Ion Geophysical Corporation (IO) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Input/Output second quarter earnings conference call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded today, Thursday, August 4, of 2005. I would now like to turn the conference over to Mr. Jack Lascar.

Thank you, Erica, and good morning, and welcome to the Input/Output conference call. We appreciate you joining us today. Your hosts 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 e-mail distribution, or fax list to receive future news releases, or experience a technical problem and did not receive yours yesterday, please call DRG&E, and provide us with that information. That 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 recorded instant replay until August 11. The information was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, August 4, 2005, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by Management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the Company's expected future financial position, [second] sales, results of operations, cash flows, funds from operations, financing plans, gross margins, business strategies, budgets, projected costs and expenses, capital expenditures, competitive position, product offerings, technology development, access to capital and growth opportunities are forward-looking statements. These forward-looking statements are based on Management's current expectations, and includes known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control that may cause the Company's actual results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including its annual report on Form 10-K for the year ended December 31st, 2004, and on Form 10-Q for the first quarter of 2005. Furthermore, as we start this call, please also 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.

At this point, I'll turn the call to Bob Peebles.

Thanks, Jack. Good morning, and thank you for joining us. Over the next few minutes, I will speak to recent market trends, and update you on where we stand from an operations perspective, and on our key strategic initiatives. Mike will then review the second quarter financial results in more detail.

As you probably know, we reported last evening second quarter earnings of $0.03 on revenues of 84 million. We had mentioned in the first quarter conference call that we are expecting better results over the course of the year. I am pleased to report that we remain on track for improving our financial performance through the second half of the year. The highlights of the quarter, which Mike and I will elaborate on in more detail, include the fact that after several years of drought, our seismic contractor's businesses are improving, and they are slowly starting to increase their capital spending. We would expect this trend to escalate as they become more confident in the strength of the market, and they come up against capacity issues.

Related to our operations, we are seeing increases in full-wave usage by all companies, and interest continuing to grow. GXT has turned the corner getting back to profitability, and VectorSeis Ocean is positioned for an exciting future.

As we stated in our previous conference calls, one of our missions is to prove that recording the full wave field using digital technology will ultimately replace today's standard approach of using arrays of n-load geophones. Eventually, we believe that digital full wave will be the standard method of recording seismic data in land and on the seabed, and VectorSeis will be the sensor of choice due to its technical superiority.

We also believe that gains in productivity on land using full wave point receivers and other system enhancements will play a significant role in converting the market to digital since operating costs will decrease due to improved field performance. The productivity argument also applies in the marine market where we believe the productivity in VectorSeis Oceans, or VSO, and the improved data quality will have the effect of making OBC much more price competitive than in the past, and thereby expanding the OBC market.

I would now like to give you a quick update on some of the oil company full-wave usage numbers that I referenced during the last call. I will compare 2003, 2004, and the second quarter 2005 full wave data. Estimated full wave surveys expenditures was 7 million in 2003, 37 million in 2004, and for the first half of 2005, approximately 30 million. With 30 million already spent this year, compared to 37 million for all of 2004, we believe it's a realistic expectation that we will see oil companies' full wave spending increase again during 2005, likely accelerating as the year progresses.

The actual numbers of surveys that include both 2-D and 3-D, we had 24 surveys in 2003, 4 surveys in 2004, and a total of 28 surveys in the first half of 2005. The dollars per survey is growing, which is an indication that we are moving from more experiments to full-scale acquisition jobs. Our expectation is that we will likely see at least a 50% growth in the number of surveys year-over-year. Full wave surveys in the first half of this year includes ones in India, Russia, China, Canada, Poland, Kazakhstan, and the U.S. By our own internal estimates, I/O System IV vector sites' market share of oil company surveys was over 70% during the first half of 2005. We will continue to update those estimates as our market data improves throughout the year.

On the land imaging systems, in our land imaging group, vibrator truck orders remain very strong, reflecting a growing international land market, with our pipeline exceeding our delivery capacity. Our Sensor Geophone business started slower than expected in the first half following the record year in 2004, but it appears a slow start was due to delayed orders rather than any slowdown because our pipeline had been increasing over the last few months, indicating a strong finish.

We have also been getting feedback from some of our major oil company executive contacts that they are shifting additional emphasis to land acquisition, as much of the future opportunities are on land in places like Russia, Libya, Algeria, and India.

