Ion Geophysical Corporation (IO) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Input/Output fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, March 16, 2006. I would now like to turn the conference over to Jack Lascar with DRG&E.

Thank you, Mary, and good morning, 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 Morrison, Controller and Director of Accounting.

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 experienced a technical problem and didn't receive yours this morning, 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 a recorded instant replay until March 23rd. The information was provided in this morning's earnings release.

Information reported on this call speaks only as of today, March 16, 2006 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 positions, segment sales, results of operations, cash flow, funds from operation, financing plans, gross margins, business strategy, budgets, projected costs and expenses, capital expenditures, competitive position, product offerings, technology developments, access to capital and growth opportunities 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 these statements. These risks and uncertainties include the risk factors disclosed by the Company from time to time in its filings with the SEC, including in its annual report on form 10-K for the year ended December 31, 2004, and on Form 10-Q for the first three quarters of 2005.

Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning, and please note that the contents of our conference call are colored by those statements.

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

Thanks, Jack, and thank you for joining us. All of our divisions, including GXT, improved significantly in both revenue and earnings growth during the fourth quarter and full year 2005. But before we review the announced preliminary financial and operational results, I would like to comment on the financial restatements of 2004 and the first three quarters of 2005 described in our press release.

We had a very good fourth quarter and a strong performance for the year, but I'm disappointed that this situation developed and caused delay and distraction for us and our investors. First, I would like to state that the Company is responsible for our financial statements and to [ensure] that we are properly following GAAP, and any changes that have been made are our decision.

Due to the nature of the restatements, I would like to take some time to explain in more detail what has happened, and how we plan to avoid this problem in the future. As we stated in our press release, during the assessment of GXT's internal control over financial reporting by us and our audit firm during the course of the audit of our 2005 financial statements, it was determined that GXT's policies for timing of recognizing revenue generated from licenses of multiclient seismic data were not in accordance with SEC guidance.

GXT had always recognized revenue from these licenses, and after it and its customers signed a written contract containing all economic terms of the license transaction and after delivery of the data to the customer. After signing the licensed contract and delivering the data, GXT had often requested that its customer also sign an industry form of master geophysical data use agreement developed by the International Association of Geophysical Contractors trade association.

Because a licensed contract had already been signed, however, GXT didn't place priority on obtaining a signed copy of the master data use agreement from its customers. These signed data use agreements were typically returned by the customer well after the delivery of the data, sometimes months later, and often after all the license payments had already been received by GXT.

After a review of the GXT multiclient license transactions during 2005, it was determined that GXT should not recognize the revenue until the customer returned a signed master data use agreement. I/O had engaged its current audit firm in August of last year. I/O's previous auditors had not raised this issue during their audit of I/O's 2004 financial statements, which included GXT.

After consultation with our auditors, we decided to change our policy and recognize revenue on GXT multiclient license transactions only upon the signing of a later master data use agreement in transactions where the document exists. Due to the changes to 2005, our 2004 auditors then reexamined the revenue recognition issue with regard to 2004 GXT license transactions and, despite no change in facts, reversed their previous position.

Within that context we decided to apply the new revenue recognition policy to all GXT data license transactions that occurred in 2004 and 2005. As you would expect, this change in GXT revenue recognition policy has an impact on the timing of recognizing revenue from certain GXT license transactions in 2004 and 2005.

I want to emphasize that the restatements will change reported revenue and net income for 2004 and 2005, but the restatements have no impact on the commercial substance of the customer contracts, the Company's net cash flows, or the cash received by GXT during 2004 or 2005. The net effect of the restatements is to shift the amount of revenue recognized from certain multiclient licenses to subsequent periods.

We anticipate that the impact of the financial restatement for 2004 will reduce revenue for 2004 by approximately 6.7 million or approximately $0.08 per share, and increase the 2005 results by approximately the same amount, which is the amount reflected in our preliminary financial results. We anticipate that the combined impact of the 2005 quarterly restatements will reduce the combined revenues and net income for the first three quarters of 2005 by approximately 9.2 million and 5 million, respectively, or $0.06 a share, and subsequently increase fourth-quarter 2005 results by approximately the same aggregate amounts.

