Ion Geophysical Corporation (IO) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Input/Output Third Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Jack Lascar. Please go ahead sir.

Thank you Rob. Good morning and welcome to Input/Output Third Quarter Conference Call. We appreciate your joining us today. Your hosts today are Bob Peebler, President and Chief Executive Officer and Mike Kirksey, Executive Vice President and Chief Financial Officer. Before I turn the call over to management, I have a few items to go over. If you would like to be on an email distribution or fax list to receive future news releases or experience a technical problem and didn't receive yours yesterday, please call DRG&E and relay that information. That number is 713-529-6600. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations Section of the Company's website at www.i-o.com or via a recorded instant replay until November 4, 2004. To use the replay feature, call area code 303-590-3000 and use the pass code 1101-1606.

Information reported on this call speaks only as of today October 28, 2004 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Management is going to discuss today certain topics that will contain forward-looking information that are based on management’s beliefs as well as assumptions made by any information currently available to management. Forward-looking information includes statements regarding expected revenues, gross margin, EBITDA and earnings per share for the fourth quarter and full year 2004. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday and please note that the contents of our conference call this morning are covered by these statements. Risks that the Company faces are discussed in greater detail in the Company's filings with the Securities and Exchange Commission including the Company's report on Form 10-K for the year ended December 31, 2003. Please also note that you can find a reconciliation to reported numbers for non-GAAP measures that we will discuss on this call in our press release. I would like to turn the call over now to Bob Peebler.

Good morning and thank you for joining us. The agenda this morning will include review of the major third-quarter events and progress against our goals, a review of the third-quarter financial results, a look at the remainder of 2004 followed by a question and answer period. The expression, `When it rains, it pours` is a good way to describe our third quarter. We had an unfortunate confluence of events that pushed our results significantly below our original guidance. Our gross product margin of 24 percent was negatively impacted by our lower margin product mix, unexpected costs associated with launching new systems and customers delaying purchase commitments. In addition we recognized a write-down of the Yukos subsidiary [Inaudible] geophysical receivable.

Before Mike goes into the specific financial details of the quarter, I would like to step back and give you the bigger picture of my views of IO's business including what we are doing to improve our performance going forward. Even though we are all disappointed to not hit our numbers in this quarter, there are several positive factors that are important to highlight. These include hot strong topline growth that resulted in revenues of 80.9 million in line with our guidance of 75 to 85 million. We had year-over-year growth of 167 percent and almost a 100 percent when acquisitions of GXT and Concept Systems are excluded.

Operating cost as percent of revenue at 24 percent excluding unusual items compared to 38 percent for Q3 2003. Final shipment of our VectorSeis Ocean to our launch partner RXT and we're now in the early shakedown phase on an initial shoot. Significant VectorSeis expansion pool was sold to the Chinese contractor BGP for a very large VectorSeis shoot in China. The opportunity was driven by working directly with the Chinese oil company, Sinopec which also included GXT processing. This is an excellent example of our business coming together to solve an oil company problem that drives business for everyone and another validation of our strategy.

We also had strong growth in GXT data library pipeline that has been driven by multiple projects around the world. We’ve had good progress towards R&D integration between I/O Imaging Systems, Concept and GXT that is targeting both image quality and productivity gains via a systems approach. We're on track with our growth targets for VectorSeis Systems approaching 40 million for the year compared to approximately 20 million in 2003, and finally our EBITDA of 9.5 million excluding the Russian write-down compared to a negative EBITDA of 1.9 million in Q3, 2003. Mike Kirksey will go into more details for the quarter but I would like to make the point that excluding the expenses related to our systems introductions, we mainly suffered from a poor product and service mix. We have the expected topline growth that fell far short of what we expected in gross margin, mainly due to lower data library sales for GXT and lower margin products sales in our Land Division.

We feel this was an anomaly versus the trend and look forward to significantly improve gross margins in Q4. That being said, we can do better in managing our business, and I would like to provide you with 3 key areas that we are redoubling our efforts. The first is sales management to give us better visibility into the status of our pipeline of opportunities including probability and timing of closing. Over the last few months, we had combined 2 privately held companies, Concept Systems and GXT, with I/O. The fact that we're all in a growth mode coupled with a needed quarterly discipline of a public Company has trained our sales management systems.

