Geospace Technologies Corp (GEOS) 2015 Q3 法說會逐字稿

Welcome to the Geospace Technologies third-quarter 2015 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 Mr. Rick Wheeler. You may begin, sir.

Thanks. Good morning, and welcome to Geospace Technologies conference call for the third quarter of FY15, and thanks for listening today. I am Rick Wheeler, the Company's President And Chief Executive Officer, and I'm here with Tom McEntire, the Company's Vice President and Chief Financial Officer.

I will start the prepared portion of the call with an overview of the quarter, and Tom will follow that with an in-depth review and commentary of our financial performance. I will then close out the prepared portion of the call with some final remarks, and we will open the line for questions. Also, as a matter of convenience and previously mentioned, we will make a replay of this conference call available in the investor relations section of our website at www.geospace.com.

Let me caution that the information we will discuss this morning is time-sensitive and therefore may not be accurate on the date one listens to the replay. Secondly, many of the statements that will make today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

By example, this includes statements about the market for our products, revenue recognition, planned operations, and capital expenditures. These statements are based on our current perceptions, expectations, and knowledge, but actual outcomes are influenced by uncertainties and other factors that we are unable to control or predict.

These and other risks, both known and unknown, can lead to undesirable results, or cause our performance to materially differ from what we may express or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and Form 10-Q filings.

Yesterday after the market closed, the Company released its financial results for the third quarter of FY15. The depressed market conditions that began in 2014 have continued without relief through the third quarter. Our revenues totaled $19.8 million, a decline of $21 million over last year's third quarter.

For the nine months ended June 30, 2015, the Company recorded revenues of $68.9 million compared to $210.6 million for the same period last year. The decline in revenue for both periods is directly attributed to the pronounced decrease in demand for our products in today's seismic market, coupled with having no large contracts currently underway the manufacture of permanent reservoir monitoring, or PRM, systems. With these lower revenues, losses were incurred for both the quarter and the nine-month period of $8.6 million and $19.2 million respectively.

Revenues for traditional seismic products in the third fiscal quarter were $6.3 million, a decrease of $3.6 million from last year. For the nine months ended June 30, this segment had revenues of $23.6 million, a reduction of $19.7 million over the same period last year.

In both periods, the reduced revenues are a direct reflection of the very broad end activity that exists in the current seismic exploration market. The difference in revenue year-over-year for the nine-month period is also accentuated by uncommonly large Geophone orders seen in last year's first quarter.

Our wireless product revenues in the third quarter were $6 million, a decrease of $6.2 million from last year's third quarter. For the nine months ended June 30, 2015, wireless product revenues totaled $23.8 million compared to $70.3 million for the same period last year, a decrease of $46.5 million.

These declines are again a direct result of reduced demand for seismic equipment in today's market. We note, however, that in contrast to the declining overall seismic market, utilization of our OBX Marine nodal systems continue to increase in the third quarter.

Various customers deployed over 3,700 OBX stations from our rental fleet on a variety of projects throughout the quarter. The rental revenues have sequentially increased in every quarter of this fiscal year, mostly from increasing rentals of the OBX Marine nodal system. The number of successful high data quality surveys achieved by our OBX customers is steadily growing.

From this, we remain encouraged about the future of our OBX product line. However, project delays and cancellations of some jobs as reported by our customers demonstrate that this specialized ocean bottom seismic market still shows risk and volatility.

Revenues from our reservoir products in the third quarter totaled $1.2 million, a decrease of $12.1 million compared to last year's third quarter. For the nine months ended June 30, reservoir product revenues were $ 4.5 million. This compares with $80.7 million in the same nine-month period of last year, a reduction of $76.2 million.

While lower demand for our borehole and other general reservoir products was a contributor to the reductions in these periods, the largest component of the decreases was the absence of any PRM system contracts during the current fiscal year. In contrast, last year, the three months and nine months ended June 30, 2014, saw revenue contributions from the Statoil PRM order of $6.7 million and $61.7 million respectively. Despite having no contracts in hand, we continue discussing future PRM systems with potential customers, and we believe that our vast leadership, experience, and past successes in PRM technology for well over a decade keep us well-positioned to secure future PRM contracts.

In the third quarter, our non-seismic businesses continued down the path of improved performance. Third-quarter revenues for this segment were $6.1 million, a 21% sequential increase over the second quarter, and an increase of $0.9 million over last year.

For the nine months ended June 30, 2015, revenues and operating income for our non-seismic businesses were $16.5 million and $2.3 million respectively, each reflecting an increase over the same period last year. These modest improvements are largely a result of broader acceptance and adoption of some of our industrial product lines.

