Geospace Technologies Corporation (GEOS) Q2 2024 Earnings Report, Transcript and Summary

Welcome to the Geospace Technologies Second Quarter 2024 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curda, the company's 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.

Thank you, Jamie. Good morning, and welcome to Geospace Technologies conference call for the second quarter of fiscal year 2024. As mentioned, I'm Rick Wheeler, the company's President and Chief Executive Officer; and I'm joined by Robert Curda, the company's Chief Financial Officer. In our prepared remarks, I'll first provide an overview of the second quarter, and Robert will then follow up with more in-depth commentary on our financial performance. After some final comments, we'll open the line for questions. Today's commentary on markets, revenue, planned operations and capital expenditures may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on what we know now, but actual outcomes are affected by uncertainties beyond our control or prediction. Both known and unknown risks can lead to results that differ from what is said or implied today. Some of these risks and uncertainties are discussed in our SEC Form 10-K and 10-Q filings. For convenience, as was mentioned, we will link a recording of this call on the Investor Relations page of our geospace.com website, which I invite everyone to browse through and learn more about Geospace, our subsidiaries and our products. Note that today recorded information 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 second quarter and first 6 months of fiscal year 2024, which ended March 31, 2024. After reaching the halfway mark of the fiscal year, the company has recorded positive net income of $8.4 million or $0.62 per share. Following the profitable results of last year, the first half of fiscal year 2024 serves as a strong indication that our strategic efforts towards sustained profitability are at work. Furthermore, the long-standing strength of our balance sheet remains firmly intact with no debt and over $51 million in cash and short-term investments. However, low utilization of our OBX and Mariner ocean bottom nodes did have an unfavorable impact on our Oil and Gas Markets segment, where second quarter revenue fell short of the previous 6 quarters. This led to an overall net loss for the isolated second quarter of $4.3 million. Although no specific guidance was provided, we did mention in our first quarter conference call that some gaps in our OBX rental contracts were expected, which became a driving factor in lowering second quarter revenue. Additionally, revenue originally set to be received in the second quarter was actually brought forward into the first quarter when a rental contract for our new Mariner ocean bottom nodes was converted to a $30 million saving. Despite these circumstances affecting the second quarter, we do believe the second half of the fiscal year will see better utilization of our ocean bottom nodes, which should bolster performance of our Oil and Gas Markets segment. Our Adjacent Markets segment showed strong performance in the second quarter, generating revenue of $12.2 million. This figure represents the third highest quarterly revenue from this segment in the company's history coming close to matching a record-setting amount of last year's second quarter. We believe these results demonstrate that our long-standing strategy of creating an increasing stable source of revenue from the Adjacent Markets segment through expanded product lines and nurtured growth is working while offering less volatility than our Oil and Gas Markets segment. Our Emerging Markets segment also made a meaningful contribution to revenue in the second quarter, adding $1.1 million to the 3 months total. The largest portion came from fulfilling major aspects of the nearly completed DARPA contract that we announced last year. Several significant discussions and engagements mentioned in the last quarter for utilizing Quantum's SADAR array monitoring system and other analytics do remain underway. These include multiple government agency security and surveillance projects as well as advanced monitoring projects in the energy and energy transition areas. Each of these demonstrate opportunities where our technology could be uniquely applied. And while these discussions continue to be very productive, they are somewhat slow going. As such, contributions to revenue this fiscal year from this segment may be meaningful, but will likely remain relatively small, leaving the potential for larger revenue contributions in the next fiscal year. With that, I'll now turn the call over to Robert to give a little more detail on our financial performance of the second quarter and 6 months.