I'm confident that we can make significant improvements over the medium term, but I would also caution that even with better sales management systems, we are always going to be challenged on a quarter-by-quarter basis since the mix of our sales include very large deals that can swing earnings by several cents one way or the other.

The second area is product engineering manufacturing with a goal to significantly improve quality and lower costs. Although we are delighted to be in the position of bringing 2 major systems into the market this year, we're having too many unplanned startup and cost issues that could have been prevented with better quality assurance programs from the beginning. We are already learning from our experiences and are adjusting to do better in the future. In the meantime, we are aggressively tackling any short-term product related issues to help assure that we satisfy both the oil companies and our launch partner contractors. We will spare no effort to make sure our new products are successful in the market.

The third is a renewed focus on ways to get additional manufacturing costs out of our existing products and to strengthen our pricing when possible. We have multiple programs to improve margins and even though we fell short of our Q3 targets, we have made substantial progress over last year when our gross margin was 16 percent compared to 24 percent for the third quarter this year. We look forward to progress that carries on into 2005.

Now to our view on the overall market. It's our expectation in 2005 we'll see a substantial increase in oil company exploration spending. Most of the larger companies are currently in the planning phase for next year and the feedback we're getting is they are bullish mainly due to the growing belief about the sustainability of higher commodity prices. Many are also prospect-short, and that drive increases in exploration and development spending in seismic services.

We expect to see some normal year-end spending, but I don't believe that the higher commodity prices are translating into significantly higher exploration spending for the balance of the year. The large oil companies seem to be sticking to their original exploration plans to emphasize financial discipline with the increases coming through their new 2005 plans. We have also seen some portfolio shuffling due to the higher prices that has actually delayed some short-term spending until they sort out what assets they plan to sell. We still have the view that the international markets including new ones like Libya are going to be our main growth engines with limited expansion in North America. I am frankly bullish on next year's overall industry activity and believe that the service sector should benefit from increasing businesses and firming up of prices. This obviously helps if our customer contractors return to stronger profitability.

In summary, I view our third quarter as mainly hitting a speed bump rather than any systemic or market problems. I am very confident of our strategy and our key programs to deliver results. We expect to do better in Q4 and look forward to a strong 2005. Most importantly, with the acquisitions of Concept Systems and GXT, IO is now a leader in new seismic imaging technologies and has built a strategic foundation for a technology-based seismic solutions company. The technologies that we have launched along with the game changing technologies we have in our R&D plans can change the face of our industry in the years ahead. Full-wave digital systems, advanced marine positioning technology, leading edge processing tools and advanced data integration capabilities all form the backbone of the future of IO. I could not be more confident in our future. I will now turn it over to Mike.

Thank you Bob. As indicated in our press release, second quarter sales were 80.9 million, GX Technology accounted for 17.5 million of which 4 million were library sales. Before I go into division-by-division details, let me summarize the impact on our margin of the Q3 issues Bob referred to. Net expected start-up costs for new products impacted gross margins by 2.5 points, this is unfortunate, but when we launch new technologies, we are going to over deliver service to make sure our launch partners are well taken care of. Lower than expected revenues from both high margin data library sales and system sales reduced our gross margin about 4 points compared to our expectations. Some of these will materialize in Q4. Additionally, an unfavorable product mix reduced the gross margin approximately 1.5 points. All of these items had an overall EPS impact of approximately 11 cents, if these items had not impacted Q3, our results would have been within our original guidance provided in July.

Now, to the division details. In our Land Group sales were 38.4 million compared to 36.6 million in Q2 and 20.7 million last year, gross margins were 22 percent in the Land Group compared to 28 percent in Q2. As stated earlier, a combination of product mix and unplanned startup costs reduced gross profit from expected levels. The Sensor geophone Division continued to be a strong performer in our land group on pace for a record year with 16.4 million in sales in Q3. The Marine Division continued its good year with sales of 19.1 million in Q3 compared to 13.1 million in Q2 and 7.6 million a year ago. Positioning products and VectorSeis Ocean both continue to add handsomely to the Marine revenues. The final VectorSeis Ocean shipment for 2004 was made in Q3 bringing total shipments of VectorSeis Ocean this year to approximately 17 million.

