Ion Geophysical Corporation (IO) 2005 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 to conference over to Mr. Jack Lascar. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the Input/Output 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 did not receive yours yesterday, please call DRG&E and provide us with 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 recorded instant replay November 17. The information was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, November 10, 2005, and therefore, you are 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, segment sales, results of operations, cash flow, funds from operations, financing plans, gross margins, business strategy, budgets, projected costs and expenses, capital expenditures, competitive position, product offering, technology developments, access to capital and growth opportunity are forward-looking statements. These forward-looking statements are based on management's current expectations and include 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 2004 and on Form 10-Q for the third 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 those statements.

Since this is the week of the SEG show here in Houston and there are so many new things going on within the industry regarding products in the market, Mike will cover the financials first, and then Bob will cover all the market and product details. Bob -- I'm sorry, Mike.

Thanks, Jack and thanks to everyone for joining us. Looking at the third-quarter results in our press release, we generated 82.7 million in revenues compared to 80.9 million in the third quarter last year and 84 million in the second quarter of this year. When you realize that the third quarter of 2004 included $11 million of VectorSeis Ocean sales and this year none, you can see the improving conditions. Considering the third quarter is usually the weakest for most of our business, this level of revenues further strengthens our view of our improving market.

It was especially frustrating to decide to defer 7.3 million of revenue or $0.05 per share to comply with what we believe the SEC position is regarding revenue recognition rules. I would like to give you some details.

One of two contracts in question representing 80% of the total was with a customer who had our proposal and contract for a Data Library sale and communicated their acceptance of our offer the last week of September via e-mail. We shipped the data and invoiced. When the completed paperwork arrived in our office, the contract was dated Monday, October 3 and the customer signature dated October 5. Our lawyers concluded we had a binding agreement in September. In subsequent follow-up with a customer, they verified it was their understanding to be a September transaction, but administrative absences delayed the paperwork. In fact, we have already been paid the majority of the invoice.

In consultation with our auditors, they advised that it was their experience that in today's environment the SEC would not approve of revenue recognition in the third quarter with these facts. The deferred revenue is reflected on our September 30 balance sheet and will be included in our operating results in Q4. Quite disappointing, but only temporary. So enough of that story.

Turning to our operations, our entire Land Group, both Sensor and the Land Systems unit, had revenues of 38.8 million compared to 38.4 million a year ago. The Sensor Geophone business was down 1.9 million year-over-year because of a single large lower margin order last year. However, the profitability of the Sensor Geophone group in the third quarter this year reached new highs. We now have back VectorSeis system for systems in the hands of 20 contractors worldwide, including the shipment scheduled for Q4. The gross margins in our Land Group were 20% compared to 22% last year, reflecting the continued cost reduction challenges and the price competition while introducing new technology and penetrating new markets. There was also some effect of a lower margin sales mix.

Cost and gross margins are our prime areas of focus as achieving 30% gross profit in our Land Systems unit would have added $0.05 per share.

In the Marine business, sales were 16.3 million compared to 19.1 million a year ago. Last year's Q3 results included 11 million of the first VectorSeis Ocean sale. This quarter did not include any VectorSeis Ocean sales as our forecast plan calls for VSO revenues in the last quarter of this year. This is continued evidence of the improving Towed Streamer and Marine market. As the Marine fleet worldwide increases in size and in utilization, we're starting to see more opportunities for revenue growth throughout this year and next.

Gross margins in the Marine group were 42% compared to 29% last year, a material improvement and another example of the strong Marine market, including a positive mix, of our Digi product line.

Our Concept Systems data management software business had revenues of 4.7 million. That continued to be highly respected in the field of navigation, positioning and (inaudible). They performed above plan for the quarter.

Our Seismic Imaging Solutions group, which includes GXT, had a good quarter with revenues of 22.8 million compared to 18.6 million last year. GXT's performance showed steady progress. As I noted earlier, we deferred recognizing revenue of 7.3 million or $0.05 per share. The impact of the deferral decision on overall gross margins of the Company was 3 points. The impact on operating income was 4.3 million, and the impact on EBITDA was 4.7 million.