Thanks, Rick, and good morning. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance here on our call this morning. In yesterday's press release for our second quarter ended March 31, 2024, we reported revenue of $24.3 million compared to last year's revenue of $31.4 million. The net loss for the quarter was $4.3 million or $0.32 per diluted share compared to last year's net income of $4.6 million or $0.35 per diluted share. For the 6 months ended March 31, 2024, we reported revenue of $74.3 million compared to revenue of $62.5 million last year. Our net income for the 6-month period was $8.4 million or $0.62 per diluted share compared to last year's net income of $4.5 million or $0.35 per diluted share. Our Oil and Gas Markets segment produced revenue of $10.8 million for the 3 months ended March 31, 2024. This compares with revenue of $18.4 million for the same period of the prior fiscal year, a decrease of 41%. For the 6-month period, the segment contributed revenue of $50.8 million versus $38.6 million, an increase of 32%. The decrease in revenue for the 3-month period was due to lower utilization of our OBX rental fleet and the increase in revenue for the 6-month period is due to the $30 million sale of our Mariner ocean bottom nodes, which occurred in the first quarter of this fiscal year, partially offset by lower utilization of our OBX rental fleet. Our Adjacent Markets segment revenue is as follows: our industrial product revenue for the second quarter of fiscal year 2024 was $9 million compared to $9.6 million for the same prior year period. Industrial Products 6-month revenue for the fiscal year is $15.5 million, a decrease over the same period in 2023 of 12% The decrease for both periods was primarily due to lower demand of our water meter cable and connector products and industrial sensor products, partially offset by an increase in demand for our contract manufacturing services. Imaging product revenue for the second quarter was $3.2 million compared to last year's revenue of $3.1 million. The 6-month revenue for imaging products for fiscal year 2024 is $6.6 million compared with $6 million, a 10% increase when compared to the same period in 2023. Finally, revenue for our Emerging Markets for the second quarter was $1.1 million compared to $191,000 for the same period in 2023. The 6-month revenue for the segment for the fiscal year was $1.3 million compared to $284,000 for the same period in 2023. The increase in both -- in revenue for both periods is due to revenue recognized from a DARPA contract we announced in 2023. Our operating expenses increased by $500,000 or 5% for the second quarter of 2024, while they decreased by $900,000 or 4% for the 6-month period ended March 31, 2024. The increase for the 3-month period is primarily due to higher research and development expenses mostly relating to ongoing project expenditures. The decrease in operating expenses for the 6-month period is primarily due to lower personnel costs as a result of our workforce reduction in the first quarter of fiscal year 2023. Our 6-month cash investments into the rental fleets was $3.9 million and property, plant and equipment investments were $3.2 million. For fiscal year 2024, we expect to invest $7 million in additional equipment to our rental fleet and $5 million for plant and equipment. Our balance sheet at the end of the second quarter reflected $51.2 million of cash and short-term investments. And our credit facility has available borrowings to $11.3 million. Thus, our total liquidity is $62.5 million as of March 31, 2024. Lastly, we own real estate holdings in Houston around the world that are owned free and clear without any leverage. This concludes my discussion, and I'll turn the call back to Rick.

Thanks, Robert. Now I'd also like to draw attention to 2 other notable announcements in our press release. First, we are very fortunate to welcome Rich Kelly to our Geospace management team as Executive Vice President and Chief Operating Officer. Rich comes to us with an extensive executive background serving in the most recent 7 years as President of Sercel Inc. His accomplishments and experience bring a wealth of knowledge and leadership to Geospace that is keenly aligned with all facets of our technology-focused engineering, manufacturing, business development and operations. I sincerely believe Rich's contributions will enhance our strategic plans and goals and advancing the company to its next level. Secondly, I'm very pleased to highlight our announcement of the stock repurchase program authorized by our Board of Directors. Under this program, the company has been authorized to make discretionary purchases through open market block trades of up to $5 million in total, with actual purchases depending on a variety of factors, including stock price, trading volume and our general business and market conditions. With that, that concludes our prepared commentary. And now I'll turn the call back over to Jamie for any questions from our listeners.

[Operator Instructions] We'll go first to Bill Dezellem with Tieton Capital.

Let's go with Tieton Capital. So let's start with the rental business. You referenced in the opening remarks and the release that you feel good about rentals in the second half of the year. We haven't seen any significant announcements about that yet. Would you walk us through kind of what it is that you're seeing on the OBX and Mariner front for rentals, please?

Yes. Bill. Well, the rentals in the second half are associated with the timing that most of these projects come about. There haven't really been any real announcements other than those that are associated with the sale and the large rental that originally was a rental contract that turned into that sale most recently. But there are quite a number of different projects out there that have either slipped a little bit in time in terms of when they're going to be performed, but also new ones are popping up on a daily basis they probably wouldn't manifest any real rentals until maybe the fourth quarter of this fiscal year. But the ones that we're talking about are ones that are already out there, have bids that have already been placed and will likely need our OBXs simply because the capacity can't really accommodate all of the rental projects that are out there.