Gross margins in Marine were 29 percent for Q3 compared to 38 percent in Q2. Like Land unexpected startup expenses dropped margins from expected levels. At GXT we expected more library sales, which carry attractive margins, but they did not materialize in Q3. We expect Q4 library sales to be somewhat larger. Also GXT's processing business was somewhat slow in Q3, matching their historical business pattern. This is expected to pick up in Q4 and on into Q5 as the Gulf of Mexico heats up with pending lead sales and expansion into international markets. Operating expenses were 28 percent of sales, 24 percent excluding the building gain and the Russia Reserve, down from 38 percent of sales in Q3 last year.

We continue to leverage our existing infrastructure which was built for higher sales levels we are now starting to achieve. Events in Russia concerning the Yukos subsidiary [Inaudible] geophysical which owed us 11 million came to a head recently when we were informed by Yukos that this subsidiary would likely not continue to operate. All related vendors started taking action under their individual contracts. Our receivables were secured by the equipment and a majority of the equipment has been recovered but the whereabouts of some is still unknown and some has been damaged. While we continue to pursue all our avenues of recovery, the Company believes the reserve of 5.2 million is appropriate at this time and should cover any exposure related to the receivables. This amount is reflected in G&A expenses. The low taxes for Q3 continue to reflect the use of our U.S. net operating loss carry forward. This lower rate is likely to continue into 2005 as U.S. profitability continues to improve. Our balance sheet finished the third quarter with approximately 32 million in cash and CapEx was 2 million. I'll now turn it back to Bob for some other comments.

Looking at the rest of 2004, we expect continued acceptance of our new products in major systems, which is reflected in our pipeline going into Q4. Customer interest in System Four and in VectorSeis-based systems in general continues to grow, for example, with significant customer interest at the lastest Society of Exploration Geophysicists, or SEG, convention in October. The ramp-up of System Four analog sales was slower than expected due to start-up issues during Q3. But we believe most of these are behind us and we are now renewing our sales efforts going into Q4. We now have the advantage of a much more competitive offering in the analog land system market and look forward to improving our market share over the next several quarters. An additional advantage of System Four Analog is its hybrid capability that allows recording of both analog and/or VectorSeis digital full-wave, depending on the desires of the oil company customer. Because of this fiber capability every System Four analog sale creates a future opportunity to sell VectorSeis full-wave digital into the market. We recently sold a 6000-channel system for analog to BGP to be used initially in the Chinese domestic market. This is a good start on our goal to gain market share in our international markets.

Our Sensory group in Holland is enjoying a record year that is carrying on into Q4. We believe that the Sensor business is a good indicator of overall seismic land business since they have a large market share and sell geophones that are used with both IO and competitor land systems. Their pipeline continues to look good for this quarter and into 2005. The integrated seismic services and processing offerings of GXT including the access service line are positioned to have excellent results going forward. Several multi-client projects are ongoing that will come into the market in Q4 and on into 2005. The market is rapidly shifting from spectator purchases to specific reprocessing requirements and custom shoots, both proprietary and multi-client sponsored. The increasing need for customer design surveys and high-end imaging should benefit IO moving forward and these noncommodity-imaging solutions are the focus of GXT.

In addition to this ISS business GXT excels in ultra deep depth imaging which is critical in assessing regional petroleum systems. As we've stated before in the Gulf of Mexico specifically, approximately 3000 blocks will likely change hands over the next 3 years. This turnover will drive demand for the ultra deep data licenses along with tailored seismic acquisition processing. Again a major future driver for business related to the Gulf of Mexico where we expect we’ll start becoming a major business driver for GXT.

Looking ahead, based on our current pipeline of business, we expect 2004 revenues to be in the 260 to 270 million range. We expect consolidated gross margins to be approximately 30 percent. Based on the expected level of revenues and gross margin EBITDA should be 30 to 35 million. Excluding the impact of the Russian write-off earnings per share should range from 14 to 20 cents. The third quarter is traditionally a weaker quarter with the fourth quarter and first quarter being the strongest. Because of the large individual sales in our pipeline we've widened the traditional range in order to better demonstrate the impact of timing and product mix with our overall expectations. As a result, we expect fourth-quarter revenues to be in the 80 to 90 million range and earnings per share to range between 18 cents to 14 cents. In summary, Q3 was a difficult one for us. We learned some lessons. We have dealt with the old Russian receivable problem from a financial reporting perspective, but we'll continue to pursue recovery. We remain confident that we have laid a strategic foundation for profitable future. We will now open for questions.