The group reported gross margins of 26% in the third quarter, which is a major improvement from the 23% we reported in the second quarter or the 12% we reported in last year's third quarter. As we mentioned previously, a higher level of processing business improved the margins nicely. The backlog of processing projects continued to grow during the third quarter. The processing back (technical difficulty)-- levels that should sustain attractive operating results in this portion of GXT. The data processing business is expected to run at full capacity throughout Q4. GXT management indicates they are quoting more processing opportunities than they have seen in the past.

Now overall operating expenses for the Company fell from 27% of revenue in the third quarter of last year to 23% this year. Over the past year, we have reduced our operating expenses from 30% of revenue down to the low 20s through a combination of higher revenues and cost control initiatives. As we have indicated, we can expect to continue to leverage your infrastructure with higher revenues.

We incurred an income tax expense of approximately 1 million during the quarter. We continued to use our net operating loss carryforwards in the U.S. that were generated in prior years. The factors are a little higher in this quarter as a result of a larger mix of foreign earnings.

Turning to the balance sheet, inventories dropped approximately 4.1 million from year-end and are expected to continue to drop during Q4. CapEx for the quarter was approximately 2 million and additions to the data library were 7.7 million as several projects have got underway.

You will notice deferred revenue increased about 6 million, reflecting the deferred recognition of the Data Library sales I mentioned. Our 25 million line of credit was drawn down 3.6 million at September 30. The remainder of the line is available.

Moving now to the outlook, as we mentioned in our press release yesterday evening, we continue to 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, a stronger overall Marine Seismic market and the recognition of the deferred revenue of library sales in the four quarters.

We expect margins to continue improving as we move to the last quarter of the year with full-year 2005 gross margins to range between 27 and 30%. We anticipate operating expenses as a percentage of revenues to be between 18 and 22% during the last quarter. As a result, we continue to anticipate 2005 earnings to range between 12 and $0.25 per share.

I would like to turn the call over to Bob now for his remarks.

Thank you, Mike. We just completed a very busy part of our week with the Society of Exploration Geophysics or SEG ending yesterday afternoon. This is a very special convention as it marked the 74 birthday of the SEG and for I/O a breakthrough announcement on our next generation Land Imaging System, FireFly. More on that later.

Over the next few minutes, I will speak to all the current events, products and market trends and update you on where we stand from an operations standpoint.

We had mentioned in the past couple of quarters that we expected improving markets and results over the course of the year. I'm pleased to report that we're seeing that. I was disappointed in the way the revenue recognition decisions worked out, but that is the accounting world we find ourselves, and in the end, from a sales booking perspective, we had a very solid quarter and have entered Q4 with a growing pipeline of opportunities.

I would also like to mention that even though Katrina and Rita are now a distant memory, they were very real challenges for us during Q3, and I would like to say a few words about what happened from a human perspective.

Our Marine Imaging Systems group is headquartered in New Orleans, which includes the manufacturing, R&D and operations, and we have approximately 100 employees and their families that live in the greater New Orleans area. Due to the storm, our New Orleans operations were completely shut down with people scattered all over the country and many out of communications. The first day after the storm we had already started the process of moving over 65 families to Houston into temporary housing and helping them deal with all the related issues such as schooling for their children, clothing, banking, issues, etc.

We were still missing over one-half of our New Orleans employees three days after the storm. So much of our early focus was helping locate people and setting up a support structure, both physical and emotional. Our non New Orleans-based employees and even suppliers opened their hearts, homes and pocketbooks to provide help in this desperate time, including contributing over $40,000 which the Company matched to help the families with the most need. I was equally impressed by the determination of our New Orleans team to not only get back into operation, but to continue to focus on making the Q3 forecast. The support of our HR group and their expanded team with the help of many other folks inside and outside the Company provided sufficient support to address family issues so that our employees could focus much of their time on getting our operations going again.

We did have a small amount of business that slipped out, mainly related to manufacturing delays to some of our suppliers who were also impacted. But the majority of the forecasted Marine business was booked and shipped. Not long after Katrina, we faced Rita and the problem shifted to Houston. This was complicated by the fact we were also operating Marine temporarily out of Houston. Fortunately Houston missed the worst of Rita as it bared east of us, but we did lose six days of operations and all the related challenges that caused.