Related to land full wave system sales, we most recently closed a System Four VC sale to a new Chinese land contractor, expanding our domestic China contractor base. With our current pipeline of land system VectorSeis opportunities, we believe our 25 million revenue goal for land is obtainable and will be driven primarily by international markets.

On the marine imaging systems, our marine business had a strong quarter, with the sales up 54% from Q1. We are seeing strong contractor activity coupled with the opportunity of equipping new vessels later this year or in early 2006. The best news for the quarter is the significant progress we made concerning field reliability and related performance for our seabed full wave acquisition system, VectorSeis Ocean, VSO. Working closely with our launch partner, RXT, we have eliminated many of the technical and operational issues. We will continue to upgrade the system with improvements that come from our experiences over the last several months.

As we announced this morning in a separate press release, we recently entered into a new multi-year agreement with RXT that includes the framework for significant new system sales over the next couple of years, beginning with the PO just issued for the second system. That second system will likely be delivered over six months, starting in Q4 of this year. Even though we had operational issues related to going through the start-up phases with the system, we have consistently gotten outstanding data.

We also have seen the productivity gains we had expected, and expect even further productivity improvements with the new planned enhancements. We look forward to working closely with RXT to focus on building the market now, but the operational issues appear to be behind us. We believe more than ever in the commercial viability of our new VSO system, and expect a bright future going forward as it sets a new standard for marine imaging.

In summary, we expect a strong second half with our marine group that includes the likely delivery of VSO equipment in the fourth quarter, and equipping a 3-D boat for a new customer in Norway. The growing interest by oil companies for high resolution code streamer imaging for 4-D applications and more complex exploration is being reflected in their interest in Western G Co's Q-Marine. This is starting to drive more interest to some of our new Digiposition technologies by competing marine contractors and bodes well for future Digi product line sales. Our marine business is well positioned for some exciting times ahead. Also, Concept Systems is benefiting from the general improvement in marine activity, and the desire for improved positioning, which is the focus of some of concept's new product lines.

Now, let's move to GXT. As expected, GXT returned to profitability this quarter with an improved processing business. After a few months of disappointing results, we are finally seeing GXT's business regain a better balance between proprietary processing, multi-client surveys, and data sales, which has positive implications for improving profitability for GXT, as the year unfolds.

GXT's gross margins should continue to improve as their processing capacity is soaked up with increasing demand. Even with the improving Gulf of Mexico activity, we are expecting that much of GXT's future growth will be in international markets. A significant amount of current spending in the Gulf of Mexico has been driven more by new sheeting than high-end reprocessing.

At the same time, many of the international markets are about where the Gulf was several years ago with a significant need for hiring and reprocessing. We believe GXT is well positioned to take advantage of that trend as we build out their international capabilities. We are also focusing on growing GXT's land processing business to support the expanding full wave land opportunities.

With our data processing more in balance, the main variable for GXT's second half performance is related to multi-client projects, where permitting and other factors are still impacting their timing. GXT has a strong pipeline of opportunities, but they are bunching up late in the year with permits and crew availability being the main variables.

I will now turn the call over to Mike who will give more detail on our financial results for the second quarter.

Thank you, Bob.

Looking at the second quarter results, we generated 84 million in revenues, compared to 62.3 million last year. It is worth noting that if you exclude the low, but improving margins at GXT, margins for the remaining portions of the company were 30% in the second quarter. Our entire land business, both sensor and the systems unit, had revenues of 37.4 million, compared to 36.6 million a year ago. The Sensor Geophone business was down slightly year-over-year, resulting in all the land revenue growth being in our systems and truck business.

Gross margins in our land group were 23%, compared to 28% last year, reflecting competitive price challenges as we entered new markets and customers such as Algeria, and a large competitive tender in our Sensor Geophone unit. Margins in our land business are a focal point for us in the second half; at the same time, we continue to build the full wave market.

In the marine business, sales were 16.8 million, compared to 13.1 million a year ago. This quarter included no VSO sales, as our backlog for VSO was expected to generate revenues in the last half of the year. Our marine business is up approximately 28% from last year, and 54% from Q1. This is obvious evidence of the strong marine market.