(OPERATOR COMMENTS) Thiru Ramakrishnan, Simmons.

It's one quick clarification, your Q4 guidance is, what?

8 to 14 cents.

8 to 14 cents. I misheard you. Looking into Q4, when you look at some of the unfavorable items that you had that delayed data library sales and the delayed higher margin land systems, how much of that do you expect to get in the fourth quarter versus what was expected?

The pipeline -- there is a sort of two questions on the data library side, the pipeline of opportunities, if anything going into the fourth quarter is the same or has grown, and what's more promising compared to the third quarter is that if you get into the fourth quarter, typically the oil companies are easier to transact with, they are effectively, as you know, going into the end of the year spending. I've spent considerable time with our GXT guys, and they have plenty of projects, they have a very large pipeline and they have real deals they are talking to, obviously, to backup the numbers, so I would say, some of the ones that obviously, were in the Q3 will likely be among the ones that will close in Q4, there’s probably some that weren’t in the Q3 (indiscernible) Q4. So, those -- it's a long list and there is a lot of different reasons that oil companies buy, and because they all look at their own exploration programs, it's sort of a -- it's a dynamic.

And then the land systems?

The land systems, yes, the land systems, I would say that, yes, there will be some in the Q4 that came out of Q3.

When we look at start-up costs, as your products become more prolific in the marketplace, or should we expect these sort of costs to be recurring or is this kind of a learning curve, where you get it right the first time and then--?

It's a learning curve. I would like to say we are at the top of the curve. These systems are large, complex real-time systems, and you have a multiple of field circumstances that we put them in, and so even though you can actually do significant testing, until you get them in the field, they are just circumstances that you don't anticipate, and so what will happen, we started out with probably 70 percent of the circumstances covered, and then you get into a complex job and you find issues that you have to deal with. So, I would say we are a long ways from where we were, even 2 or 3 months ago we’ve made a lot of progress, we've learned a lot of things. I think, we are still going to have -- we will still probably have some expenses going forward, frankly, it's a little bit of an unknown for us.

What we are dedicated to is to do whatever it takes basically to make sure that the products are successful, and so what we wouldn’t do is if we need to spend a little more money to make sure that we are fixing the problem or making sure the customer is satisfied, we will do that. So, we are going to err on the side of customer satisfaction, because these are such important launches for us that we just cannot not do that. I would say you know, I have been in the sort of the technology service business for a long, long time and this doesn’t really surprise me. In retrospect, we're seeing a lot of things we could do better, and with new products that we also have in the hopper, we're going to be a lot smarter on how we roll them out and a lot of the quality control processes we can put in place to do a better job. All that being said, it is not unusual in the oil field when you get out that you have to sort of nurture these products a little bit at the beginning. So -- that's a longwinded way of saying, I think we've made a lot of progress. I can't promise you that we won't have some more expenses associated with the rollout. I think that more of it is behind us than in front of us.

All right. And then, with some of the sales, data library and the land -- the land systems' sales that were delayed, revenue was made up with kind of your lower margin traditional equipment?

It sort of worked out -- it just worked out that way that we had some -- we start out the quarter with a large backlog or pipeline of opportunities. And normally what happens is you at the end you get a reasonable distribution of how they come in and in this case, it wasn't sort of like we could just -- we were sitting there swapping in-and-out things. In this case, the things that came in disproportionate to what we had anticipated in revenue mix. The things that we got in were things like [Inaudible] trucks which are -- which right now are a pretty good business for us. But they can't carry to the day.

We’ve got to have a mix of the other higher margin products and we just haven't seen this mix develop like that. I think a lit bit of it is the reflection of the third quarter. The third quarter is a little bit -- is historically a little bit slower. I think some of the -- particularly on the data library sales, I think as we look at the business, I think it will be more naturally skewed. I think Q3, when we plan -- going forward, we are going to look at Q3 is going to be probably a normal soft quarter in that part of our business. But even that, I think it was just a confluence of things that all added up to -- we had a pretty good revenue -- we had a -- we were pretty much where we thought on the revenue, but the mix just didn't work for us.

In Q4, are you expecting the same strong sales from the VectorSeis, the trucks and kind of the more traditional equipment?

