Yes, David, this is Rick. Yes, I'm the one that said that. It's a rare circumstance, but there are occasions where some of these jobs that the oil companies are looking to perform because of weather issues and how the windows of opportunities sort of open up for those things, but the timings land very specifically in certain months. As it would turn out for this particular circumstance, our equipment was all out and all in use. And there was – with respect to this timing, this particular timing, there would have been no way to construct equipment that would be able to fulfill those needs. So it's not a normal circumstance. It's somewhat of a circumstantial situation, but based on the aligning of the stars, so to speak, but you're right. It does represent both good and bad. The good is that it's simply one cog in one of many wheels that are turning with respect to boosting this demand for the OBX.

Exactly, exactly, the good news part is important. I'd also like to come back to the answer to Bill's last question about the sequential revenue decline in the oil and gas segment that specifically – the total sequential decline in revenue across the segment was – if I'm doing my numbers right, about $4.2 million. And what surprised me a bit was that the operating income swing of that $4.2 million was so large, it was $3.6 million. I'm wondering if you could explain what that was, whether it was a function of mix or the customer nonrefundable deposit and perhaps then was all profit? What was going on to explain that?

David, this is Tom. I'll take my best shot at your question. A big change in our rental revenue from Q2 to Q3, if you will recall that we have a fixed cost on our rental fleet, whether it's rented or not. And so for the most part, when we do rent something, that drops all the way to the bottom line because we're going to have that depreciation weather we rent it or not. And so the decline in rental revenue between the two periods is primarily the impact on our operating income for both periods – between the two periods.

Reminds me of the comment by Steve Martin in the movie, the jerk when he flaps his head at the carnival barker and says, I get it. It's a profit thing.

Well, I'll be happy to further explain in a later phone call or something. But essentially, if we have an extra $1 of rental every quarter, we're going to have an extra $1 of operating income because that depreciation is there, whether we rent it or not.

So it makes it a very nice business to have in a strong market.

Well, I've said this before. And this is may be my philosophy on rentals, but when they're rented, it's the highest gross margin we have and when it's not rented, it's the lowest gross margin we have.

Thank you.

Our next question will come from Chris Sansone with Sansone Advisors.

Good morning gentlemen.

Hi, Chris.

Good morning.

So if my math is correct, you added 11,000 OBX stations in the third quarter?

I believe that's right.

Okay. And could you give me a sense of when you started booking revenue on those additional stations? I know they all didn't happen at once, but just trying to get a sense for whether those additions where beginning of quarter or end of quarter loaded.

Probably, more of that was end-of-quarter loaded. We are in the process of shipping and delivering a 9,000-unit contract right now in our fourth quarter. In fact, we've shipped most of it and we still have a couple of thousand more to ship, but a lot of those units were added during the third quarter. And we're still completing units to finish the shipment of those – that final order of 9,000. So they probably didn't generate much revenue at all in the…

That you referenced in the second quarter press release, so that's what you're talking about here, so potentially we go to 37,000-ish units, exiting the fourth quarter?

No, a lot of those 28 – the difference between 17,000 and 28,000 has to do with billing up these 9,000 units in the third quarter for delivery in the fourth quarter.

Okay. And could you just talk about the increase in expenses? Because it looks like we're not getting the leverage on those incremental expense dollars. I think Tom, you called out some of it was nonrecurring in nature. They were transaction – related to the transactions over the course of the year.

Yes. Our operating expenses were pretty close to what we had in Q1 and Q3. They fell in Q2 for several reasons and probably, you shouldn't expect the Q2 to repeat itself. But what we did in Q1 and Q3 is probably what it's going to look like going forward. There were acquisition-related expenses for the OptoSeis purchase that are not going to recur and unless we get into another acquisition opportunity. But it's kind of difficult to map because things show up, they disappear, they show up again. We certainly don't want to see bad debt to show up every quarter like we did this quarter, but that's just a sense of the aging of our receivables. That doesn't mean that debt is completely uncollectible, but as our receivables get older and age, we provide more risk-based bad debt expenses.

Okay, got it. And then just to go back to one of the questions one of the other callers had about potential size of the OBX rental fleet. You would look at the growth trajectory that you guys had this year, and you said that you don't see it going to 60,000 stations. But I guess why couldn't it go to 60,000 stations over some period of time given the demand trends that we're seeing this year?

Well, it's not to say that it couldn't. It certainly could do that. But I guess that's not in our strategic planning that it needs to. We're very cautious and prudent about how this market needs to be approached. And really it's more a sense of our conservative view of doing our best to satisfy the reasonable levels of demand that are showing up here. But then again, the industry will drive that for us. And we'll be taking a look at it on a daily basis if it – if you really want to get down to it.

Alright guys. I think you may have guessed I am working from home today. Thanks a lot.

Alright Chris.

And there are no further questions at this time. So I'll turn it back to the speakers for closing remarks.

All right. Well, thank you, Brie. And thanks to everyone who joined our call today. And we'll look forward to speaking with you for our fourth quarter conference call sometime in November. Thanks, and goodbye.