In addition to the confusion that this revenue recognition issue has caused, the issue has added significant delays in our release of earnings and completion of our audit. Our auditors have not yet completed their audit of our 2005 financial statements, so we issued preliminary unaudited results in the press release. The restatements will only impact I/O consolidated and GXT results. For the sake of simplicity and ease of comparison between periods of all the operation results discussed in our call today -- exclude the anticipated impact of the restatements and should be considered preliminary until I/O files its 2005 annual report on Form 10-K.

Looking forward, we intend to work with our auditors to revise the GXT license contracts to enable GXT to recognize revenue from future license transactions in proximity to the license transaction itself, and to assure as best we can going forward we avoid these types of problems.

I would recommend to our investors that from the point of view of understanding the underlying trends prevalent in our multiclient business and the impact on our total business results that they look to our pre-adjusted GXT results.

Looking beyond the revenue recognition issue, we had a much improved year in all our divisions, including GXT, in both revenue and earnings growth. With that in mind, I'll let Mike review the financial results for the quarter and the year, and then I will make a few operational comments about the quarter, the year, and also will look forward to 2006. Mike?

As Bob mentioned, please remember that all the financial results I will describe are unaudited and preliminary, and do not reflect any anticipated changes from the restatements. Looking at the 2005 fourth-quarter results, we generated $122.1 million in revenues. Our entire land business, both Sensor and land systems unit, had a very robust quarter, with revenues of $48.4 compared to $30.4 million a year ago.

The gross margin in our land group was lower at 23% in the fourth quarter. This reflects a higher proportion of low-margin vibrator trucks in the revenue mix and increased costs associated with penetrating new markets with our System Four platform.

In the marine business, sales were $25.6 million compared to $11 million in the fourth quarter of 2004. We benefited from the VSO shipments to RXT during the fourth quarter and from an improving marine market. As the marine fleet worldwide increases in size and in utilization, we're starting to see more opportunities for revenue growth throughout 2006 and 2007. Gross margins in the marine group were 40% for the quarter.

During the fourth quarter, our Concept Systems data management software business had revenues of $4.4 million, and our seismic imaging solutions group, which includes GXT and AXIS, had a very strong quarter with revenues before the restatements of $43.8 million compared to $22.9 million last year before restatements. GXT's performance continues to show steady progress. GXT reported gross margins of 35% in the fourth quarter, a significant increase over the 12.4% we recorded in the fourth quarter of 2004. This increase was primarily attributable to a substantial increase in multiclient revenues and additional increases in data processing revenues in 2005 compared to 2004.

GXT continued to see an expanding backlog of processing projects during the fourth quarter. We expect revenues and gross margin from the processing portion of GXT's business to continue to improve as GXT's capacity is more fully utilized with processing and multiclient projects.

Overall, consolidated operating expenses continue to fall from 31% of revenues in the fourth quarter of 2004 to 21% this year. Over the past year, we have reduced our operating expenses as a percentage of revenues from the low 30s down to the low 20s through a combination of higher revenues and cost control initiatives. We incurred an income tax expense of approximately $1 million during the fourth quarter, creating an effective tax rate of 7.2%. This low rate reflects the continuing use of our net operating loss carryforward from prior years.

During the full year 2005, we generated $355.6 million in revenues with a gross margin of 28.4%, which is essentially flat with last year. In 2005, the entire land business generated $155.2 million in revenues, with 22% gross margin compared to $126 million and a gross margin of 27% in 2004. The marine business generated $69.6 million in revenues with 41% gross margin compared to $54.7 million and a gross margin of 36% in 2004. The increase in marine gross margin was primarily due to a higher proportion of high-margin DigiBIRD revenues.