We are expecting our margins to get back to a more normal mix. I mean we just look at the mix of the business and we should see a more normal mix and it should be reflected in the gross product margin. It's more on target with what we have – we’ve made a lot of progress there, it should be more on target to what we have been experiencing versus having it drop down like it did.

Last question with your Q4 gross margin guidance. Are you guys comfortable using that same gross margin guidance for '05?

Yes, we have been pretty much saying that sort of the low 30s is a good solid number to be using.

(OPERATOR INSTRUCTIONS). Mary Saffrin (ph), Gracey Spear Advisors (ph).

I am wondering if you could give us an update on what's going on with your arrangements with Apache and I read about another one that started with 4 companies in the North Sea. How is this going in to lead into product sales? Has it led into anything so far or is it still more in the research?

On Apache - Apache -- probably the best news we have with Apache right now, one is that they are refining to the stage where they are actually interpreting on data in the Canadian shoots in the winter. If you recall, that was where we sort of started out, had shoots last -- sort of in the first -- I think it was the January, February, March time frame. We have been going through process, the data, now they are starting to actually interpret. We have gotten feedback from them that they are quite satisfied; they think the data quality is quite good, I would say outstanding. And now they are actually into interpretation and although we don't yet have specifics, it sounds like that they are going to be drilling some wells off of targets off of at least one of the fields that they have been working.

So they are seeing things -- they are apparently seeing things that they couldn't have seen without the shear data, they liked the resolution. So all that will add up to -- once we can get out there with that information in more detail, that just helps build the case for the advantages of Full-Wave. So I would say, net-net, that relationship is still going. We are shooting another data set in a whole different area in Oklahoma. We are probably a quarter away or so of having that data shot. Our initial -- we have got some initial feedback that the data itself looks pretty good; not pretty good, looks good. And again they are trying to solve a real tough problem there. We are not sure the application of it, but we are all hopeful that we can actually make some breakthroughs there. So, I would say, it's going along as we had expected, it is frustrating for all of us. These are long cycles, from the time you shoot the data, process the data, and interpret data, in fact as we go through this it really helps emphasize our strategy of finding ways to shorten that cycle.

Is this -- do you think this is typically the shot last winter, so it’s like a – (multiple speakers).

Yes. That's very typical. If you look at the average cycle on land, if you throw in the permitting and all things they do, it's not unusual for it to take a year from the time they fist start to the time they actually drill the wells. You'll get the results and drill the wells. I don’t know if you remember, but one thing we've emphasized is that by taking more of a system approach, we are looking for ways to substantially find ways to reduce that cycle time because you can imagine how that drives net present value on projects.

Robert Ford, Sanders Morris Harris.

Good morning guys. What date did you close the sale on the Alvin facility?

It was in August something, August -- I don't remember exact date.

Okay. So, you had that 3-cent gain there included in your guidance that you gave on October 5. Correct?

Yes. October 5, we had a lot of preliminary information. We knew that and so at that point in time, basically everything we knew, at that point in time we gave that guidance.

Okay. Just for future reference you probably won't disclose that that your guidance included the 3-cent gain. The market is not accepting the numbers real well this morning? Switching over to GXT, can you give us some type of revenue guidance for 4Q, some kind of range for the entire business and for data library sales?

I'd hate to give granular data library sales. Their expected revenues in Q4, again, is between kind of a 27 and 33 million, if I remember exactly right, which is quite a bit larger than Q3.

Okay. And last thing Mike. Centered at 16.4 million this quarter, what did it do in the second quarter and the third quarter of last year?

It did about 9, about 10 million in the second quarter. And the third quarter last year, I don't have that at my finger tips but I will get that for you.

Okay. That's all I have for now. Thank you guys.

Perry Leditor (ph), Steelberg (ph) Investment Management.

Good morning. I just -- first of all I wanted to clarify is the figure that was just given about the gain -- the after-tax impact of the Alvin sale is 3 cents, correct?

That's about correct. Yes.

Okay. And then, you all had terrific organic revenue growth this quarter and in the Ocean area -- in the marine area I was wondering if you could give us any indication of how much of the growth there was from the final shipments of this VectorSeis Ocean-bottom project?

The final piece of the VectorSeis Ocean was about 10 million.

