Geospace Technologies Corp (GEOS) 2018 Q1 法說會逐字稿

Welcome to the Geospace Technologies First Quarter 2018 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. Sir, you may begin.

Thanks, Leo. Good morning, and welcome to Geospace Technologies' conference call for the first quarter of fiscal year 2018. 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 a prepared overview of the quarter, and Tom will then follow with an in-depth commentary of our financial performance. Next, I'll close out the prepared portion of the call with some final remarks, and we will open the line for questions.

For everyone's convenience, as mentioned, a recording of this call will be linked in the Investor Relations section of our website at www.geospace.com. Be aware that the information we discuss this morning is time-sensitive and may not be accurate on the date one listens to the replay.

Also, many statements made today can be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about our product markets, revenue recognition, planned operations and capital expenditures. All such statements are based on our present knowledge and perception, while actual outcomes are influenced by uncertainties and other factors that we are unable to predict or control. Related known and unknown risks 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 10-Q filings.

After yesterday's market close, we released our financial results for the first quarter of fiscal year 2018, ended December 31, 2017. And as noted, revenue in the fourth quarter totaled $14.6 million, which represents a decrease of 4% from last year's first quarter. Despite the lower revenue, including $3.8 million in reduction in rental revenue compared to last year and $0.3 million portion of onetime termination expenses added to our cost of revenue, our first quarter gross profit significantly improved. The improvement over last year resulted primarily from the sale of 14,000 single-channel GSX stations from our rental fleet to an international seismic contractor and was further aided by a $2.7 million reduction in inventory obsolescence expenses.

Revenue from our traditional seismic products in the first quarter totaled $3.8 million, an increase of $1.2 million when compared to the first quarter of last year. The higher revenue is a direct result of the sale of geophone sensors from our rental fleet. Albeit lumpy, as sales in recent quarters have demonstrated, we nonetheless expect an overall improvement in revenue from our traditional products if seismic exploration activities increase and if oversupplies of these products are consumed.

Our wireless seismic products generated $3.6 million of revenue in the first quarter. This is a decrease of $2.7 million from the same period a year ago. Last year, first quarter revenue was boosted by a performing rental contract for our marine OBX products, whereas the first quarter of this year did not have any significant OBX rentals. However, the difference was partially offset by the sale in this quarter of the 14,000 single-channel GSX stations. We believe that recent sales of our wireless products in an otherwise very tough seismic market are a testament to the optimum utility they can provide for our customers.

Total revenue from our seismic products -- reservoir seismic products in the first quarter was $0.6 million compared with $0.5 million for the same 3-month period last year. Revenue for both periods was primarily driven by the sale, repair and rental of our borehole seismic tools. The differences in revenue across these periods are within typical variations of an overall flat demand for these products. Revenue from this segment is expected to remain essentially unchanged absent any revenue from PRM systems, which is not expected in the foreseeable future.

Our non-seismic business segment produced $6.5 million of revenue in 3 months -- in the 3 months ended December 31, 2017. This is an increase of 13% compared to last year's first quarter. Within this segment, the largest increase in revenue over the last year came from our industrial products, which grew to $3.7 million. Year-over-year revenue from our imaging products in the first quarter also increased modestly to $2.8 million. Compared to last year's fourth quarter, revenue from our non-seismic segment decreased by 9%, which can partially be attributed to a certain level of seasonality impacting our industrial product revenue. However, we continue to expect revenue from these products to incrementally grow as their use within the industry expands.

And now I'll turn the call over to Tom for more financial details.

Thanks, Rick, and good morning, everyone. Before I begin, I'd 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 first quarter ended December 31, 2017, we reported revenue of $14.6 million compared to last year's revenue of $15.3 million. Our net loss for the quarter was $9.5 million or $0.72 per diluted share compared to last year's net loss of $11.7 million or $0.89 per diluted share.

A breakdown of our seismic product revenue is as follows: Our traditional product revenue for the first quarter was $3.8 million, an increase of 47% compared to revenue of $2.6 million last year. The increase reflects a sale of specialty sensor products as well as the sale of geophones from our rental fleet.