Again, our people responded professionally with safety as the main priority, but also focusing on how to get back to business as soon as practical. This included scrambling to ship equipment early before the storm arrived and GXT setting up computing systems to allow processers to work from home. Again, we experienced minimal impact on our business due to the preparations before the storm and quick recovery afterwards.

In retrospect, I could not be prouder of the people in our Company. They not only demonstrated their motivation and operational skills for our business, but also the human side of watching out for each other. For the ones listening in, I would like to again say thank you.

Now before I get into the details of each division, I would like to make a few overarching comments about our business and as I see it going forward. I've had several interesting discussions with oil company and contractor executives during the summer months and most recently during the SEG. There are some common themes that I believe will be the main drivers of our business for the foreseeable future.

First and maybe most important is a growing realization that we're draining the world's reserves at approximately 50% faster than we're replacing them. Another way to say it is for every barrel of hydrocarbon we find we're using two. Many companies have dealt with their own reserves prospect problem by acquiring other companies and properties, but that does not add a barrel of oil to the world's reserves, and high commodity prices are increasingly making those types of transactions financially difficult.

A very recent comment from the CEO of a super independent was that their main problem was being case rich and project poor. He was realizing that to survive they needed a strategy that was based more on finding oil and gas than acquiring, but they did not have the technical edge needed to accomplish that goal. Much of the technology developed and being applied over the last decade has been designed to extract hydrocarbons faster to increase cash flows and profits versus finding new reserves. This long cycle now has put us in what we call the desperate age of exploration where companies are now being forced to move away from the lower risk development and production and start meeting the technical challenges of finding and producing in much more complex reserves -- reservoirs.

To meet this challenge will require much better images of the reservoirs, both refining and producing them, and I believe we're at the beginning of a new era of seismic energy. The second theme is that even though we have a big focus on going deeper in Marine, both depth of water and drilling horizons, approximately 80% of the world's reserves are on land. I have been told by several oil company CEOs that they are planning to significantly increase their spending on land activities, in many cases starting with shooting new seismic data. I think this is a megatrend that will continue during this desperate age of exploration.

The third team is a problem of access. This is a broad topic and much of it has to do with the control position of the national oil companies and the world geopolitical scene, but it also has to do with issues of the environment. For example, in the U.S. it is estimated that 90% of the undiscovered oil and 40% of the undiscovered gas is located on land that is federally managed. Finding ways to reduce the environmental footprint is one of the greatest technical challenges for our industry as this issue is not only a U.S. problem but a growing global problem.

The final theme is all of this adds up to increasing activity. Combine the lack of exploration activity with the growing criticism from politicians related to a lack of investing profits back into the industry, and we can expect that the forecast of 25% spending increases may be conservative. This all bodes well for the seismic industry as it is at the heart of future exploration and has a growing role in production as 4-D becomes more cost-effective in helping optimizes fuel performance.

The financial highlights of the quarter, which Mike mentioned, reflect the fact that seismic contractors business continues to improve. We're now seeing a combination of improved demand for Legacy products, as well as new generation products. Our Marine business appears to have the wind to its back, and GXT just had its best quarter since we acquired it.

As we stated in our previous conference calls, one of our core missions is to prove that recording the full wave field using VectorSeis technology will often replace today's approach using arrays in geophones. We continuously push adoption of this new technology, including contracts for Q4, and we now have 20 contractors deploying System 4, which is our main platform for full-wave.

At the SEG conference in Houston this week, we announced a major leap forward for our technology initiatives that we believe will drive adoption of full-wave to another level. I announced this planned introduction of a Next Generation solution for cableless land seismic acquisition. Known as FireFly, this latest innovation from I/O combines proven wireless communication, data storage and power technologies in a seismic acquisition system architecture that is capable of supporting cost-effective, high stage and count surveys, while simultaneously increasing operational productivity and reducing (inaudible) safety and environmental risk. FireFly is scheduled for commercial release in late 2006 at which time it will join System 4 in VectorSeis Ocean and the companies portfolio of full-wave acquisition platforms.