So Rick, apologies that I don't think I comprehended everything that you were saying there. So you have projects that you have already won, but those deliveries or the projects won't begin so your rentals won't begin until the fourth quarter. Is that correct? And then did we also...

Those are new projects. We do have rentals that are underway now. And we also -- but again, we mentioned there was a lag in those rentals and some timing differences. But we do have rentals that are scheduled for the third quarter and the fourth quarter that are already in place, and there are new ones that because of the logistics of mobilizing these crews, those new ones probably would not manifest until the fourth quarter, maybe some of them even in the next fiscal year.

Okay. That's helpful. So as you think about the rental revenue in Q3 relative to the $4.8 million in Q4, should we anticipate a significant step up? Or how are you thinking about that?

We're certainly seeing as an improved condition over what the second quarter represented. And that's the message we tried to get across.

And is it enough to bring the rental revenues up to somewhere in that $10 million, $15 million sort of range in a quarter?

Not going to give you any guidance, Bill, as far as that goes, but it's certainly going to look better than it did in the second quarter where we had these gaps that we had already mentioned.

Great. And then I think another component of what you were saying implied that you don't have enough OBX nodes to fulfill the rent, the rentals that you see in the pipeline. Was that correct? And if so, would you frame that up a bit tighter? And maybe how you solve that problem?

No, that's an industry-wide capacity issue that is faced. There are occasions where we do have requests for renting our nodes that we do not actually have capacity if you're just looking at higher inventories. But as we've always said and we've always -- the way we've performed in these situations, unless there are significant financial commitments we're not really inclined to just go build up the rental fleet, even though we do realize there are some capacity shortages within the industry. There has to be a financial commitment there to make that worth our investment.

Okay. And then I do want to jump to Quantum for a moment. The reference in the release to, I think, several significant discussions. Would you put more meat on the bone on that for us, please?

Well, most of these are not really things that we can discuss. They're basically arrangements with various government agencies where they have some security and surveillance concerns. There are certain tensions that are arising throughout different places in the world that our U.S. government and military agencies are concerned about. And so to that extent, special capabilities that our products offer are what's being discussed with some of these agencies. Of course, we all know about the border patrol and the capabilities that we've been able to demonstrate there. Certainly, those are elements that are still likely. And if you read the most recent government -- the GAO reports, that there will be some additional money spent on some of those projects, too. But those won't occur until next fiscal year.

So Rick, would you help us with timing in terms of what some of these contracts? I guess maybe what are the fastest that some of these might turn into revenue? And then how long -- how far out are we talking that this could extend?

Well, as mentioned, we don't expect these to turn into significant revenue, larger revenue opportunities this fiscal year. So any of the larger opportunities are not going to manifest until, at the earliest, fiscal year 2025. As far as timing goes, I mean, this is related to the government budgetary cycles things that are way out of our control and that have other factors that are playing into that. Some of the others that are ongoing with the energy space represent using technology that is brand new to the extent that these capabilities have not existed in those areas before. So there's still a lot of discussion in bringing those technical people on board with what the technology can do.

And then picking up on that, if I may. Relative to the energy arena, would the passive monitoring that Quantum provides actually create revenue for the energy companies? Or are these conversations really more centered around carbon capture, which, I mean, the challenge there, of course, is that it's an expense as opposed to revenue generating?

That's an excellent point and, in fact, they apply to both categories. Certainly, the carbon capture is one that is an ongoing discussion, and you'll perhaps see some movements there sooner than later. But many of these other uses of the passive monitoring technologies are, in fact, related to the revenue side of the energy business, but we really can't discuss how they would be applied because there's significant intellectual property involved in what we're trying to do there.

[Operator Instructions] At this time, we have no additional questions. I'd like to turn the call over to Rick Wheeler for closing remarks.

All right. Well, thank you, Jamie, and thanks to all of you who joined our call today. And we look forward to speaking with you again on our conference call for the third quarter of fiscal year 2024, and that will be in August. So thanks, everyone, and goodbye.

Thank you. This does conclude today's Geospace Technologies Second Quarter 2024 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.