Our GSX and OBX wireless product revenue for the quarter was $3.6 million, a decrease of 43% compared to revenue of $6.3 million last year. This decrease primarily reflects revenue that we had from a large OBX rental contract in last year's first quarter, which generated $4.3 million of rental revenue. There were no such similar rental contracts this year. Offsetting the decline in rental revenue in our first quarter was the sale of 14,000 channels of our GSX wireless recording stations from our rental fleet.

Reservoir product revenue for the first quarter was $618,000, an increase of 20% compared to revenue of $513,000 last year. The increase for both for the period was primarily due to higher demand for our borehole products and reservoir monitoring services. We reiterate that this segment will continue to contribute insignificant levels of revenue until we are engaged in a contract for the delivery of the PRM system.

Moving on to our non-seismic product segment. Our industrial product revenue for the first quarter was $3.7 million, an increase of 19% compared to revenue at $3.1 million last year. While year-over-year revenues were up, revenues are down sequentially due to an expected seasonal decline in demand for water meter products during the winter months. Imaging product revenue for the first quarter was $2.8 million, an increase of 5% compared to revenue of $2.7 million last year. We believe this increase relates mostly to the timing of customer orders and does not really reflect any particular trend in our customers' demand for our imaging products.

We recently announced an initiative to reduce our factory and operating costs by $6 million. These cost reductions are expected to result in improved operational performance and cash preservation as we go forward. However, seismic product demand continues to remain low. And as a result, our gross profit margins will remain under pressure due to the underutilized factory capacity that we have and from noncash charges for rental equipment and obsolescence. Until we see significantly improving seismic industry market conditions and increased factory utilization, we expect our seismic product gross profit margins to be challenged. Our first quarter operating expenses increased 8% from last year. Excluding the impact of bad debt expenses in both periods, our operating expenses declined by $200,000 or 2%, primarily resulting from reduced stock-based compensation expenses and were partially offset by $400,000 of termination costs.

Cash investments in our property, plant and equipment were $218,000 for the first quarter. We estimate fiscal year 2018 cash investments in our property, plant and equipment will be approximately $3 million. We made no cash investments into our rental fleet during the first quarter, although we do expect to make approximately $2 million of cash investments into our rental fleet to replenish rental equipment recently sold to customers.

Any additional investments into our rental fleet will be based on future demand for our OBX and GSX systems. At the end of our first quarter, our balance sheet remains strong with $46 million of cash and short-term investments. We had no long-term debt outstanding, and borrowings available under our credit agreement were $26 million. In addition, we reiterate that our various real estate holdings in Houston and around the world 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. As we noted, oil prices have substantially risen from their $30 low point 2 years ago, and the volatility seen in the past has, for now, mostly abated. As a result, many oil companies have recently reported at least an intention to increase capital spending, although rather conservatively in most cases. This is certainly a positive sign, but examination shows that a majority of stated increases are earmarked for production-related expenditures and not directed toward new exploration efforts. As such, the seismic industry will continue to face struggles because the amount of services and equipment available in the marketplace to acquire seismic data far exceeds the amount that current levels of exploration work can sustain. In most respects, this translates to an existing oversupply of seismic equipment and instrumentation, which in effect reduces demand for many of our products. We believe that the current low level of exploration being funded by oil and gas companies is insufficient to provide them with a sustainable future.

The implication is that exploration efforts will eventually have to increase, even though there is no real clarity regarding the time line of improvement. We believe that our genuine commitment to our customers and our dedication to embed quality, innovation and efficiency into our products help cement a position of leadership and preference in our industry. These fundamentals, in conjunction with our strong balance sheet and cost conscious management, give us a sound footing to both endure the current market conditions and to benefit in their recovery.

Now this concludes our prepared remarks, and I'll now turn the call back over to Leo for questions.

(Operator Instructions) Our first question comes from Bill Dezellem of Tieton Capital.

I actually have a group of questions. Cut me off when I've overstayed my welcome. First of all, the inventory obsolescence expense being down, would you explain how that works? And the reason I ask the question is, I have understood it to be somewhat formulaic, and since the activity level does not appear to have picked up as revenues are essentially flat. That seems to me as though it would lead to a very similar level of inventory obsolescence. So I hope I'm not too far in the weeds, and maybe it's an easy explanation.