As marine fleet more widely increases in size and in utilization, we are starting to see more opportunities for revenue growth throughout the year. Several large orders, including the next VSO system are expected to ship in the last half. Gross margins in the marine group were 43% compared to 38% last year. Our Concept Systems data management software business had revenues of 3.7 million, and also is experiencing a strong marine market.

Seismic imaging solution group, which includes GXT, had revenues of 26.1 million. Seismic imaging solutions had gross margins of 23% in the second quarter, which is an improvement from the 15% we reported in the first quarter. And important key for GXT going forward is the growing backlog of processing project which grew over 50% during the second quarter. We expect revenues and gross margins from this portion of their business to improve significantly during the second half as GXT's capacity is more fully utilized for processing projects.

Overall, operating expenses fell from 25% of revenue in the second quarter of last year to 22% this year. We worked hard to keep our costs under control, leveraging our infrastructure to higher revenues. As we had indicated, we expect revenues to increase through the year, while expenses should remain fairly consistent. Excluding the impact of the GXT acquisition in June of 2004, operating expenses were essentially flat with last year. We incurred an income tax expense of 521,000 as we continue to use our [prior-year] of tax losses.

Turning to the balance sheet, inventory dropped approximately 3 million from year end, Capex for the quarter was 1.5 million, and additions to the data library were 1.1 million. Since year end, inventory in our land business is down 10%, while the marine inventory is growing with large second half projects and backlog. During the second quarter, the landlord of our leased facility in Houston sold the facility to a new owner. We were able to renegotiate the lease, reducing our overall rent costs, and remove 11 million in debt and 8 million in property representing the capital leased amounts previously on our balance sheet.

At the end of May, we announced that we entered into a new 3-year agreement establishing a 25 million senior secured revolving credit facility with CNC Bank and Whitney National Bank. We believe this facility will provide I/O with financial flexibility necessary to accommodate our working capital needs as we continue to grow. Just to mention the revision to the first quarter that was outlined in our press release, during the second quarter, the Company's internal review process determined that because of the clerical error, approximately $778,000 in royalty expenses were incurred by GXT and recorded in the second quarter and should have been recorded in the first quarter of 2005. The impact of this revision is to increase cost of sales in the first quarter by 778,000, resulting in the aggregate loss per share during the first quarter of $0.05 compared to a loss per share of $0.04 as previously reported. The Company will amend its quarterly report on Form 10-Q for the first quarter to reflect this revision.

To summarize, at the total company, we are within 2 million of our internal revenue plan for the first six months. Our marine business is in good shape with a strong pipeline for the remainder of this year, and the high likelihood for major DSO sales again year. Our land business continues to gain traction in full wave with gross margins being a key area of focus for us. GXT is gaining their balance, and we expect a stronger second half from this operation. Overall costs are being held relatively constant, while we continue to increase overall sales and marketing activities to support full wave adoption.

Moving now to the outlook, for 2005, we now expect revenues to range between 330 and 350 million, with much of the revenue growth coming from continued market penetration of our field acquisition systems, continued improvement of GX Technology's overall results, and a strong overall marine seismic market. We expect sales and margins to improve as we move through the second half of the year, with second half gross margins to be likely to be in the high 20's, or low 30 range. We anticipate operating expenses as a percentage of revenues to range between 20-23% for the last half of the year. As a result, we anticipate 2005 earnings now to range between $0.12 and $0.25 per share. Several multi-client projects at GXT are in process, but some uncertainty exists around the exact timing, as well as the permitting requirements.

In addition, the next VSO system may be delivered in phases, and therefore the revenues which will be recognized in 2005 could vary accordingly. These uncertainties have led us to reduce the lower end of the range a few cents.

Now, I would like to turn the call back to Bob for some closing remarks.

Thanks, Mike. We've made significant progress over the last 24 months, but there's still much more we can do to improve our execution, both technical and business development. That is where I'll be spending the majority of my time for the remainder this year. Operator, we now are ready for questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS]. First question is from Andrew O'Connor with Wells Capital. Please go ahead.

Good morning, gentlemen. Bob or Mike, can you remind me, what Capex do you guys plan to spend for full year '05?

Capex for the full year, I'm not talking about the data library. Capex is about $10 million.