To take seismic imaging to the next level onshore, our industry needed a land recording system capable of cost effectively acquiring fully sampled full-wave seismic data. Fully sampled means having sufficient receivers and sources to optimize the seismic image. Unfortunately due mainly to the cost and environmental constraints of cable systems, the majority of land surveys are woefully under sampled resulting in sub-par results. Yet the vast majority of existing land acquisition systems rely on cable-based architectures since there has not been a good technical solution for cableless applications.

FireFly overcomes the constraints cables impost on seismic survey design and resulting adverse effects on image quality. By utilizing FireFly, our customers will have the ability to customize seismic surveys and deploy more sensors to fully sample specific subservice targets at any depth.

Since FireFly we utilized I/O's VectorSeis sensors. Geophysicists will now have a platform for acquiring full-wave broadband seismic data in a cost-effective manner. We believe the game changing productivity will free up low value dollars that will eliminate the economic barriers of deploying full-wave sensors. The downtime and cost to troubleshoot, repair and maintain the cable systems should be significantly less than for cable-based architecture. Reductions in waste and troubleshooting translate into less manpower intensity in the field and improve crew safety performance. The smaller footprint of FireFly will also reduce risk to the environment and disturbances compared to cable-based system seismic systems. We made a significant R&D funding commitment starting in early 2004 and have been working on the detailed design of FireFly since then and have recently conducted successful field tests of key system components.

Throughout our FireFly development cycle, I/O has engaged thought leaders from prominent seismic contractors in oil and gas companies. As a group, we share a common vision for the revolution that FireFly can make possible in land seismic imaging. FireFly incorporates technologies throughout I/O, including our content systems and GX Technology groups. We look forward to our continued collaboration with the seismic contracting community and oil and gas companies as we work together to accelerate the adoption of FireFly in full-wave as the new seismic imaging standard and bring it to full commercialization as next year unfolds.

We firmly believe that the combination of cableless FireFly and full-wave VectorSeis will break down many of today's adoption barriers and take full-wave digital imaging to the leadership position in market. So you can tell we're extremely excited about the FireFly addition to our product range.

I would like to give you a quick update on some of our oil company full-wave usage numbers that I gave during the last conference call. I will compare 2003, 2004 and year-to-date full-wave data. Estimated full-wave survey expenditures in 2003 were 7.2 million, in 2004 36.9 million, and in the first nine months of this year 31.8 million. The 31.8 million already spent this year we believe is a realistic expectation that we will see oil company full-wave spending once again increase during the year.

Related to the actual numbers of survey, we see a trend that we are moving from a bunch of small products in 2004 to larger full 3-D surveys in 2005. Our current projections we will see -- likely see -- for our current projections, we will likely see fewer surveys completed in 2005, but an overall increase in total dollars spent due to the increasing survey size. The actual number of surveys that include both 2-D, 3-D we had 24 surveys in 2003, 40 surveys in 2004, and 29 surveys in the first nine months of 2005. Full-wave surveys in the first nine months of this year include ones in India, Russia, China, Canada, Poland, Kazakhstan and the U.S. By our own internal estimates, I/O System 4 VectorSeis marketshare was over 80% so far this year.

On land imaging, in our Land Imaging group, vibrator trucks orders remain very strong, and we are still sold out in this product line until early next year. Our Sensor Geophone business had a good quarter with a record operating income. Revenues were down from last year's third quarter because of major shipment to Saudi Arabia with lower margins that took place in the third quarter of 2004. However, their pipeline has been increasing over the last few months, indicating a strong finish.

As I mentioned before, the Sensor Geophone business is our best indicator of global land activity as they have a high marketshare. The products are also used with competitor systems and they participate in most geographical markets.

Related to land full-wave system sales, we most recently closed another VectorSeis land system to another contractor in the former Soviet Union. With our current pipeline of land system VectorSeis opportunities, we believe we will end with 20 to 25 million in 2005 sales with our internal goal of 25 million of land VectorSeis still in reach. Our number one issue in the land systems business continues to be gross margins, and we are aggressively attacking costs in that area with foreign sourcing and other cost reduction plans.