Bill, this is Tom. Your explanation is pretty accurate. It is a formula approach, and it's based on activities within our inventory items that are on our shelf and ready to be sold. So I think it's a good sign. We've taken a significant amount of inventory obsolescence charges in the past, and this perhaps is a sign that, that level of charges may not be appropriate going forward. And we're kind of getting down to our core inventory that seems to have some movement. So I would explain it that way.

So just thinking out loud then, in the past, the inventory write-downs have not been across the board, but on the slower moving parts on the shelf. Those -- what this number is telling us, since you're dealing with a formula, is those slower moving parts are cleaned up to a very reasonable level. And the inventory that we do see is that, that moves more -- at a more comfortable pace.

Yes. Maybe stating it a little bit differently, the slower moving items or obsolete items have enough reserve against them or do not need as much reserve as what we've had in prior years.

Keep in mind too, Bill, that in the last quarter of the prior fiscal year, we took an accelerated amount of reserves on our PRM-related inventories too, which would somewhat move those aside.

Actually those -- both of those comments help clarify. And then, let's move to the rental fleet for a moment. I think there was a comment that you'll be spending a couple of million dollars with a rental fleet investment this quarter, you said due to sales that have taken place. Are those due to sales that we will see in the March quarter? Or those due to sales otherwise?

These are past sales. We had a fairly large sale of, I think, 45,000 channels of our GSX 3-component system back in the fourth quarter of 2017. And then again, here in the first quarter of 2018, we sold 14,000 channels. So it's to kind of bolster back enough channels to meet demand from our customers.

Okay. So your comment wasn't giving us great insight into something here in the March quarter, that has taken place already then.

No, these are channels previously sold in prior quarters.

All right. And then relative to OBX, what's the prognosis for additional meaningful rental contracts here in this fiscal year?

Well, we certainly have a customer base that is seeing more requests for quotes and are fulfilling those requests. So the quote side is certainly higher. But it's all going to be a function of how many of those manifest into real contracts in the future.

But the quoting activity is going up.

It is. The quoting activity is an encouraging aspect of what we see from our customers. And as a result, that puts a plus side tick on that OBX product line.

And is it your sense that multiple customers are quoting on the same piece of business, or are these a wide variety of pieces of business?

It's some of both. There are certain customers that are bidding on similar surveys out there and disparate surveys, too. So it kind of crosses all borders there.

Great. And then relative to PRM, what are you sensing in terms of the likelihood that there will be a contract put out for tender sometime in this calendar year?

I think there's some reasonable chances that, that may occur. But again, you've seen this business for many years, Bill, and it's not predictable with respect to that -- how those awards or those tenders are put out. Nonetheless, we're in those phases of discussions that would imply the possibility, but that's really all I can truthfully tell you.

And how many different oil organizations do you sense could be in a position to put a contract out this calendar year?

Well, they're all capable, but they're not doing it. So I mean, it's a short list, right? I mean, if you look at the space of those that have taken advantage of permanent reservoir monitoring and all the benefits it affords, the list is rather short. As we said before, they all do reservoir monitoring, but they don't all choose to take advantage of the return one gets on an investment in a permanent system as much. So the list has always been and still remains to be a short list.

(Operator Instructions) And we do have a question from David Nierenberg of Nierenberg.

Given that you've mentioned that even with the price of oil more than doubling off of the bottom that we're in a situation where there's an excessive amount of new and used seismic equipment inventory in the market. Without asking you to share anything of a proprietary nature, which you wouldn't answer anyway, I'd like to get a sense of what you can do through your R&D spending to deepen the moat in the hope that, that may accelerate the obsolescence of some of that competitive overhanging inventory and perhaps enable you to generate new revenues faster.

That's an excellent question, David. And the answer is that we can continue to impart new potential efficiencies that the contractors may be able to gain, either in the deployment side and/or the data preparation side from our equipment. And that's exactly sort of the front faces of what our R&D effort tend to focus on is providing some higher levels of efficiencies in the use of the equipment, so they can get more done with it comparatively, and then also to fold in any new technology that might be out there that still works into increasing those efficiencies. For example, we've got new products that we've introduced that can send data through the cloud. And to an extent that contractors learn how to make that an effective tool for themselves, we can fight that effort in that way too.

(Operator Instructions) And we do have a question from Ken Funsten of FAMCo.