Okay. And then in line with your estimate of Capex and your new earnings guidance, $0.12 to $0.25, what free cash flow would be commensurate with the new earnings guidance of $0.12 to $0.25 for full-year '05, and what priorities for free cash flow are there? Thanks.

Free cash flow for the year would be approximately $10 million, and really, that money will go to fund working capital as these large projects go through our system.

That's all we have for now. Thank you.

Next question is from George Davies with Adco. Please go ahead.

Good morning, congratulations on what I think I hear and what I'm reading, it sounds like things are on the right track, and perhaps going to maintain. My first question is in regard to holding down expenses relative to growth in revenues, can you expand a little bit on marketing and sales which were up year-over-year for the quarter, 45% versus a 35% gain in net sales? And were up for the six months 80% versus 53% growth in net sales for the six months; can you expand on how that happened?

That is simply the result of the fact that GXT was acquired at the end of the second quarter last year, so most all of the increase you see are the result of GXT being in the numbers for the full six months this year, and only a couple of weeks last year.

Okay. Can you, I guess the second half of that question then would be what sort of relationship we're likely to see for the second half of the year in terms of increased revenues versus increases in marketing and sales.

As I mentioned, we expect the expenses would be relatively consistent over the last half of the year. We reported 18.5 million this quarter. I would tell you, it would be a little north or a little south of that as we go through the year. As we have said, we expect revenues to be higher in the second half, meaning that the percentage would go down.

All right. That's all for now. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is from Joe Agular with Johnson Rice. Please go ahead.

Thanks, good morning. My question first I'd like to ask a question on the VSO. Could you maybe give a little bit of color on your decision to give RXT the exclusive in all areas except for the North Sea through 2007?

One of the beliefs we have in the early part of the technology cycle, we're better served to work closely with a partner, and build the market out versus trying to deal with multiple partners. Now, as we said in the press release, that does not exclude some limited sales we think are quite possible in the North Sea, so we will likely have, a good chance we'll have another client out there.

Obviously, [clients that] -- who a requirement of purchases for that to work for us is fine. We really are dealing with our capacity to build, for one thing, our capacity to support, and so it's just really good to have that focus over the next, really another couple years. If you look at the lead times on manufacturing, we would frankly have a hard time serving multiple clients in that short period of time, although through 2007, it sounds like a long time, it's really not that long, in that context.

Okay. And I guess the agreement itself, I mean, are they pretty much locked into the schedule of two per year?

Yes. To maintain exclusivity.

And there is a second system that will be delivered in 2005? Is that correct?

That's correct.

If I could ask my follow-up question on the kind of guidance issues for this year, I guess we've noticed in the past third quarter is more seasonal than the others. Are you expecting the same thing this year?

The third quarter. Actually, we're sort of looking at the half; but right now, I think right now what we are seeing is strength in the market. In other words, compared to a year ago, the market just didn't have quite the feel of momentum in it. So particularly in just our normal businesses, in our normal businesses like our Sensor Geophone business, our basic land systems, trucks, those kind of things, the strength is there. So really, the variable for us that we have in timing is really more or less tied, not even -- the GXT processing business is strong, so it's really tied more or less to the timing of the -- timing of their multi client business. [multiple speakers]

So what I'm trying to get at I guess is your guidance for the full year, you would expect the third and fourth quarters to look fairly similar then?

Joe, as we said at the beginning of the year, we expect the year to continue to improve as we move along. And we also said that the VSO shipment is likely in the fourth quarter, and you know how big that is.

Okay. That explains it, Mike. Thank you.

Next question is from Thiru Ramakrishnan with Simmons. Go ahead.

Good morning. With respect to the RXT deal, that was fairly encouraging. I want to touch on, absent RXT in 2006 and 2007, what are your thoughts on customer demand of VSO?

Obviously, one -- RXT's commitment reflects their belief in the strength of the market, as reflect ours. The thing that I think that we are seeing, Joe, -- Thiru, sorry -- the thing we are seeing is the data quality is just outstanding; and secondly, we're seeing perform, as we get into the system where it's working properly, then the performance is coming up to our expectations. And if you just combine those two facts with growing need for better marine data in a lot of these development areas, it's just pretty easy to imagine this thing is going to go up. RXT has an aggressive plan; they're putting the capital behind them to take to market, and so we're encouraged.

