Core Laboratories Inc (CLB) 2007 Q3 法說會逐字稿

Good morning. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs Q3 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS.) Mr. Demshur, you may begin your conference.

Thanks, Tracy. Good morning in North America, good afternoon in Europe, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees, to Core Laboratories' Third Quarter 2007 Earnings Conference Call. As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO.

Also this morning we are again joined by Core's COO, Monty Davis, who will present the detailed operational review, as Monty has been the chief architect of Core's recent operational successes.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements. Then we will come back and give a brief consolidated Company overview, touching on some financial and operational highlights. And then Dick will follow with a detailed financial review, and then we'll go to Monty, who will review Core's three operating segments, detailing our continued progress, and discussing the continued successful introduction of new Core Lab technologies and services, and then highlighting some of Core's operations. And then fifth, we will open the phones for a question and answer period.

I'll now turn it over to Dick for remarks regarding forward-looking statements. Dick?

Thanks, David. Before we start the conference this morning I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors, including those discussed in our '34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize or should any one of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion on some of the foregoing risks and uncertainties, see Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as well as the other reports and registration statements filed by us with the SEC.

Now with that said, I'll pass the discussion back to David.

Thanks, Dick. I'd like to give a consolidated Company overview. Core's operations, once again, posted the most profitable quarter in the Company's 70-year-plus history. It was an excellent quarter, but our operations believe that they can still do better, so stay tuned.

During the third quarter, Core's operations under the tutelage of Monty Davis, delivered all-time quarterly records for revenue, operating income, net income, earnings per diluted share, and operating margins. The quarter marked the tenth consecutive quarter in which Core's operations posted record revenues and the seventh consecutive quarter for posting all-time quarterly highs for net income, operating profit, and earnings per share.

Also during those 10 quarters, Core spent approximately $56 million for capital expenditures, during which time the Company has generated over $308 million of operating income from continuing operations. In addition, over that 10-quarter period, every new dollar of CapEx that Core has spent has generated approximately $3.70 of new revenue for the companies.

Core's leverage and scalability continues to produce superior results. Core hired about 100 new net employees in 2006 and grew the revenue by over $90 million or about 19%. This year, Core will hire about 100 new net employees and will grow revenues another $90 million or about 17%.

Also, Core's low CapEx needs -- our CapEx usually equals or is slightly higher than annual depreciation, plus the leverage and scalability of Core's worldwide operations has enabled the Company to generate high levels of free cash flow. Yet once again in 2007, Core's CapEx will total less than 4% of Core's total annual revenues against an industry average of about 12%. Core's CapEx will equal less than $1 per share in 2007 and yet again in 2008. This CapEx will be invested to grow international operations in Europe, Africa, the Middle East and Asia Pacific. These are Core's most rapidly growing areas.

Over 70% of Core's revenue is sourced from international reservoirs and we expect this percentage to grow even higher in future years. We believe with Core's current infrastructure the Company can generate annual revenues in the $900 million-plus range.

Core's future opportunities continue to be in the international theater and crude oil related, although the development of non-conventional natural gas reservoirs in North America and worldwide and the oil sands in Canada will play an important role in our future growth.

On the technology front, we continue to be pleased with Core's increasing market acceptance and market penetration of Core's recently introduced technologies. In reservoir description, Core's reservoir fluids business recently received the highest technical and quality ratings from a major oil company that is one of Core's biggest clients.

Revenue generated from characterizing crude oil and its derivatives, natural gases and formation waters now exceed 50% of the Company total. The pressure-volume-temperature, or PVT and phase behavior datasets are critical components, along with measured petrophysical or rock property datasets needed to optimize reservoir performance.

Core's continued technical leadership in these areas is unsurpassed by any other oilfield service company. As our reservoir fluids guy says, it's not the rocks, but it's knowing what's in the rocks that makes oil companies successful.

In production enhancement, the effectiveness of the bundling of Core's SuperHERO, ZeroWash, SpectraScan, and SpectraChem technologies being used in multistage simulfracs, where two or more adjacent horizontal wells and gas shale reservoirs are being hydraulically fractured, is continuing to go well. Initial production rates have been significantly higher and ultimate recovery rates will prove to be significantly higher as well.