What about this idea from the major shareholder about using some of the excess cash and borrowing power because you have so much to buy [in] stock that would help stockholders, your equity owners when the recovery does come with much better earnings? Why not?

Well, as it turns out, I mean, the amount of cash that we would be available to put into a stock repurchase would not really be essentially very effective in its change. So you're not going to see a great number of shares that would be capable of being purchased. We would furthermore be putting ourselves at risk with respect to the uncertainties that we face. And moreover, the strength that have allowed us to maintain a balance sheet of such integrity that we have now.

Well, I've been listening to you guys for a couple of years, and you often sound more like morticians than visionary management. I know it's been a rough period. But there would be incremental gain for shareholders. As the last caller said, the oil price has doubled. And as you said yourself, sooner or later oil companies must reengage in exploration just to replenish the reserves.

Yes, and the thing to do for prudent management is to make sure that one can achieve that endurance to where they can make those benefits. And without the clarity of the oil companies beginning to fund, as is appropriately needed, the exploration side of their businesses, then you're still playing with risks that aren't necessarily tractable risks.

Ken, it's also worth mentioning that in the last 2 fiscal years, we've received over $30 million of income tax refunds that have helped bolster our cash position. And without that, we would've had a huge cash burn in those years. And so we don't have any more income tax refunds going, and the market hasn't improved yet. So we're still in a cash burn situation. And we feel like it's best for us to keep as much dry powder as we can until we tangibly see a market turn.

Well, I imagine that the -- from what I've read of the letter that you've publicly published or that they have, the major shareholder disagrees with this. Speaking of taxes, are there any ramifications from the new tax bill to the company?

No. We don't see any right now. The -- most of our tax assets are fully reserved with a valuation allowance. So any changes there would have been offset. But internationally, we do not see a problem that would result in any additional taxes to us. We're still...

Problem or an opportunity.

Yes, we're still looking into it, but right now, we think we're going to be okay.

Okay. Back to that major shareholder, what sort of relationship do you have? Since they're pounding the table on the ideas of the stock repurchase and you're adamantly saying that it's too risky for your taste, what sort of dialogue is being hammered up between you two?

I think we have a very good dialogue, as a matter of fact. It's a very valued shareholder, and we respect the opinion as it relates to that. And the discussions we have are very earnest, and I think bring forth information that is useful to know.

And when you speak, you're speaking as management? Is -- the board, I would gather, is a separate entity?

Yes, the board is a separate entity from management altogether.

Yes, he has met with our members of our Board of Directors as well.

And the board echoes management in this case, 100%?

Yes, they do.

Okay. So -- well, I guess, until that changes, this is the status quo?

Well, I think for now it is.

Yes, I don't dispute what you're seeing from the owners of the commodity in terms of their lackadaisical behavior at exploration.

Honestly, it's almost hard to really digest because it doesn't make rational business sense. But then again, I mean, it's their decision to make.

Right. Like any commodity, it's self-correcting, and so this is mathematically inevitable, essentially given the demand that (inaudible) from all over the world for oil for whatever usage, with or without cars, that there's going to come with day of reckoning.

I believe you're right. I believe you're absolutely right.

(Operator Instructions) We have a follow-up from Mr. David Nierenberg.

We've also expressed to you our point of view about the repurchase, which is different from the point of view that you just heard. We would prefer, given the unknowability of the timing of the recovery of your business that you maintain a fortress balance sheet, because we view that as a critical part of your competitive advantage at a time when some of your competitors are in bankruptcy proceedings. Rather than seeing vital cash deployed on financial engineering, we would prefer instead that you continue investing in technology that deepens your moat. And the only kind of engineering that might possibly be of interest to us might be opportunities that could arise from time to time to take advantage of the distress of a competitor to take it over and destroy its inventory. But other than that, we want you guys to be the last man standing and to get all the business and to have the kind of recovery that you had 5 years ago. That would make it worth waiting for -- well worth waiting for.

Thank you, David. Yes, we appreciate that.

And at this time, I'd be happy to return the call to Mr. Rick Wheeler for any concluding remarks.

All right. Well, thank you, Leo. I think that concludes our call, and I thank everyone that joined us today. We look forward to speaking with you for our second quarter conference results in May. Thanks, and goodbye.

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