I guess -- that lends itself to the second follow-up. How confident are you that RXT will have sufficient backlog to warrant purchasing two systems per year?

We wouldn't enter into the agreement if we didn't feel pretty good about their capability to develop the market. Part of it, you have to talk to RXT. They have their own backlog and their own marketing and sales efforts. We have some visibility in the market, we particularly have visibility in the market where we are working with them, so I think the combination of those make us feel good about the market. Is it a guarantee? No. Obviously, the market has to build out as everyone is expected to happen.

If we look towards 2007, and if VSO starts to catch on beyond RXT, is there any clause in the contract which would allow you to revoke exclusivity?

No, the exclusivity goes through 2007, and then after that, it's fair game.

Last question on the pricing pressure witnessed on land products. Mike, you kind of touched on this. Was this more a function of the traditional Geophones and sensors, or is this on the land VectorSeis systems?

Not the VectorSeis system, per se. It's been more in our traditional sensor business; [a bit] in our standard land analog system, that's where we're seeing most of the pressure, particularly in some of the new markets where we haven't been as strong in the past. So I think that's just normal competitive reaction.

Is that something you expect to persist?

Sorry?

Is that something you expect to persist? Continue?

In some of these markets that we are now into where we really didn't have a presence in the past, we are heads up, basically in the backyard of our biggest competitor, yep, and in those situations, which happened in the second quarter, we're being aggressive and they are being aggressive.

Thanks a lot, guys.

Thank you. Next question is from [Michael McNolty] with Contact Capitol.

Hi. It sounds from the tone of your thoughts going forward for the rest of the year and also into '06, that you think we're finally seeing the turn that you folks have been talking about now, you know, for the past, I'd say, two or three quarters. Is there anything that you could see derailing this? And on a scale of 1-10, how positive are you on the 30,000 view outlook, if you will?

I'll pass on the scale of 1-10. I think we've given you our best judgment at this point in time. As far as our confidence, I think the things we are seeing that we feel very confident, one is that the general market itself is certainly strengthening. We're seeing that across the board, we are seeing on the contractor's side, we are certainly seeing the customers get healthier; and healthier means their business is expanding, and when business expands, there's going to be an increase, there's a good estimate that the increase in their business will increase. We're seeing this at the underline base business improving. I guess the uncertainty there has more to do with oil prices than just the macros of the industry. I would guess that in our minds, we are aligned with most people, feeling like we are probably closer to the beginning of a longer run than at the end of a long run, but that's always an uncertainty.

On the other parts of our business, the, on the processing part of GXT, we're seeing that backlog increasing nicely, and if anything, we could be looking at capacity issues towards the end of year. Our capacity issues there is mainly around people. There's not really issues of [inaudible] -- you can get that almost on demand. So the real issue is how many people can you add and still keep your quality. We are trying to really pace that business. They have a good reputation and we want to keep it so we'll expand it, so I don't see a lot of risk there.

But probably the two places we have the most uncertainty in our forecast, one is, it still comes back to the diffusion of the brand new technology. We are nearly adoptive phase, we are building out the market, we are making progress, we are seeing oil companies use it more and more. How you translate that into actual system sales is where the uncertainty comes as far as quarter to quarter, and that's probably the bigger question. And the other question we have, which are pretty big numbers for us, are the multi client surveys at GXT, and those are, particularly in these international markets, are tied to things like getting your permits from the various countries, timing of vessels. Those are becoming more tricky to manage because of capacity starting to tighten up. So that will be the two main areas we would say we have uncertainty.

Okay. Great. Thank you. And then, just as a follow-up, with regards to RXT and the VSO sales, it sounds like there could be a scenario where you actually have more sales this year than what is already planned? Is that going up to backlog?

There's an outside possibility that we could have another PO or so issued -- not another, a PO issued related to the North Sea, just don't know for sure. That's just a possibility. We, there's no way we can deliver anymore than we're currently estimating we can deliver in this year. It's all, we just basically have as much as we can manufacture and been manufacturing.

And just to refresh my memory, what is the -- with regard to a sale, a VSO sale, how much is that exactly?

Depending on the final system configuration, it's 17-$22 million.

Okay. Great. Thanks a lot. Congratulations. Sounds like things are really going your way.

Thank you.

Our next question is from Rich Beaven with Signia Capital.