At this time, I will turn the call over to Tom to provide you with more detailed commentary and insight on the Company's third-quarter financial performance.

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 this call.

In yesterday's press release for our third quarter ended June 30, 2015, we reported revenues of $19.8 million, compared to revenues of $41 million last year. Our net loss for the quarter was $8.6 million, or a loss of $0.66 per diluted share, compared to last year's net income of $3.8 million or $0.29 per diluted share.

For the nine months ended June 30, 2015, we reported revenues of $68.9 million compared to revenues of $211 million last year. Our net loss for the nine month period was $19.2 million, or a loss of $1.48 per diluted share, compared with last year's net income of $39 million or $2.95 per diluted share.

A breakdown of the revenues from each of our product segments is as follows: Our traditional seismic product revenues for the third quarter were $6.3 million, a decrease of 36% compared to revenues of $10 million last year. Revenues for the nine-month period were $23.6 million, a decrease of 45% compared to revenues of $43 million last year.

The decrease for both periods reflects lower demand for our geophones and marine products, due to soft industry conditions. In addition, as Rick just indicated, last year's first quarter included large orders for geophones.

Third-quarter revenues from our GSX and OBX wireless seismic products were $6 million, a decrease of 51% compared to revenues of $12 million last year. Wireless revenues for the nine-month period were $23.8 million, a decrease of 66% compared to revenues of $70 million last year.

These results reflect declines in both product and rental revenues, and are a direct result of reduced demand precipitated by soft industry conditions. Although wireless rental revenues declined, we are pleased note that rental revenues from our OBX Marine nodal systems increased in both the quarter and year-to-date periods of 2015.

Reservoir seismic product revenues for the third quarter were $1.2 million, a decrease of 91% compared to revenues of $13 million last year. Reservoir product revenues for the nine-month period were $4.5 million, a decrease of 94% compared to revenues of $81 million last year. The decrease in revenues for each of the periods ended June 30, 2015, was primarily due to the absence of any PRM contracts in the current year, compared to PRM system deliveries to Statoil and other customers totaling $7 million, and $71 million for the three month and nine-month periods of last year respectively.

For the third quarter, non-seismic product revenues were $6.1 million, an increase of 17% compared to revenues of $5.2 million last year. Revenues from the nine-month period were $16.5 million, an increase of 4% compared to revenues of $15.9 million last year. The revenue increase for each period resulted from increased demand for our industrial products.

Our seismic segment gross profit margins continue to be unfavorably impacted by a number of factors, including significantly lower product and rental revenues, unabsorbed fixed manufacturing costs due to low factor utilization, fixed depreciation expenses from our rental equipment during periods of low utilization, a sales mix containing a concentration of significantly lower margin products, primarily caused by substantial reduction in revenues from our wireless and reservoir products, increased warranty cost due to manufacturing flaws, and increased inventory obsolescence expenses, due to high levels of slow-moving inventories.

Should current industry conditions persist, we expect our seismic product profit margins to be under significant stress for the remainder of the fiscal year and into the future, due to the factors we just cited. In addition, continued negative industry conditions could lead to asset impairments in the future.

Operating expenses for the third quarter were $9.1 million, a decrease of 8% compared to operating expenses of $10 million last year. Our operating expenses for the nine-month period were $29 million, a decrease of 13% compared to last year's operating expenses of $33 million. The decrease in each period was primarily due to the elimination of incentive compensation expenses, and was partially offset by increased bad debt expense.

Total capital investments in our rental fleet and property, plant, and equipment for the nine months ended June 30, 2015 were $5.8 million. These difficult times have required us to cautiously evaluate any new capital projects, as we seek to preserve cash and reduce our asset base. In that regard, we expect our total FY15 capital investments to be approximately $7 million.

Our inventory balance now stands at $131 million, representing a decline of $15 million since the beginning of the fiscal year. Although demand is weak, we're working diligently to bring back further reductions in our inventory levels. Purchase orders for raw materials remain at extremely low levels, and our production activities continue to be focused on essential tasks.

At June 30, 2015, our balance sheet reflected $45 million of cash and short-term investments, an increase of almost $2 million since the March quarter. Looking forward, we currently expect to utilize about $3 million to $5 million of cash in the fourth quarter.

That concludes my prepared remarks, and I'll turn the call back over to Rick.