In the past, Core was able to touch the Barnett Reservoir once or twice, analyzing core samples and gases. With these new bundled services, Core can touch the Barnett up to seven times. Revenues used to be generated in the $30,000 range. Now it can range up to $300,000 per job.

The sequence in which these Core Lab technologies are being introduced are first, Core's SuperHERO perforating technology is used to create superior perforation tunnels into the shale formation. These perforation tunnels are deep and contain relatively little potential formation damaging debris. Then during the multistage simulfracs, Core's ZeroWash tracer and SpectraScan technologies are used to ensure the effective and efficient placement of proppant. This is followed by Core's SpectraChem technology to ensure maximum gel or slickwater cleanup of the entire fractured zone.

Our SpectraChem datasets are also being used to determine cross-well interaction during simulfracs, during which two or more adjacent Barnett wells are being hydraulically stressed. These four technologies are being used to ensure maximum hydrocarbon flow and ultimate recovery from nonconventional natural gas reservoirs such as the Barnett Shale in North Texas.

Core believes that North American tight gas sand reservoirs will be the next logical candidate for multistage simulfracs, as well as other tight hard rock reservoirs in North and West Africa, the Middle East and Asia Pacific.

In reservoir management, Core's gas yield studies contain now 52 companies. They are looking at most gas shale reservoirs throughout North America. This project will be expanded into the international arena as well.

When it comes to gas shale plays, simply put, Core recognizes that it can help maximize our clients' cash flow and their ultimate recoveries from these nonconventional natural gas reservoirs.

Monty will give a more detailed technical update on Core's new promising technologies such as SuperHERO, which has just generated revenue for the first time two quarters ago. Our pipeline for new reservoir optimizing technologies and services remains strong, which indicates a bright future for Core.

I will now turn it back over to Dick for a detailed financial review.

Thanks, David. If we go to the financials that were in the press release, I'll kind of walk you through the main points. Revenues were $170.1 million in the third quarter, up 17% year-over-year from $145.5 million in the third quarter of last year and $168.4 million last quarter. So we continue to see the positive impact of earnings from our focus on higher margin services and from the leverage that we can squeeze from our international based fixed cost structure.

Of these revenues, sales for the quarter were $39 million, up when compared to $35.6 million last year, so an increase of about 10%. Services for the quarter, $131.1 million, up $21.1 million or 19% when compared to $110 million last year. If we look at cost of sales in the third quarter, they improved to 71% versus 74% last year, primarily due to increased demand for our new higher margin products and continuing efforts to improve our manufacturing efficiencies.

Cost of services for the quarter, they continued to improve, now to 65% compared to 68% last year. Our cost structure has remained relatively fixed as revenue growth continues to drive incremental margins. G&A for the quarter was $7 million, up slightly from $6.3 million in last year's third quarter, primarily due to an increase in compensation. For 2007, we now expect G&A to come in at 5% of revenues or around $33 million to $34 million versus our prior estimate of $35 million.

Depreciation and amortization for the quarter, $5 million, slightly higher than the $4.5 million incurred last year in the third quarter, as we continue to spend capital in support of our organic growth objectives. Note that our depreciation as a percentage of cost of sales and services is only about 4.3% compared to others in the sector whose depreciation can run as high as 10%, as they must employ tremendous amounts of capital in the face of lower returns in their competitive space. We expect depreciation in 2007 to total approximately $19 million or $20 million.

Other income this quarter is in the amount of $500,000 which primarily resulted from interest income of $140,000 and $350,000 in foreign exchange gains. Year-to-date other income was $2.9 million, very similar to last year's $3 million over the same time period.

Operating income was $46 million and these earnings are up $12.2 million, or 36% compared to the third quarter of last year, and are up $4.1 million, or about 10% sequentially from last quarter. This operating income represents operating margins of 27%, up almost 400 basis points compared to margins of 23.2% in last year's third quarter.