In the Marine Imaging Systems, our Marine business continues to perform well. We were hampered by both Hurricanes Katrina and Rita, costing us approximately $0.01 per share, but we continue to achieve higher than planned margins. In fact, Marine gross margins in the third quarter were up over 12 percentage points from last year's third quarter. We continue to see strong contractor activity, coupled with the opportunity of equipping new vessels later this year and early 2006.

While we did not shift any VectorSeis Oceans during the quarter (technical difficulty)-- pleased with the operational performance of the system during the past several months of shooting. As you may remember, we announced in early August that we did enter into a new multiyear agreement with RXT that includes a new system purchase to be delivered in the fourth quarter of 2005 and the first quarter of 2006.

RXT has just upsized the current orders scheduled for Q4 and Q1, adding an additional 8 to 9 million to our revenue plans. We expect to ship approximately 75% of the original order in the fourth quarter, while the remaining portion of the order and a recent increase is expected to be shipped in the first quarter of 2006. We expect a strong fourth quarter with our Marine group that includes the delivery of VSO equipment, a robust market for streamer products and a general strengthening of the overall mean equipment market. We expect a record revenue in our Marine business of both 2005 and again in 2006.

Also, Concept Systems continued to enjoy the benefits of the very strong Marine environment that is generating very robust margins and improving operating performance.

At GXT I'm pleased to report that they continue to improve its performance. Again, it is disappointing that conservative interpretation of the revenue recognition rules that did not allow us to include 7.3 million of revenue until Q4, but good market conditions are evident, and looking beyond the revenue recognition issue, GXT had a very solid quarter. GXT business continues to regain a better balance between proprietary processing, multiclient surveys and data sales, which have positive implications for its improving profitability. Our GXT team indicates they are quoting more work than ever before, and the pipeline of Multiplan projects for next year is encouraging. We still have not achieved the balance we want between library sales and new multiclient projects, but several new ones are in the mill that should get started in late 2006 and early 2007.

GXT is experiencing a growing amount of processing work, and current backlog continues to support near-term growth. GXT data processing business is expected to run at full capacity during Q4. We are also introducing some new migration technology that we believe is very positive and supported by significant customer interest at the SEG. GXT also has solid underwritings for several attractive multiclient projects and a strong client interest in our regional span program, which dovetails with my comments with oil companies being project poor and looking for new opportunities. We're expecting that much of GXT's future growth will be in international markets working with NOCs versus the historical Gulf of Mexico market where current spending is being driven more by new shooting than by high-end reprocessing.

GXT has opened two new foreign centers and are planning others. We're also developing plans to take advantage of increasing land activity and carving out a land processing business that takes advantage of our leadership in full-wave. We expect GXT to have a good fourth quarter, and it is typically their best quarter.

Overall we continue to make significant progress. There is still much more we can do as a company to improve our execution, both technical and business development. We will continue to concentrate on improving the superiority of digital full-wave while developing and, as evidenced by FireFly, introducing new game changing seismic technologies. The market continues to prove that we're more optimistic than ever about the future.

Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS). Mary Supray, Gracie Square Financial Advisors.

Very interesting talk. I wish you could tell me a little more about FireFly, how you are going to commercialize it? It sounds like you've got it ready to test in the field or you have been testing. Could you just tell us more what you are going to have to do to get it ready for this time next year?

Sure. The FireFly platform includes not only the new electronics hardware on the ground, but it also includes a significant amount of software, what we call battlefield management, which is how you operate as you start scaling up the number of stations up to 20,000 or more. In fact, that takes us into a whole new world of operating.

So one of our challenges from a commercialization point of view is how do you build this sort of integrated system in real life field operations to work out the commercialization of the product. We're going to be doing that in collaboration with both oil companies and contractors, what we call launch partners, and we will be talking more about that as time unfolds.

Mainly from our learnings most recently with VSO, we're going to be very careful in shaking down the system and making sure that the people we are working with understand fully that we are in the very early adopter stage of the technology. We're looking and have found people that have the vision for the offering and are going to work closely with us.