I'm wondering if you can give me an idea with respect to market share on the land side for analog and vector sites, do you think you're holding market share, is there some erosion there?

On the vector side sale, we track -- what we are tracking is the, is two things, one is systems themselves, obviously, and then also the, which we think is even a more important indicator, is the jobs that oil companies are doing, and the percent of those jobs being done with our system, because that means exposure of our technology to the end user, which is the oil company. We feel confident that we're 70 plus percent market share on the oil company surveys. And I would say that the, on the systems side, if anything it's a bit higher than that on the actual system sales.

All right. I'm just looking at, I'm just looking at crew utilization looks to be relatively high; it looks like there's a lot of folks out there in the field. I'm just surprised that equipment sales are not a bit better, a bit higher. There's a little bit more activity.

One of the -- there's two dynamics there, one dynamic are that the, as the activity is increased, some of that is just soaking up capacity that's been in the market, realizing these guys have come out of years of drought. The second is that in the standard land analog system sale, we have not had the same share as our main competitor.

We believe we're improving on that with our System IV analog system. We really introduced that about this time last year, and really, have only really been effectively marketing it in the last year, in the last several months. That is where we are seeing some of the pricing issues, is we now have a system that we think is competitive, we're seeing reaction to that. We have won some deals. So I think we are, we are starting to, starting to penetrate what was a pretty low market share position as far as systems sales in the analog side.

Okay. Thanks. Get back in queue.

Our next question is from John Morosani with Warrington Capital.

Good morning, guys.

Good morning.

What kind of a gross margin are you expecting to be getting on the VSOs -- what are you [betting] to?

I don't want to -- because we've given out a price range, I don't want to go there just because of competitive reasons. I would say that if you look at our marine margins, it's sort of, and our company margins, sort of the mid 30's on aggregate, that's probably a good way to think about it.

Okay. And what am I missing here, Bob?

Could you speak up a little bit? We are having a hard time hearing you.

Sorry. Listening to one of your competitors in this area, and they claim anyway that they are selling to a much higher gross margin, some substantially over 50%, are you guys just kind of horsing your way into the market, or is there something different about your technology, or are you at the early end of the machining curve? What would be the difference there?

I don't know for sure. I don't know if they're talking about land systems or if they are talking about the marine systems or what systems they are talking about.

These are armored marine cables. [multiple speakers] for reservoir auguring.

I know what you're talking about now. That's a very different market. You're probably more or less referencing the permit market, which is cable installations and permits.

We are not actually, we actually have not competed in that market specifically. We are creating some offerings, but, so I think you are in an apples and oranges comparison here.

And are you planning to enter that market? Is that something, or are the ocean bottom stuff that you are looking for, the initial survey is not the reservoir monitoring stuff?

Our lead punch and focus right now is this retrievable system, although we are very much looking at how we can cost effectively also compete on the permit systems. Our desire is to get to focus on full wave versus trying to compete in the standard analog permit [inaudible]. We think the future is more or less full wave.

Thank you.

Our final question is from [Mary Supray] with Gracie Square Advisors. Please go ahead.

Hello. I had a question on the delivery of the VSO to your, to RXT, you said you are going to do it in pieces? And I was wondering why, and also does that have to do with customizing it, and how much customizing is there in these things, or how much of it is more standardized [multiple speakers]?

It's just, as you, these are big systems that have lots of cables, they have buoys, and as the system integration in the field, the actual, the actual technology itself, the main variables is how many cables they want, how big the spread, those kinds of things. But we are just delivering it as it is manufactured; we deliver and they can integrate it in, and it's just really timing to their timing of when they are trying to get into the field; so as we got it, we ship it to them, and they start integrating it in.

This is more their choice? I mean you could deliver it all at once if that's what was needed?

Actually, just from the way it's manufactured, it's better -- it comes from different suppliers, so if it's ready to ship, we ship, and they are pulling it together.

Yes. Okay. Thanks.

Gentlemen, please continue with any closing comments.

Okay. Thank you for taking the time to attend this conference call, and we look forward to talking to you at our third quarter conference call later in the year.

Thank you.

Ladies and gentlemen, this concludes the Input/Output second quarter earnings conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000, followed by access number 11035344 followed by the pound sign. Once again, we thank you for your participation. Have a pleasant day. You may now disconnect.