Our continued improvement in margins has been driven by our new technologies and services, along with our focus on obtaining commercial contracts that deliver higher product and service margins, thereby creating higher levels of incremental margins earned on those revenues. And combine this with better utilization of our cost structure, well, the results are clearly demonstrated in our expanding margins. And on a year-over-year basis, our incremental margins for the quarter, Company-wide were almost 50%.

Interest expense was $614,000 for the quarter, down from $1.9 million in last year's third quarter, and this reflects a lower rate of interest on our new 0.25% fixed rate convertible notes. And we expect interest expense in 2007 to be about $2.5 million.

Income tax expense was $13.8 million for the quarter, compared to $9.5 million in the prior year's third quarter, primarily due to higher taxable earnings in this quarter, along with a higher tax rate this quarter of 30.5% compared to 29.7% a year ago. So for perspective, this higher tax rate compared to last year's rate of 29.7% effectively reduced our EPS in the quarter by about $0.015.

Net income for the quarter was $31.5 million, compared to last year's third quarter's income of $22.4 million. So net income was up 41% on a year-over-year basis. Earnings per share for the quarter was $1.29 or $0.03 above First Call's Mean Street estimate of $1.26. And this compares to $0.83 earned in Q3 last year, so earnings are up 55% year-over-year. Sequentially, EPS is up $0.11 or about 9.3%.

Now, if we look at the balance sheet, cash was $42.2 million, down approximately $12 million from the year-end balance of $54.2 million, primarily due to the continued purchase of Core Labs shares under our share repurchase program and a small acquisition that occurred during the quarter.

Receivables stood at $138.9 million, up by $10.2 million from the second quarter, and by $26.8 million from $112.1 million at the prior year-end. Importantly, DSOs remained relatively consistent for the quarter at 73 days, versus 70 days for the full-year 2006.

Inventory was $30.3 million, down $1.7 million from the second quarter, and virtually flat as compared to 2006 year-end. Although our product sales have increased, we have managed to reduce inventory levels again this quarter and improved inventory turns to 3.7 as compared with 2006 levels of 3.5.

Other current assets were up by $1.6 million from last quarter's balance of $32.6 million due to increases in various prepaid asset balances. PP&E was up $1.1 million from 2006 year-end balances primarily due to the Temco acquisition in the quarter.

Intangibles, goodwill and other long-term assets are up $12 million from year-end due to increased goodwill and intangible assets of $4.6 million as a result of that acquisition and an increase in long-term deferred tax assets.

Now if we look on the liability side of the balance sheet, our accounts payables were up about $8.1 million when compared to the prior year-end balance of $37.5 million, primarily due to the timing of vendor invoice payments. Other current liabilities were up about $17.9 million from the 2006 year-end balance, due primarily to the $13.5 million deposit received on the sale of our building in Moscow. Long-term debt was unchanged, reflecting our $300 million 0.25% coupon convertible debt. Other long-term liabilities are $50.9 million, up $1.2 million from last quarter, primarily due to an increase in liabilities for retirement benefits.

Shareholders' equity ended the quarter at $68.5 million, down from the prior year-end balance slightly of $71.8 million. The decrease is primarily due to the continued repurchases of Core's shares through our share repurchase program, offset by net income, shares issued for exercised stock options and tax benefits on stock-based comp. Our annualized return on equity for the quarter was 184%, up from 115% in 2006.

Capital expenditures for the quarter were $6.7 million, up slightly from $6.5 million in the third quarter the prior year. For the first nine months of this year, we have spent $15.3 million. We expect CapEx in 2007 to be in the $20 million to $22 million range. This level of spending equates to about 3% of our revenues, substantially lower than the 10% to 15% that others in the sector deem necessary to spend, due to the higher asset content that is often required by many of them.

Given our more true service-oriented business model, we are able to continue to grow our global build-out in support of our organic growth objectives, while at the same time delivering to you, our shareholders, some of the industry's highest returns on invested capital or capital employed. And because we do have one of the industry's more disciplined approaches to capital, our depreciation as a percent of cost of sales and services is one of the lowest in the industry at about 4.4%.