And so our goal is sort of the first half of '06, using our own internal system and equipment to work with people to start shaking it out. We will be slowly but surely increasing the number of stations on the ground, and then we will be entering the second half with some launch contractor or contractor/contractors where we will start further increasing and really getting into larger more commercial scale projects for seismic acquisition. Again, likely in concert with interested oil companies.

And then by the end of the year, towards the end of the year and going into '07, we plan to be ramping up substantially on the total number of stations we can put on the ground, and that is when we will really be fully engaging our new software management system. The concept is currently in the process of building now.

So obviously you can see from that description that when we announced FireFly, we are announcing really the beginning of the commercialization phase, but we're not just taking orders and shipping. We're really building out a game changing system.

It is going to be an exciting year. We really have a very strong interest in the technology. The reason the interest is so strong is because people -- the basic idea behind the system and what it addresses, an improved image and game changing productivity, just squares perfectly with where the market sees its needs. So it's really now up to us to execute over the next year, and obviously we will be keeping people of updated as we continue to progress.

Thanks. I will look forward to the update.

(OPERATOR INSTRUCTIONS). John Morosani, Warrington Capital.

Bob, can you this tell me on the FireFly, are the channel -- or the geophones that you have right now, do they fit right into a FireFly deployment system? In other words, is there (multiple speakers) --?

Yes, it is an all-digital system. And the VectorSeis sensors that our customer is using with System 4 are transferable or backwards compatible, if you want to think of it like that, with FireFly. So that is one of the nice things about features of the system is that we can -- effectively people that are using System 4 cable system with VectorSeis shoots about 60, 70% of the cost has to do with the sensor technology itself, and that will be compatible with FireFly. So they really don't lose that investment.

So, in other words, in pastimes when you guys have announced new systems, you sort of had to scrap the previous. This is fully going forward compatible with what you're selling right now?

What I'm saying is that not everything -- and obviously there is a lot of System 4 that is designed for the purposes of running a cable system. But there are subsets of that, and much of the unique -- if you strip away the cables and some of the ground electronics associated with cables, what is left is the sensor or the station, the VectorSeis station, and that represents about 60% of the total cost of the system, and that is backwards compatible.

Thiru Ramakrishnan, Simmons.

The first question, could you walk us through how the acquisition of exploration resources by CGG impacts your business from a VSO sales profile and also with respect to upgrade plans on one of their vessels?

The latest SEG, there's lots of interest in VSO. I don't know of any ongoing conversation with any particular customer, short-term other than RXT. We know that we have a two year basically agreement with RXT for that. But there are conversations -- lots of people interested in VSO as you go beyond that timeframe. But we have not had any specific detailed conversations with X-Ray or CGG sheet about an order for VSO currently.

But what about the upgrade plans on one of explorations vessels? I think it was from a 2-D to a 3-D?

There are some upgrade stuff. We had shipped material to them. There are other upgrades out there, other vessels out there also, so that whole market, upgrade market continues to be robust.

Last question. Bob, could you just walk us through I guess the new build/upgrade cycle that is going on in terms of Marine capacity, Marine Seismic vessel capacity, and how many 3-D vessels are out there versus 2-D, and what is the opportunity there for you?

I don't have -- actually I don't have off the top of my head the total population statistics. I can talk to it in general terms. We can probably come back to you later with the Marine guys and give you a little more detailed data that we would have as public data basically.

But what we are seeing is going into next year expressed interest by several companies in bringing new capacity in the market. I guess one that I can talk about because they made an announcement is BGP. At the SEG they announced their full intentions of more aggressively coming into the Marine market. I think starting with Towed Streamer, but they are even talking some about OBC. I think they have one Norwegian vessel they talked about -- not Norwegian -- I can't even remember where it is from, but it is an older vessel that they are bringing in in refurbishing and tooling up. But I know they have pretty aggressive plans. They now have a President of Marine, which I met, and so that would just be one example.

Obviously we are in conversations with people that are private conversations, and they are going to have to disclose for themselves what their plans are.