The seismic imaging solutions business generated $114.9 million in revenues before restatements during 2005 with a gross margin of 27% compared to $50.7 million before restatements in revenues and a gross margin of 20% in 2004. The improvement in sales and margins was a result of strong processing business combined with stronger data library sales.

At the end of 2005, we had net operating loss carryforwards of approximately $162 million, which will expire in 2018 through 2024. So you should expect us to continue reporting relatively low effective tax rates for the foreseeable future.

Turning to the balance sheet, inventory dropped approximately $6.3 million from year end. CapEx for the quarter was $1.1 million, and additions to the data library were $8.5 million for the quarter.

Before I conclude, (technical difficulty) all these financial results are unaudited and do not reflect changes from the described restatements. With that, I'll turn the call back over to Bob.

Thanks, Mike. I am pleased to report on the progress we have made at GXT both during the fourth quarter and the year. GXT ended 2005 with continuing growth in their data processing backlog, strong data library sales, and the progress on new span programs, including an exciting new program that just started acquiring data in India. This project, along with the AfricaSpan are proving the technical capabilities and growing respect for the Company on a global scale. I'm also pleased to report that GXT results are highly accretive for 2005, validating the acquisition both strategically and financially.

In our Imaging Systems group, we had very strong revenue growth in all our divisions, with the only disappointment being gross margins in our land systems business. As stated last quarter, we have been struggling with our gross margins with our land systems suffering from higher costs related to quality issues, manufacturing variances related to inventory mix problems, and competitive pricing pressures.

We have made significant progress over the last year improving the quality and performance of System Four and I feel we are slowly but surely closing the gap with our competitors. I believe this has been validated with System Four sales year-over-year increasing by 145%. We plan to stay the course, with continuous improvements being made on quality, and also taking costs out of the system to make it more competitive. These actions started during 2005 and will continue in 2006 as a major focus for the land division.

Our marine division also had an excellent fourth quarter, including the first shipments of our newly designed System Two VSO to RXT. We shipped over 7 million of VSO equipment, and will continue with deliveries into early Q2 to complete the $20 million order. We've made many design improvements drawn from our early experiences with VSO, and look forward to a highly reliable and even higher performance system. In addition, we continue to obtain outstanding data and associated image quality from VSO that is starting to get industry attention.

The Digi productline was also a strong contributor to excellent gross margins in the fourth quarter, and a reflection of the growing marine seismic market. As reported last quarter, our sensor division, which was the market leader in geophones, ended with the manufacturing capacity fully utilized and a strong backlog and pipeline going into 2006. The same can be said for Concept, which is also enjoying the increased business from a growing marine seismic market.

I will now shift to reviewing the full year and also looking forward to 2006. Starting with land systems, three years ago this summer, we hatched our new strategy for the Company. And one of our strategic assumptions was that considering that 80% of the world oil reserves are in land, it was reasonable to expect that there would eventually be a renewed interest improving land imaging technology and a significant increase in land seismic imaging activity.

Our new course included three major initiatives for land. First, educate the market on the value of [exercise] full wave including forming partnerships with oil companies to accelerate the diffusion of the technology. Second, launch an R&D project to build a next generation cableless land system that would bring significant gains and productivity and be an enabler for full waves. And third, extend System Four to an analog system so we could compete more successfully in the mature analog market.

It is interesting that we are hearing from several supermajors, such as BP, on how land has a growing importance in their portfolios, and how they are now looking at what needs to be done to improve image quality on land. It appears that our earlier assumptions about the market are turning to be right on the mark.

Related to our three initiatives, we made considerable progress in all three fronts during 2005. Starting with full wave diffusion, we had been reporting each quarter our own internal analysis of how oil companies are using full wave. To continue with that analysis, the following is our best estimates in what has transpired for the complete year from an oil company activity perspective.

Our internal estimate suggests an approximate 30% increase of full wave expenditure by oil companies year-over-year. There were approximately 44 wave surveys in 2005, essentially flat with 2004, but the trend to larger 3-D surveys is continuing, which explains the increase in expenditures from 2004 to 2005. It's also notable that over 70 oil companies have been involved with four-way surveys since 2003, with 23 new ones involved in 2005. The most active areas are Canada, U.S., Russia, and China, with India and North Africa emerging as potential new markets.