Thanks, Tom. Around the globe, we've seen demand for seismic exploration services reach historic low levels, and there is no simplistic forecast for when increased levels of demand might return. To the extent that current market conditions and the seismic industry persist, demand for our seismic equipment products is expected to remain at corresponding low levels. Until seismic exploration activity returns to more conventional norms, and/or it manufacturing for new PRM contracts begins, our profits will continue to be hard-hit by depreciation of unutilized rental equipment and fixed factory overhead cost left absorbed by our minimal manufacturing operations.

Given that seismic exploration and reservoir management are necessary components for a stable and sustainable energy market, endurance through this down cycle and a strong emergence thereafter are our focused objectives. We believe that our strong balance sheet and continued development of industry technology are the key elements that will allow us to achieve these objectives.

This concludes our prepared remarks, so I will now turn the call back to Aaron to issue some questions.

(Operator Instructions)

Joe Maxa, Dougherty & Company.

I was wondering, on the OBX side, if you are seeing that demand for the rental continue here in the fourth quarter, as you had a pretty strong rental quarter, all things given, last quarter? And then also if you are getting any interest, any type of activity where there are maybe some purchases on any of your wireless stuff?

Certainly the indications are both from what you've seen in the last quarters and the quoting that we got outstanding, certainly indicates higher interest in the OBX, and an ongoing continuation of that increase. As we mentioned, that is still a very volatile situation, there.

It's always the case very easy to withdraw some of these contracts when they're offered. But yes, we're definitely seeing an increased interest currently, projecting into the fourth quarter, but no guarantees.

Okay. That's primarily with the OBX on rental side?

Yes, that's the OBX. There's always the potential of sales for our wireless equipment, but things are tough right now with respect to people's capital budgets and what they're willing to spend. And as we say, that's why demand for our products is somewhat low at this point.

Of course. Okay, that's all I had.

Bill Dezellem, Tieton Capital.

Thank you. I have a group of questions.

First of all, I wanted to clarify what I think we just heard you say relative to your rental revenue in the September quarter. You are, from what you see now, thinking that it will be up versus the June quarter, is that correct?

I can't predict that. I'm just saying the indications are that, particularly in the OBX, interest has increased, and we have quotes outstanding now. But all of that is extremely volatile, Bill, and so, no, we couldn't predict that per se.

Understood.

And you did reference in the release that you saw some OBX project cancellations. Were any of those some of the big ones that you had been hoping for? And can you characterize those cancellations, please.

Some of those cancellations are ones that are going to be retendered as we understand. Some are larger than others.

In fact, we mentioned that 3,700 or so of the OBX were out this quarter, and that has been an ongoing increase. Many of the jobs that we're quoting are actually much larger than that.

And those that you are quoting that are larger, what is the estimated time frame, and is the estimated time frame even relevant because things are so fluid right now?

Things are so fluid that it almost isn't relevant. And actually, many of these quotes do extend into the next fiscal year.

That is helpful.

Let's talk about the cash. Tom, you had mentioned you thought you would burn $3 million to $5 million of cash in the fourth quarter. What will that cash be used on?

Bill, it will be used probably, most likely payroll and supplies, and perhaps some raw materials, to the extent that we might need some. But mostly for operating expenses.

I guess what I'm trying to get my arms around is that you mentioned in your remarks, that you were working to bring inventory down, which should generate some cash. And here in the most recent quarter, you were able to generate a little bit of cash.

I'm trying to grasp if the inventory reduction is going to be less than what was in the June quarter, or what the other swing factors might be that would change you from a cash generation to a cash burn?

I can't really predict the exact type of inventory that we're going to buy, and how much we would be able to bring the inventory down. But most of it is for operating expenses, Bill. We have cash operating expenses every day.

Great, thank you both.

(Operator Instructions)

Bill Dezellem, Tieton Capital Management

If others won't ask questions, I'll come in with a couple more. The PRM conversations that you have been having, would you say that the likelihood of an order in the next 12 months has increased or decreased from how you would have characterized those conversations six months ago?

The likelihood of an order is really contingent on, among other things, things that we don't control. Whether or not CapEx budgets are redefined by some of the oil companies, we've seen -- if you look, you've seen many of the E&P companies actually reflect changes in their budgets, almost on a monthly basis, sometimes.

But we still think that there is very good chances of one of these PRM contracts coming through.

Would you like to handicap it, whether it's a higher or lower likelihood than you thought maybe six months ago?

No. That would be too speculative on my part. I think the risks are still there, but the opportunities are also still there.

Great. I'd actually like to ask the exact same question for OBX. Not rental, but outright order.

Relative to the conversations that you've been having, is the likelihood higher or lower with order in the next 12 months?