Do you think there is going to be a big increase in Marine capacity?

I think there will be an increase in Marine capacity. Obviously you don't put a Marine vessel overnight. But I do see more than one vessel coming into the market over the next year.

In terms of upgrades?

Upgrades -- late upgrades there are several things going on. One of the upgrades is being driven by technology, which is good for us. As you know, in Marine there's really two major plays. You either have people that are getting better equipped to do 4-D, and that continues to increase both Towed Streamer. In fact, the majority of 4-D is currently Towed Streamer, although the permanent idea there is still a lot of talk around that.

As you move into 4-D, Towed Streamer, you need much better positioning control, accuracy. In a lot of ways, we are sort of the go to guys for that. We've got leading technology with our Digi line, and we are continuing to add new technology there. And then also we have Concepts, which really have a lot of 4-D technology and planning and do a lot of consulting in that area. So I think that's driving an upgrade cycle with many of our customers.

There is also interesting things going on in Towed Streamer. For example, white (inaudible) shooting. I think BP sort of started that with some of the new technology. That is still going on. We have a new product line called Orca coming out of Concept that is involved with software management. And to get into these more complex surveys, we would almost need another generation of that technology.

So I think we're going to see a strong sort of upgraded existing capacity. A lot of it being driven by need for new technology, and then once the fleet started getting busier, they start -- things happen. And so you have the normal just MNS that goes along with increasing business.

Joe Agular, Johnson Rice.

I think on the last call you all mentioned a Marine sale for outfitting a vessel in Norway. That was expected I think to ship maybe in the fourth quarter. Is that still on track?

Joe, I'm not for sure what you're referring to, and we have shipped equipment for several boats. I don't know if one of them was in Norway, but there are other upgrade opportunities out there. Some may -- there is some that could go in the fourth quarter, but I'm not for sure specifically what you're talking about.

I will have to go back and check my notes on that. The other question I guess I had was in your discussion of GX and some of the interest in the span data that GX has in the Gulf of Mexico, I'm not entirely clear on if GX has been acquiring similar type data in other locations right now, and if so where exactly what markets and regions are you targeting? If you can give us an update on that?

Yes, Joe. In fact, much of the current span sales are not out of the Gulf of Mexico now. The Gulf of Mexico was our first round. We had some large sales along the close of Africa, for example, the Western Coast of Africa that we have spans. We have several spans now. Even like in the coast of Africa, you have Congo span, you have it broken up into different offerings.

We can show you, in fact, I believe on our website now. We just, for everyone's interest, we just launched a new website this week. On that website, you can go in and believe under "spans" it will show you all the different spans we currently have. It is actually quite impressive. We are entering the year with several more that are getting kicked off. One of our challenges has been, as up until a year or so ago, we were sort of a one-trick pony. Now, with the Gulf span, but now we are increasing -- we are increasing -- and have spans to sell around the world.

Another thing I might mention is that we're currently just now completing an extension of the span in the Gulf of Mexico with VSO. And so we're taking the VSO or the spans lines and then extending them into closer to near shore. There is a lot of interest in excitement about that. We are seeing data from that work that fits, frankly, unbelievably good. We're recording converted waves down to 30, 40,000 foot. We are seeing accuracy and resolution that people just have not seen. We have comparisons between Towed Streamer and VSO. It is extremely impressive. So we think that, even in more mature areas, there's a good chance we will be coming back in and filling even with 3D surveys eventually with some of our new technologies. So that whole area in my view is really hitting the sweet spot right now. As people are starting to crank back up in exploration when you do wildcat exploration in Marine, the first thing you need to do is have a much better handle of the basin geology. And so that is where span is really aimed at and that is why we're really seeing significant increases in it.

Just to make sure that you all are still sort of following the same strategy, you all are mainly taking a fully funded approach (inaudible)?

That is our approach and sometimes the funding comes in, the contractor comes in or underwriter a little bit later but all of these have underwriters.