Beyond the full wave usage numbers, what is going on in the market? First, we have sold approximately 55 million in System Four vector size since the commercial launch in mid 2004. At any point in time, most of the systems are collecting data as reflected in our usage numbers, so it's fair to assume that the industry is slowly gaining significant experience with digital full wave.

It's also important to remember that from the time the data is acquired, processed and interpreted, well over a year or more has lapsed. So the industry is now only starting to gain practical experiences with using the data.

The good news is that we're seeing excellent results and are continuing to push full wave into new frontiers. A good example is an Apache full wave shoot in Egypt that will start in late spring or early summer, and should help validate full wave for desert shooting which is a very important technical milestone for us. It was also noticeable at the SEG during the fourth quarter of last year how many more technical papers were being presented about full wave.

The second part of our land strategy has been a confidential R&D program launched back in late 2003 to build a cableless land system. We've been ramping up the R&D funding since late 2003, and in Q4, we finally made a public announcement about our new system, which we now call FireFly. I'm happy to have FireFly out of the closet, since trying to describe our land strategy without talking about FireFly has been like having one hand tied behind our back.

FireFly is a completely redesigned land system that includes new operational management software being built by Concept Systems, new planning and processing techniques from GXT, plus a ground electronics and associated equipment by our FireFly engineering team based in Dallas. We believe that a fully commercial FireFly has the potential of changing the land acquisition game.

Related to FireFly, we announced this morning that we have entered into a multiyear agreement with BP America Production Company with the intent to deploy a 10,000-station field trial of FireFly, which will be the first commercial application of the technology. The imaging project will take place in the Wamsutter gasfield in Wyoming, which is a strategic asset for BP.

The FireFly field trial is within the context of BP's associated $120 million technology field trial program. It's both I/O and BP's belief that FireFly has the potential to significantly improve resolution and characterization of target reservoirs while minimizing the impact on the environment and mitigating risks associated with seismic field operations. We also expect with BP's help to secure additional oil companies and seismic contractors in testing the FireFly system in complex imaging environments around the world.

In addition to our focus on next-generation land technology, our third initiative was aimed at competing better in today's mature cable system market. We introduced a new hybrid System Four during the summer of 2004 that has taken us over a year to overcome some quality issues related to normal new system introduction. We made good progress in 2005, and will soon be introducing System Four, version 3 that has fixed the outstanding issues impacting reliability, and now are focused on driving out cost to improve our System Four margins as the year progresses.

Our marine division, along with Concept Systems, has enjoyed a significant increase in our mainline businesses due to a substantial increase in overall marine seismic activity. Several new boats are scheduled to come onstream over the next couple of years, and this is driving new equipment sales.

In addition to a nice boost in our overall Marine related business is the progress made on VSO during 2005. Since this time last year, we significantly improved the reliability of the first system to the point that RXT has continued to build backlog and have raised additional capital to support the business model due to the success in the market.

Last summer, we entered into an exclusive contract with RXT that runs through 2007 that commits them to the purchase of significant numbers of systems during that timeframe. We continue to believe that VectorSeis Ocean, or VSO, was a game-changing system that will substantially enlarge the ocean bottom survey market due to much improved image quality combined with significant operational productivity improvements.

Moving now to the outlook. Looking forward to 2006, at GXT, compared to a year ago, we're entering the year with much improved processing backlog. The biggest challenge now for GXT processing is finding qualified people to support our expansion plans, including the support of the globalization of our processing business, with three new centers recently opened in Venezuela, Nigeria, and Angola. GXT's multiclient business grew from approximately $15 million in 2003 to over $100 million in 2005.

In 2006, we're involved in several new projects, including the most recent IndiaSpan, which was started early this year and already has strong customer interest. We believe this business has above-average growth potential for the foreseeable future.