I think right now the focal element on the OBX still remains mostly an interest of rental. The contractors, while there is activity out there, and it's continuing to increase in terms of opportunities for surveys on ocean bottom, it's really an issue for the contractors of rolling those up into consecutive jobs, and that is difficult to do.

But that is the primary stimulus for looking more towards purchases. It's always possible, because many of these contractors are doing well about securing some of these jobs. But I can't really give you a number of probabilities on that.

And I'm going to circle back to PRM for a moment.

Given that it has been a while since you have had an order and the size of these orders can be quite large, are you sensing at all that there is a logjam taking place? And is there any chance that you have a strange scenario where you may end up being able to accept multiple orders?

Of course, that could happen. I can tell you now, there's not a logjam, as far as that goes. But timing on these are such that each of the oil companies that we might be discussing this with have their own time frames, and there is the chance that can happen.

But if you'll recall, the Statoil job, we actually pulled that in from the original timeframes that they had originally looked at, simply just through the use of overtime and that sort of thing. I don't see a logjam at this point.

That is helpful. Thank you again.

Ken Sill, Seaport Global.

(technical issues) Pardon the interruption, Ken. Your line is cutting out.

I'm sorry. I will take it off-line. It doesn't seem to be working.

You were sounding a little better toward the end, Ken, if you want to try it one more time?

Okay, I'll try it one more time.

Has there been any change in oil company decision-making with the recent decline in crude? I'm assuming it's just put more uncertainty in the market, but I was wondering if you noticed any change in the tone?

There's a lot of change in the oil industry. As I mentioned, you see them revise their capital budgets sometimes a third and fourth time. I think there is still a lot of examination by the oil companies as to their best approach.

Everyone is trying to guess what sort of duration some of this might extend through. Certainly there are changes, but then again, they've got to do business. And so to some extent, there is coming back to realities of what needs to be done, to protect their assets.

Okay thank you.

It's a tough time, but we're all aware of that. Thanks.

Jon Burke, Amica Insurance.

I have a question on the cash burn element. If we look -- if we just assume there is no change in current macro conditions, and if we look forward for the upcoming year, outside of the first-quarter payment that was made for bonuses for the prior year, is there anything -- would there be any material change in the cash burn going forward?

Jon, that's a good question. We think we can sustain at this level of averaging at about $1 million a month or less.

Going into next year we expect to receive a big income tax refund, we're going carry back a loss in our US tax return and get a refund. That will supply a lot of cash in the third quarter of next year. So overall, next year, we think we're fine.

Okay. Knowing that is no problem.

A couple more, Tom, you mentioned factors that are hurting the gross margin, one of them being warranty expense. Was that just one of many, or is that material? Was there a higher-than-expected return of equipment?

It wasn't really a return of equipment. It's equipment that had some flaws that we're in the process of repairing right now.

And so yes, it was higher than normal. I think we had about $1.9 million charge to warranty expense in the quarter, which is unusually high for us.

But it's a singular event. It's not an ongoing event.

Okay. And that's, whatever the issue was, either mechanical, technological, you guys have surrounded it and fixing it and fine going forward?

Yes.

And then the last one Tom, again on your comments, you mentioned possibility of asset impairments in the future. Is that more of an accounting where the assets are underutilized for so long that they have to be written down? Or I don't remember in the past you've made that statement on the calls.

Yes. It certainly is an accounting exercise that we do go through an impairment analysis quarterly, and we look at it. As we continue in this type of market, and the longer we're in this market, the longer we expect to be in this market, the higher the risk that impairments of a much larger magnitude than what we take every quarter -- we're always booking inventory reserves, and receivable issues, and things like that. But it could be greater than that, if this is going to be long-lasted, and our rental equipment and inventory and things are not going to have any demand.

So yes, we look at it quarterly, and we're just throwing that out there that it's a possible reality.

Okay. Is there a definition around it, as far as a look back, or is it a look forward, I guess?

There's a cash flow analysis that you have to put together and make assumptions about, the utilization of your assets and how much cash you will derive, and from a goodwill standpoint you would discount that back to the present value and look at those things. Yes, it's a fairly in-depth exercise.

Okay. Thanks. That is helpful.

(Operator Instructions)

At this time there are no additional phone questions. I would like to turn the program back over to Mr. Rick Wheeler for any additional remarks

Thank you, Aaron, and we would like to thank everyone for joining our call today. We look forward to speaking with everyone during our fourth-quarter conference call in November. Thanks again, and goodbye.

Thank you. This does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.