Okay, terrific. Thank you.

Ole Slorer, Morgan Stanley.

Just to clarify one thing on the Russia charge, where exactly in the third quarter was that accounted for? Was it in the G&A line or was it--?

Yes, Ole, that's right.

Okay. And I wonder whether you can also with respect to – if you could provide guidance for the fourth quarter, give us some insight if possible to what some of the initial response on the new DXT products have been around the shelf in the fourth quarter for sale?

Let me repeat the question, Ole, because you were hard to hear. What I heard you say was that, you wanted to know what the preliminary reaction--

Yes. You have West Africa span, you have a Carib span. You have a whole – (multiple speakers) -- 6 to 7 new GXT products on the shelf there, which should be ready to hit the market about now and I wonder whether you’ve gotten any preliminary kind of feedback from customers?

Yes. I can, it's a bit anecdotal because I haven't been involved in -- I've got more or less -- the products are selling, but when I look at what they have in their pipeline, whether it’s strong interest and they are sort of in the negotiating type stages, it's combinations of those products. What we are seeing are that people are interested in two of these and one of those and so there is -- so those conversations going on. I think it is going to be quite usual for us see – where we may sell A, B, and D to one company and C, A, and 3 to the other company. So, I would say the interest is good, which is not surprising since they were originally funded, which I already said there was at least -- typically more than one oil company that had a strong interest, then the guys don't do a shoot in an area unless there’s more than the companies that originally put the deal together for substantial future purchasers. So I would say net-net, it looks like the interest is high.

Is it possible to say anything about how the backlog has developed? You mentioned that the backlog is developing very well for equipments. Can you--?

For the backlog, I would use the word pipeline rather than backlog -- pipeline meaning real identified opportunities where we're at some stage in the sell cycle, and when I look at the pipeline, it's made up of many of those data libraries. So it's not just skewed towards just one set -- in fact, it has a lot of those in it.

Is it possible to quantify how that pipeline has developed a little bit more in terms of numbers?

We haven't given out total pipeline numbers, and I frankly don't have that -- I don't have that historical data in front of me. What I just know right now is that they have a substantial coverage. In other words, when I look at the total pipeline, and what they're trying to close, there is a pretty substantial coverage.

I would imagine that a second sale of VectorSeis Ocean would be part of that pipeline to the same customers? Is there any kind of more information about when we could expect that to potentially close?

That would be in -- because that project is not a data library, it's a proprietary shoot and it's really not in the pipeline per se of the library sales. It's more or less in a contracted operation that includes some processing.

Ole, we are having a little trouble hearing your question. Were you talking about VectorSeis Ocean or about the data libraries? Which was your first question?

And the backlog that you got on equipment sales most on data libraries?

We are having a little trouble hearing you. With regard to VectorSeis Ocean, what is in the pipeline for that is into next year. There are a couple of customers that are interested and that we're talking to right now on that subject. But the VectorSeis Ocean part of the pipeline is in 2005.

Yes that's 2005, and I would say that our main interest over the rest of this quarter is to – and into early '05 is to really get this RXT system up and running satisfactorily, really demonstrate the performance and all the things that go along with it. But we do have now active conversations in markets starting to prepare for '05.

Byron Pope, Pickering Energy Partners.

BGP has been a relatively important customer for you guys in 2003 and in first half of this year. Can you handicap for us how you see activity levels for these guys shaping up for '05? Do you think these guys purchase more from you in '05 than they did in '04 or is it just too early to tell?

It's a little bit early to tell. My guess is that the -- if I look at the total business I'm not sure that they're going to grow in percent of our total business. They are still in our plans -- I'm sure they’ll be a substantial part of our go-forward business. But I haven't seen -- we're right now right in the planning for '05, and still sort of rolling numbers and that’s sort of at a granular level of how our customer pipeline shake out. But my sense is -- BGP in 2003 has spent a lot expanding into international markets. In 2004 this year, they've been consolidating a bit, and I think they're still focused a little more on the domestic market -- the example of our 6000 channel AC going in for domestic -- actually it is quite encouraging for us because we really want to participate in that domestic Chinese market. But I think probably next year, I wouldn't be surprised to see them about the same level of participation as we've had in this year.