In the imaging systems group, our marine division has a strong backlog, including the RXT orders, and is mainly challenged by delivering quality products and systems on schedule. We are also in the early stages of a new product line called DigiFIN, which will help our customers compete against Western Geco's Q, and will be in the early field stages during the first half of the year. As already mentioned, it is expected that RXT will soon be ordering the third system to be delivered in Q4.

It is expected that 2006 will be another very strong year for marine business. Related marine activity, we also expect a solid growth year for concept systems, who are also enjoying the expansion of the global marine fleet.

Within our land business segment, we expect to continue to see strong geophone sales throughout the year, reflecting growing exploration activity around the world. We are continuing to expand our sensor manufacturing capacity to handle the increasing market, but also to continue to drive down costs.

Related to land system sales, we entered the year with a much improved System Four from a reliability perspective, and are looking forward to the next release, System Four version 3, to be released in Q2. We do see some softness in our land system sales in the first quarter related to timing issues of the System Four, 3 and the normal budgeting cycle of some of our larger customers, not unlike what we saw in the first quarter of last year. The pipeline for land systems business is growing, both analog and VectorSeis, and we believe we should see solid growth, particularly in the second half of the year, when we have the new System Four release in the field.

As we mentioned in our press release, based on our preliminary view for the year and our current pipeline of business, we expect 2006 revenues to range between $410 and $450 million. We expect ongoing margin improvement as we continue to focus on quality and COGS, with full-year 2006 gross margins expected to range between 30 and 32%. We anticipate operating expenses as a percentage of revenues to be between 20 and 24% for the year. As a result, we anticipate 2006 earnings to range between $0.20 and $0.35 per share.

Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS) Joe Agular, Johnson Rice.

Thanks for the very extensive overview there, Bob; it's really helpful. I was just -- I guess, wanted to ask a question first on the announcement with BP, because that seems to be a fairly significant event for the Company. Is there any financial impact at all in 2006, or is this sort of just an agreement that, justifiably, I guess, would be designed to get the technology out into the field into the hands of a major oil company that could help sort of push it along in terms of its acceptance and potential for additional sales beyond that.

Joe, within the agreement, there are some commercial terms that are important to us -- I think from a -- being prudent, we're really not -- in our basic plan and forecast, we really do not include any kind of, you might say, revenue or earnings net revenue from the FireFly activity in this year. There is a possibility from an upside point of view that that could, in fact, happen. Our big issue is -- obviously, it is a field trial. There is a lot of both -- all the companies that are involved with and understand that's the stage we're in. We have a pretty aggressive program to meet their needs in the shoot coming up. And so we're just being conservative or, I think, being prudent, in fact; we're just including that in our forecast. There is some possibility of upside. But in the agreement itself, which -- we're just not going to get into the absolute details, there certainly are some financial terms in the deal that are quite good.

Well, that's great. On the FireFly, the other question I guess in terms of product development relates to commercialization of it. And is it something that you still envision on the prior time frame that you gave on the SEG?

Yes, where we're set up currently, and in fact, even really compared to the SEG with the involvement of BP, we are really -- it has enabled us to accelerate the prototype part of the business. In other words, if we were doing it completely on our own, we would not be able to ramp up at the rate we're going to ramp up to get to 10,000 stations. So this really helps the Company to accomplish that.

And also, obviously, it really helps to have a company like BP involved with us, because we're really building the system together. It's quite an exciting program for us.

And just as a follow up, your revenue and gross margin guidance for '06 are very impressive. It seems like the R&D and marketing expenses are going to be up a little bit, and some of it, you mentioned, I guess is tied to FireFly. And I was just wondering if you could maybe expand on that a little bit in terms of --

There is a significant increase year-over-year on FireFly, which includes both the R&D expense, and it also includes -- if you want to think of it as marketing, it's technical marketing in the sense that we have created a whole new group, starting with Jim Hollis, who is the executive of the FireFly activity. And he included it as a whole new -- what we call FireFly solutions, which are really technical marketing people that are working closely with the customer and our launch contractor and continue to evolve the specifications as we start getting the field experience, and obviously working with the data. So there is -- I would say the majority of that increase is related to FireFly.