So instead of comparing the valuation of the Company by the use of simplistic price to EBITDA multiples used for asset intensive peer companies, which in fact rewards those firms that have lesser capital discipline, we would suggest a more rigorous analysis based on returns on invested capital or discounted cash flows should be used to properly evaluate the worth of the Company.

And David just mentioned a great example of value creation from those incremental dollars spent on CapEx. Our revenue and earnings gains per dollar of CapEx are significantly higher than what we've heard reported by others in this sector so far this quarter.

Looking at cash flow, cash provided by operations in the quarter was $28.1 million. And after paying for our $6.7 million in CapEx, our free cash flow was over $21 million. For the nine months ended September, free cash flow was $72.5 million, up 14% from $63.7 million when compared to the same period last year.

And now to the stock buyback program. During the third quarter we reduced our basic share count by 486,000 shares at a cost of just over $52 million. This number of shares equaled 2% of our current outstanding share count. From inception of the program we have reduced our basic share count in the aggregate by 14.6 million shares at a cost of $538 million, representing 44% of the shares outstanding at the time the program began in October of 2002.

Needless to say, this has been a very successful program for our shareholders, as it has contributed to our shares increasing in value over 12-fold since the inception of the program. So the return to our shareholders has been over 1,300%, significantly higher than the OSX, which rose less than 300%, or the S&P which barely rose over 100%.

Now let's go over our internal financial targets. We now expect to wrap-up 2007 with revenues for the full year between $667 million to $672 million or somewhere between 16% to 17% higher than in 2006. This reflects continued secular growth as our revenues have grown in excess of the anticipated increase in our clients' worldwide activity levels by about 300 to 400 basis points.

And for the full-year 2007 we expect to earn in the range of $4.81 to $4.85 per share. As you may remember, these EPS targets have increased as the year progressed. Our very first EPS targets for 2007 were given on last year's third quarter call at $3.60 to $3.80 per share. So our operations have performed very well during the year, enabling us to increase these targets now by over 30% from when first given a year ago. This also represents an increase over last year's 2006 actual results of $3.07 by about 57%. Should we attain these projected annual earnings for 2007, our full year incremental margins over 2006 will be just over 55%.

So for Q4 that means our revenue target is in the $173 million to $178 million range, which is up about 15% above last year's fourth quarter revenues of $152.8 million. For earnings we expect EBIT to be in the range of $47.4 million to $48.8 million, which should drive EPS up to between $1.30 to $1.34 per diluted share, assuming a 31% effective tax rate in the quarter, as well as excluding any gain or loss from nonoperational matters such as the sale of our Moscow building. These results, if attained, would reflect a 35% increase in earnings per share over the $0.98 earned in the fourth quarter last year, representing incremental operating margins of approximately 47%.

And now for the 2008 targets. We have been discussing with our oil company clients their spending expectations for 2008 specifically for projects relating to production and production enhancement. While this is still somewhat early in the budgeting cycle for many of our customers, we believe that these early indications suggest that spending in North America will be relatively flat year-over-year, while spending outside of North America may be up low to mid-teens on a year-over-year basis. Given that our revenues are sourced 70% outside of the US, our client spending surveys would suggest that our revenues could be up 10% to 13% over 2007, which is reflective of our continuing secular growth. So as we believe that we will continue to grow at a rate 300 to 400 basis points faster than the growth in industry spend.

Based on this revenue growth and the earnings impact that these incremental revenues will create, we believe that revenues for 2008 will increase in the range of $737 million to $757 million. Now if it turns out that international industry spending is up 25% in 2008 like we heard from a large service company last week, then that would be great, as we would expect to grow at a rate somewhat faster. But at this early point we suggest you take your own view of what the industry spending increase will be in 2008 over 2007 and then add 300 to 400 basis points to that to arrive at a view on what our projected revenues could be in 2008.

We also believe that our incremental margins in 2008 will be similar to those experienced in 2006 and 2007. Our targets are based on attaining 50% incremental margins in 2008, which should drive our EBIT up to the range of $209 million to $218 million. And assuming a tax rate of 31% for the full year and no further share repurchases, this would equate to $5.75 to $6 in earnings per diluted share.