Okay. One other question if I could. I think Russian revenues are roughly 18 percent of total revenues in Q2. Just wondering how much of that revenue was related to this Yukos subsidiary that will cease to operate going forward?

None. No shipments, I think we mentioned it in the press release were 2001, 2002, and 2003.

(OPERATOR INSTRUCTIONS). John Morosani, ING Investment Management.

Couple of questions here. Just for the revenues that you guys thought you were going to get sort of turn of the third quarter. Have any of those contracts actually come in, the multi-client sales?

Yes, I believe two of them.

2 million.

2 million of it.

Two of that, what was that 4, 5?

There was about 5 million or so that we expected, that didn't make it, and we know where 2 million of that is.

Okay, and you had said that GXT, that the third quarter was a seasonally slow quarter, Bob, and that you would expect a pickup as we roll into the fourth quarter, we are sort of a third of the way through there. Have you seen that acceleration happen so far?

Yes, I have seen it in terms of what I would say their confidence in their pipeline and the level of activities. The nature of that business, we should see business closing probably in November and December, if this works like that. But I am spending some more time over there and most recently it just seems like they feel pretty solid about what they’ve got in front of them.

I guess my question is there is the part of their business is the sale of success (ph) in their library and part of it is the actual processing work, which I would assume that sort of cranks through on a day-by-day basis?

Yes, actually there are sort of two components to their ISS business, one is the actual projects they put together and start to process and they actually -- you get revenues from that and then you ultimately at the end have the data library sales. And then you have the processing business itself. The processing business itself, if you go back and really look at their history, Q3 is almost always their weakest quarter and they are seeing now some interest and more bid activity and all of that starting to pick up. So, I think they are starting to follow their normal pattern, I think our learning from this as you could imagine, we're ourselves -- this is the first full quarter we have had the guys on board and our learning is also understanding the patterns of their business and how to judge it. So, but yes, John, I think their main businesses are following the pattern.

Joe Agular with Johnson Rice.

Did you give -- I apologize if I missed this. Did you all give an update on how you are coming along with your target for VectorSeis sales in '04?

Yes, I think we are -- we actually wrote it into the -- I can’t remember if it was in the press release, the script, but the, as you remember we have made about 20 million in system sales a year ago. We are approaching -- well we should be around 40 million plus or minus, one deal can put you 3 or $4 million one side or other there, but we are making the progress pretty much as we had planned.

It sounds like you are on target, is it too early to maybe venture a guess for what that might look like in '05?

Too early.

Okay.

That is the kind of stuff we are looking at today.

Okay. And GX, I guess, obviously, the timing issue is always something you have to consider, but if you sort of factor into just maybe a bigger picture on GX in terms of the growth rate that you see in that particular segment. Do you still see kind of the similar growth rates heading into '05 that you anticipated say when the deal is made to buy – (multiple speakers)?

Yes, I think so. I think we are still -- we sort of had a 30 percent plus or minus growth rates in sort of our internal thinking and that is still pretty much what we are thinking. Again, we will be probably clarifying that when we come back out at the beginning of the--after we finish this quarter, but we haven't seen anything that has spooked us about GXT and when I look at the projects they are working on and the overall activity of the industry, I still have to feel very strong about the quality of that business.

One of the things I guess is a little bit tricky right now, is that over the last 5 years or so, the seismic cycle if you will has sort of been disconnected from the way it used to work when you were very much seeing seismic as the very early leading indicator of industry activity, and I guess it's tough for some of us out here, at least to try and figure out sort of the connection between what's going on as you see major oil companies starting to ramp up spending, broadly speaking on a global basis and trying to determine how much of that's going to end up in terms of seismic increases. Can you just maybe give a little color if you have any on what you think?

Here's what I am seeing that's interesting, these are all just, I would say putting some color into the way we think about it. One is that some of the products that are most interested —that the oil companies are most interested as it relates to GXT is the -- what they call their span (ph) products, in fact their data libraries are built on these spans which are almost basin by basin, where they go in and do very deep long 2D lines that are designed to better understand the petroleum systems of those basins. Those are really used for exploration. The only reason you would want those, is that if you are trying to go in and are looking at deep exploration plays or exploration plays in new areas that you don't understand the regional geology. And we are seeing a trend in some of the major companies of sort of back to basics of beeping up their own regional geological staffs.