We also have some increase related to just normal expansion, global expansion that we're currently doing. I think if you look at it as a percent of revenues, it actually probably is coming down slightly.

Okay, well, I just wanted to make sure I understood -- it seems like '06, you are taking a little bit of a hit, but it should set you up hopefully for a really good '07 with respect to --

No, it's an investment -- it is an investment. And I think that's -- I'm actually glad you pointed that out, because we are making a heavy investment in this one. But as we have said from the beginning, this is absolutely a strategic move on our part. And obviously, we believe it's going to pay off for all of us.

Patrick Flavin, Flavin, Blake & Co.

Nice announcement -- continuing with the questions on FireFly, has BP supplanted Shell as sort of the leading-edge of the majors in terms of exploration, Bob? I noticed that just a few weeks ago they signed another permanent seabed agreement with Geospace. Are they becoming the leading axe in the development of seismic technology?

It's probably dangerous for me to cast one of our customers against the others. What I will say about BP -- both companies have great technical capabilities, and we do work with both of them. What I will say about BP -- BP has a sort of a track record of being very innovative on new business models. We have been working with executives at oil companies for some time in helping them understand the importance of getting engaged in this new technology early in the cycle, and how difficult it has been to really get new technology in the market and how to speed up the diffusion.

And what is really good is that BP has taken a very aggressive role, and I think a leadership role in showing the industry how they can engage in a collaborative way with a technology supplier, and really help take the technology forward.

So I think from that point of view, BP is really showing some leadership. Obviously, I can't say that without mentioning Apache, who also has been in there with us even from the beginning with the technology. But I don't want to get into trying to compare the two companies as far as their technical competence.

And then can you help us tie back in terms of a thought process -- you are really all about full wave acquisition and the education and dispersion of that technology. Is FireFly the equivalent of VectorSeis for land? How do the two parse together?

How it parses, full wave, as we currently deploy it on land, is on the cable system, the System Four cable system. The exact same sensor technology will be included in FireFly. The beauty in this is that once you get untethered from the cables, you significantly reduce the equipment on the ground in weight by 80%.

What this does is opens up -- number one, it opens up all kinds of possibilities in [new] and environmentally challenged areas. So one of the big problems oil companies have is access -- whether it's Alaska or the Rockies or other parts of the world, a lot of it is environmental concerns. And this really helps address that issue.

Secondly, from a productivity point of view, we are expecting to see significant increases in productivity as far as for -- dollars the oil company spends, the number of sensors they can put out. One of the handicaps of full wave has been trying to make gains with the cable system. And so we think this really helps enable the diffusion of full wave. And so I think we will be proving that in this.

In the meantime, we will still be a seller of cable systems. There's going to be cable systems around for a long, long time. There's probably certain places that they even make more sense. And so we're going to see the market segment out. We believe over time, though, that we're going to see the cable systems take more and more of the share, and obviously because in this case it is a full wave [measurable] period, that is going to also drive full wave diffusion -- very important part of our strategy.

[Joe Hill], Copia.

It sounds like the frequency and sample size of the FireFly product is going to be the equivalent to your traditional cable geophone channels?

In fact, the frequency response of the sensor is the same. It is absolutely the same VectorSeis sensor, either in the cable system or the [cableless] system. What is different is that because of the reduction in cost and the increase in flexibility, it allows us to significantly increase the number of channels or stations we'll be able to put on the ground.

Just to give you a little feel, a typical survey of the size we're talking about BP would have -- I'm going to use a term, and I'm not going to try to explain it, but it's called [fold], which is just an indication of [density] of the survey. A typical survey today might have what we call a fold of 40. We're going to see on the BP job a fold of almost 480 to 500. It is more than a 10x increase in channel density.