Now what could cause these targets to change? Perhaps one or more of the risk factors mentioned in our public filings or a change in interest expense should the proposed FSP #APB14-a become effective, or a change in a tax rate as a result of FIN 48, or in the event that share count changes as a result of our convertible note, or in the event the Company continues to be opportunistic with its share repurchase program.

With this secular revenue growth and strong incremental margins, we expect our overall EBIT margins to expand over 2007 levels by another 230 basis points to our highest full-year level of 28.6%. Net income is expected to be up $25.8 million or about 22% over 2007. The increase in EPS may be even higher in the event we continue to repurchase shares.

And now I'll pass the discussion over to Monty, who will provide a more in-depth operational review.

Thanks, Dick. It's a real pleasure to be in a position to discuss another record quarter brought about by the efforts of all of our employees. I want to commend our employees on behalf of all the shareholders.

Our reservoir description segment reached new record revenues and profits by using Core Lab expertise and technologies to describe the reservoir system for our oil company clients. Intimate knowledge of the porous and permeable rock of the reservoir and the three fluids contained in the reservoir, is critical to optimizing recovery.

Quarterly revenues for this segment reached a record high of $97.5 million, which is a growth rate of 20% over the third quarter of 2006 and an annual growth rate of 18% for the first nine months of 2007 compared to 2006. Operating margins reached 26.8%, an improvement of 500 basis points over the third quarter of 2006.

Our reservoir description business in Canada is heavily involved in the oil sands reservoirs. In the quarter we completed work for the 2007 season analyzing over 40 miles of oil sands cores. We expanded our capacity by 50% for the 2008 season and doubled the required freezer space.

Canadian oil sands are long-lived reservoir development projects which have recently drawn investment from significant international oil companies. We believe that these oil sand reserves have good economic returns and the operators will be significant users of our services for many years.

The reservoir description services that we provide are critical to optimizing the recovery, the transportation and for designing the upgrading facilities for exploiting these reserves.

We are also experiencing very good growth in the Middle East and Asia Pacific, with Malaysia and Australia leading the way on crude oil projects, which is resulting in improved incremental margins for reservoir description. Our US operations are at the same time setting record revenues and operating profits, mainly from international oil projects which have advanced analysis requirements and from unconventional reservoirs in the United States.

Our reservoir fluid and crude oil analysis in Europe is also performing at record revenue and operating margin levels, analyzing oils primarily from Europe, Africa and the Middle East.

In the quarter we took a significant reduction in our Nigeria laboratory operations due to numerous business interruptions which have produced margins well below our requirements. Inconsistent revenue levels and relatively high cost made this an area that could not justify our investment dollars, so we chose this course of action.

In September we acquired a company, Temco Inc., a small manufacturing company based in Tulsa, Okalahoma. While this is complementary to our existing lab equipment business, we also plan to expand to manufacture ultrahigh pressure, meaning in the 20,000 to 30,000 psi range, fluid cylinders for deepwater applications worldwide.

Our production enhancement unit generated all-time high revenues of $62 million in the quarter. That's 12% growth over Q3 2006. Revenue for the first nine months of 2007 is up 11.5% over 2006 same period. This growth was impacted by lower activity in Canada where our production enhancement services are mainly directed towards conventional reservoirs instead of oil sands. The downturn in the Canadian market has been more than offset by growth in the broad international and US markets.

Our stimulation and diagnostic technologies, SpectraScan and SpectraChem, continued growth in the unconventional reservoirs in the United States. These technologies are used to help design and determine the effectiveness of hydraulic fractures, flowback contribution, multistage frac cleanup and offset well communication. This knowledge is used by the oil and gas companies to maximize production from otherwise uneconomical reservoirs.

Revenue from our SuperHERO perforating charges continues to grow at better than three times the rate of our overall growth of our conventional perforating charges. Clients are seeing the benefit of using these deep penetrating ultra-low debris charges, particularly in reservoirs that are being hydraulically fraced. Customers tell us that frac jobs go easier after using these charges to perforate their wells. That translates into less horsepower and even in some cases the ability to fracture wells that could not be fractured otherwise. The performance of these charges is earning increased market share for Core Lab in the United States.