Patrick Flavin, Flavin, Blake & Co. (ph)

A question for you, Bob. Can you give us specifically with respect to FireFly and the land market, but also with respect to the panoply of products in full wave, what the competitive response or competitive layout is at present? The 80% number for your full wave spending for the year is prodigious, and it leads to the question of what the competition is doing.

Yes, on the competition side, which, in the general land systems, as you know, the main competitor is Sercel. Those guys did a good job. They have a solid system in their 408. They just announced an extension to the 408. They're making some improvements to the (technical difficulty) in their basic cable system that we respect. And obviously, we're responding to the cable system with what we now call System 4, Version 3. And so you have sort of -- we'll continue to go on sort of the tick for tack response on the more mature technology.

On the full wave side of the business, we still feel good about our competitive advantage with our sensor technology. We've got the built-in advantage of being out there first, and all the learning we have and, like I say, the majority of full wave surveys are being acquired with our technology around the world.

As it relates to FireFly, we did not really see a response from them on the offering. But I'm not naive enough to think that they're going to sit and just sort of wait for us to take that market. But as I said, we have been working on this thing for two years.

In addition to that, we have a system approach. We know that it's more than just hardware on the ground. It is a combination of your sensor technology, the wireless technology itself or the cable-less technology itself on the ground electronics, but also how do you manage the logistics, and that is where Concept comes in. And Concept are the premier company in the area of data management -- system optimization and data management. They have effectively changed the world in marine, and now they are going to help us change the world in land by organizing around FireFly.

So when our customer buys FireFly, he is buying a lot more than some flash memory in a box. He is buying the whole integrated offering of software, our sensor technology, and I think that makes it competitive.

Another point I would like to point out you may or may not have picked up is that we also announced at the SEG an alliance and an investment in a company called Transform. Transform have started with a clean sheet of paper and are building an interpretation system around the next generation of seismic imaging, which includes full wave.

It's an exciting one for us. We've said for a long time that you just can't change the world by focusing on any one part of the food chain. You have to address the planning, the acquisition, the processing, and we said and even interpretation, and this represents the even interpretation for us. I was quite delighted in our press announcement -- joint press announcement, we had Apache, who announced they bought the first copy of the Transform software.

We also had another exciting piece of that announcement, that a fellow by the name of Rutt Bridges, who is a former President of the SEG, was quite successful in building a company from scratch called Advanced Geophysical, which when I was at Landmark I acquired. Rutt has come back into the industry so enthused about this, and he is Chairman now of Transform Software, and he has just got a world of experience of building software, in the first case, the processing business, and now it's interpretation and preprocessing with interpretation.

So I think we've now got our foot in every part of the value chain. But we are looking at it as an integrated system. So that is a lot of words for a short question, but I think you can see that when we talk about competitor, they have got to think about competing on a system level because that is where we are at.

Terrific answer. With the lead that you have got, Bob, can you -- it all gets down to patents and intellectual property protection. Can you outline for us where that stands?

Yes, at the heart of -- obviously there's a lot of technology in the box. If you throw in Concept and VectorSeis and all that, obviously at the heart of our VectorSeis sensor is some pretty good patents -- not a good patent. We have some excellent patents based around our method, and obviously we would be watching that like a hawk. We have put a lot of time and effort and money into that, and we think we have a very unique way of doing it, and that is one that we will just have to watch.

Beyond that, we do have patents, although I believe that the main protection in this business, particularly the software piece, is again when you build an integrated system, number one, it is hard to do, and number two, you build a lot of understanding and knowledge in what I call the white space, meaning it's the things you integrate together, and you really create value by doing that. And it is just hard to duplicate.

So we do have some good patents, but we also I think are building something that is complex enough it is hard to replicate.

Thank you very much. As you said, Bob, it is all about execution. So, Bob and Mike, go do it.

(OPERATOR INSTRUCTIONS). At this time, I would like to turn the call back to management for additional remarks.

Well, that it is all we have to say. We look forward to speaking to you at the -- early next year. I would like to say thanks for taking the time to attend the conference call, and thanks for joining us.

Thank you. Ladies and gentlemen, this concludes the Input/Output third-quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or internationally at 303-590-3000 with access number 11042312 follow by the #. (Repeats numbers.)

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