And the combination of those things, the combination of those things are what's -- what tells me that, I think that everybody understands that they are going to have to get more into the exploration side of the business, now that's just the marine side. On the land side we are seeing most of the exploration activity coming in interest in more the international markets. It's not on land, on U.S. land; it's more into the -- almost a nonconventional area, it used to be called nonconventional; it’s becoming conventional. It’s things like the Barnett shale and trying to figure out fractures and it’s the things like the low perocity (ph) type gas ends in the Rockies, and those are -- we are even seeing in those areas a renewed interest in geophysics, because they are finding that those aren’t as homogenous reservoirs as they thought, and so they are trying to figure out the geological structure. Well as long as the risk is high, in a way, that’s exploration.

So I think, my sense is, is that there is a growing interest and a growing push, the one thing I have learned, I've been trying to cycle around talking to senior people in oil companies over the last several weeks to get my own, just got the sense of it, and the one thing I ended up discovering with the few data points I have, is when I ask them, how come, why aren’t we seeing a bigger increase in spending with the commodity prices in the exploration arena. I always almost get that back this idea of we are really trying to have the physical discipline of sticking to our plan, and we are going to capture the increase in the 2005 plans. Right now we are planning our exploration budgets, but what we don't want to do is to do what we've done in the past is start letting commodity prices get ourselves ahead of our planning. We would like to internalize it, decide where we are going to have our price tax and then increase the planned spending (ph). So I think the thing we will all be watching, when we start getting some rollups of plant exploration spending next year. It’s going to be really interesting. In the spending, it’s going to be interesting if we can figure out how much of that is going to be in the exploration area.

Now also we all have to remember that geophysics is also used in development activities and so I think that -- we're already seeing, I think people going back in into areas that are somewhat complex, whether it's for 4D or for infield drilling, but in more complex highly faulted areas, for example. I just have to believe that the net-net of all that is that we are going to see increases. Now as you’ve probably done as we’ve looked at the services companies as they have started increasing their businesses, when you get underneath the covers and look at the geophysics side, haven't gotten as strong as the other pieces of those businesses. So there is still a little bit of a lag.

Okay, if I could ask just one final question please, the fourth quarter guidance -- 8 to 14 obviously as you noted is a broad range. How comfortable are you with say the low end of that range at this point, in terms of -- is there visibility they have that gives you confidence that the 8 cents is sort of -- we can reach that?

What we tried to do is our low end of the range, we sort of look at it in a probabilistic way and we sort of look at how things could stack up, and what we tried to do is to have a low end sort of represent where we are pretty confident of that. Now obviously we’ve just demonstrated that that doesn't always work. And frankly the -- a little bit of our difficulty -- in addition to just look at the deals of just this whole mix issue, you know, it should -- as we look over longer time frames those things should work out. We literally have things that can move -- that can move, you know, one deal could move things 2 or 3 cents. So, that makes it pretty difficult for us. So, even though it's a broad range, there's not that many deals that can move you in and out of that range. If I looked at it, I can argue that the probability of 8 is the same probability as 14 almost, meaning that there is not -- the uncertainty is fairly broad, it's not a kite distribution. And that's why we are going to try to get better at that and part of that is, if you think about it, we have had -- we've put together companies. Two of them that I've mentioned have not been in the public domain and so sort of the discipline is exactly understanding where you are at. As you always find when you bring in private companies, they're just not there. And so we are working with the guys to get -- give us better visibility, better understand how they think about where the deals are in their deal structure, but that takes time to get that kind of discipline in our own understanding, so we know the questions to ask. We'll get better, I guarantee you. That's a -- when you have a disappointment, you learn from that and we look at how could we do that? So, this is our best current judgment of -- could we pull outside that range? There is always that possibility, you can't say 100 percent, but we've obviously -- we've tried to put out something out that we've confidence in.

And at this time, we have no further questions. I would like to turn the conference back to management for any concluding comments. Please go ahead.

We appreciate you guys joining us today. We continue to build IO in line with our strategy, and this quarter was an unfortunate set of circumstances. We've always known the results can have bumps because of the nature of our products. However, our long-term view has not changed. Thank you again for joining us today.

Ladies and gentlemen, that concludes the Input/Output Third Quarter Earnings Conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 using pass code 11011606. Thank you again for your participation on today's conference and you may now disconnect.