The reservoir management segment reported Q3 revenues that increased 14% over Q3 2006. Growth for the first nine months of 2007 however was 38.2% over 2006. The lower yearly quarter over quarter growth was due to the timing of permanent reservoir monitoring equipment delivery which should show increases once again in Q4.

Our Reservoir Characterization and Production Properties of Gas Shale Study has had four new members join in the third quarter, bringing the total to 52 consortium members. Through this study, oil companies learn the best completion methods for their shale assets, how to determine optimum recoverability of hydrocarbons from these reservoirs and methods for gas shale evaluation to select which shales are better investments for their companies. This allows them to obtain production from intervals that were previously thought to be uneconomical and conversely, to identify areas that will not be economical, thus reducing their risk.

This is the largest consortium study we have undertaken, and along with our Tight Gas Sands of North America Fracture Stimulation Optimization with 33 consortium companies, and the Tight Gas Sand Reservoir Characterization and Fracture Stimulation Optimization Phase II International Study with eight initial sponsors, make us the leader in the study of unconventional reservoirs.

We will now open the call to questions.

(OPERATOR INSTRUCTIONS) James West with Lehman Brothers.

David or Monty, perhaps you want to comment on this. In North America, execution in your business seems to be very good. I know you guys have a focus on the shale plays, oil sands and then some Gulf of Mexico deepwater. What kind of trends are you seeing in your more commodity business I guess in the conventional charge business? How is that piece of the Company faring, given the more difficult conditions we're seeing now in the North American land market?

James, we have continued to see growth in the conventional charge business in the United States, but it's not near the growth that we're experiencing in our SuperHERO charges. The SuperHERO is growing at a much faster rate and increasing our overall market share by using the SuperHERO and the HERO charges, which just provide a lot better result for our clients.

And James, you know, our target really has been tight gas sands where the HERO charge is very effective. And then as we roll out the SuperHERO charges for some of the softer formations like the Barnett Shale, maybe Monty can make a comment on we're expanding that SuperHERO line now for Barnett Shale applications.

Right. We will have new charge sizes in the SuperHERO charge are coming onto the market here at the start of the fourth quarter and we are going to continue expanding the range of those charges certainly over the coming year. This will open up new applications not only here, but in other formations in other parts of the world. We aim to have the SuperHERO available in sizes and in guns that make sense for applications around the globe.

And in my remarks, James, I did make comment that about 70% of our revenue is sourced from international reservoirs and we expect that to increase, just for the fact that the conventional natural gas market in the United States will become for us less of a target for future technical development and we'll take that overseas, where we think there are better opportunities.

Okay, understood. Then David, at one point you had given out metrics around your conventional -- your charge sales and I think we had talked about HERO charges being one out of every four charges that are sold. Do you have a similar metric for SuperHERO or for the combination of the HERO and SuperHERO versus conventional?

When you combine the two, we are certainly doing better than the one of four now. The SuperHERO, it's a little early to put that kind of comparison, but we will -- the growth we're seeing in the SuperHERO, between those two ultra-low debris charges, we will be taking a big part of the market away from conventional charges, not only our own, but others.

Give us a couple more quarters, James, and I think we'll be able to give you a metric on that, maybe at the end of the first quarter. But, probably more likely at the end of the first quarter. That will give us a year of SuperHERO in the pipeline.

Rob MacKenzie with FBR.

Just actually first following-up on James' last question, given the success of HERO and SuperHERO in the gaining market share, what kind of reaction, if any, are you seeing out of your competitors right now in developing an ultra-low debris charge?

I'm sure they're working on similar things. This is a patented technology. It's a closely guarded secret as to how we do that. And we have not seen anything comparable introduced into the market. So we're certainly enjoying the lead in this technology.

And no doubt, Rob, there are going to be individuals that are going to go ahead and reverse engineer this and we knew that when we developed HERO, which led to SuperHERO. And certainly in the technology race, we're right now running a little faster than they are and certainly that's our hope as we go forward.

Okay. My next question, either David or Monty, is I wonder if you could give us some more color on progression in the testing of your miscible flood technology?

On miscible floods we continue to make good progress. Projects in the Middle East and the North Sea continue to be strong. I would say that still currently, Rob, we do not generate a significant amount of revenue from this, although you'll see in the theme portion of our release, we did highlight our reservoir fluids efforts, because they are strongly affecting the increase in revenue and margins for the Company up in reservoir description. So I think as we continue to roll out technologies related to not only miscible floods, but other flood technology from our fluids guys, we look forward for stronger margins and continued revenue increase.

In the past we had talked about an optical development of a technology to determine the envelope for the formation of asphaltics and especially asphaltic crudes. And this Pressurized Fluid Imaging System, or our PFIS, has worked brilliantly. And so these technologies that our reservoir fluids guys are coming to the forefront and certainly are providing technology leadership worldwide in reservoir fluids, as was, I think -- as was acknowledged by one of our leading clients of the highest technology and quality of reservoir fluids data worldwide. And you know, this is one of the big three oil companies in the world.

Okay. And my next question comes to something you guys have been doing here for a little bit. And that's either using SpectraScan, SpectraChem and/or your perforating charges in the recent surge in some of the multistage simulfracs that Schlumberger and others are doing. Can you give us a feel for how fast that market is growing, the potential for it and how much market share you think you have in different parts of that process?

Well, early days for us there in bundling those services, Rob. You know, we go in and try to do the core, the natural gas characterization and then take that core into our consortium study and then that followed by SuperHERO, ZeroWash, SpectraScan, SpectraChem. Certainly we are making progress there. I would think our share for penetration of multistage simulfracs is still pretty low. So that certainly in the Barnett Shale, the multistage simulfrac we think is leading to dynamite results in adjacent wells, some production more than doubling on the IP or initial production rates. We see this application in tight gas sands as well, so when we have hard, competent, well-cemented reservoirs, whether they be located in North America or throughout the world, we think these would be excellent candidates for the bundling of these services.

Okay. And my last question before I turn it back I guess would be for Dick. Dick, can you give us a handle on what share count you're assuming in your 2008 guidance and how we should think about the impact of the share count from the convertible based on where the stock price might go in our models?

We're using 24.8% just assuming flat with our guidance for fourth quarter was 24.8%, so we're going to assume no changes in share count, because there's no guarantee that we'll be buying shares or that the share price will move up or down. The convert is an interesting vehicle from trying to track the number of shares that come into our share count. And the primary way of looking at that, Rob, is from a GAAP basis, if the share price is above say $95, shares come into our diluted share count. Now we haven't issued those to anyone and in fact, we're not responsible for the issuance of those shares when this thing finally settles. Because you'll remember we did that call spread derivative. And it's the counterparty that's responsible up to $127 to deliver those shares. So although we have to under GAAP include those shares in our share count, the Company will not be the one delivering those shares.

I think we've said that there are about 800,000 shares in our share count up to today's stock price of around $127 or so. And that's on a GAAP basis. But the counterparty will be the one delivering those shares.

And a loose algorithm, Rob, would be for every dollar of share price increase over that, you add about 40,000 shares, give or take 1,000 shares either way, because as the stock price goes up, actually you have a lesser add. But you can use that for a rule of thumb in the mid -- around $130 or $140 per share.

Rob, there's one other component and that's balance sheet presentation that may or may not come into play. But if the stock price is above, say $123 for a period of time in any quarter, we would move from long-term, we'd move that debt to short-term. It doesn't impact us in any way. None of our debt covenants have anything to do with ratios relating to that, but you might see it move from long-term to short-term.

(OPERATOR INSTRUCTIONS)

Okay, Tracy, I think we're going to go ahead and sum it up. Core has posted our most profitable quarter in the Company's 71-year history. We have never been better technologically positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company in the oilfield services sector. This positions Core well for continued growth in 2007 and into 2008.

So in closing we would like to thank all of our shareholders, the analysts that follow Core and especially all of our hardworking employees for spending their morning with us and we look forward to our next update at the end of the fourth quarter of 2007. Thanks and goodbye.

Thank you for participating in today's conference call. You may now disconnect.