The reason for this -- think of it as pixels in a digital camera. It's a significant increase in the resolution of the reservoir. What we know historically is that the world on land has been woefully undersampled. And the reason it has been undersampled -- it's been just too costly, both from an environmental impact point of view and an actual dollars per square mile surveyed.

FireFly has the potential of really changing that game, and really doing what needs to be done (technical difficulty) in increasing the station count. So that is one of the reasons BP is very interested in this, because they have a very complex challenge up in the Wamsutter field, and they really think that this increase in channel count plus the combination of full wave could really solve those problems up there.

Is this a cost to benefit issue? Or I'm having trouble thinking of a situation where, as an operator, I would prefer the traditional cable channels.

So are we. Yes, so are we over time. There could be scenarios where -- I mean, there could be some scenarios, but we're having a hard time ourselves thinking of those scenarios. But I think mainly -- when I say there are going to be cable systems for a long time, our industry moves (technical difficulty) you go through stages; your early adopters, your early majority. And it's just a natural progression, and so -- and then also, the market itself is expanding pretty dramatically. So we are going to be living in both worlds for some time. But obviously, we believe we have changed -- we're changing the fundamental way the land business is going to work, and there's a lot of productivity gains that's going to come with it in addition to -- it improves image.

(OPERATOR INSTRUCTIONS) Thiru Ramakrishnan, Simmons & Co.

On '06 guidance, is that based on a $98 million share count?

No, the guidance is on the basic share count. (multiple speakers) I think it's 76, 78 million (multiple speakers) 78 million shares; yes.

And Bob, do you have a forecast for land VectorSeis sales in '06?

Yes, we didn't put that in the press release. I would say today on the land cable systems we're looking at about $30 million. That's sort of our target.

And you're going to have about $27 million in VSO sales in the first half of '06 about -- (multiple speakers) and again, you're going to be kind of back-end loaded. So you will see --

Back-end loaded. Yes, actually, we had $7 million that we delivered on that order in Q4. And there's about $20 million left of that order that we'll be finishing up in this first half. And then obviously, the back-end load is that the System Three currently scheduled is delivered in Q4. And it's really a matter of execution. That's why we have a little bit of wide range in our -- right now. As we get a little bit closer, we will know. But we expect to have the orders soon. We are already doing some preordering and inventory preparing for that. So it's really just a matter of, can we get it manufactured, delivered in that fourth quarter? Don't have any reasons why we can't, but a lot has to happen between now and then.

So should we also expect -- I know we expect kind of a subdued first half for land imaging. Should GXT be kind of subdued in the first half as well?

GXT actually -- GXT compared to last year there are sort of two pieces to the GXT business from a -- if you remember last year, we started out in the first quarter in particular with really a slow buildup of the processing business. We were about half loaded.

That is not the case this year with GXT. We're entering the processing shop pretty much full. And so for them it's really -- like I said, it's getting the people hired and to be able to expand.

The big variable in GXT, obviously, is the same variables we had last year. If you look at the new ventures business which includes the new shoots we're starting with the multiclient and then the data libraries, the data library we just know naturally is back-end loaded. And if we look at their ventures, we do have the IndiaSpan that's going probably more -- it will lead in more into Q2 than Q1. And some of the others, there's licensing agreements and all that.

So that's why we are sort of telling people that -- the shape of the year is going to be little bit like last year in some form, and it's going to be stronger in the second half than the first half. But frankly, we could have a data library sale come in and could change that up. But I would say just from your own planning point of view, we are sort of saying we ought to be thinking about 60% of revenues in the second half.

Last question, and it is on FireFly again. Looking at your deal with BP, let's assume the field trial is successful. When and how do you bring a contractor into this, or does BP end up owning the equipment or licensing it --?

We'll have a contractor -- actually, we'll be announcing -- I'm not sure we'll do it through the press release, but we will be working with BP on the final selection of the contractor over the next few weeks. We already are talking to some contractors. And there's just some practical issues of their safety records, and a lot of things that obviously BP will also have to vet. We're also looking for people that are good innovators and will engage with us.

But from the -- the overarching idea is that the contractor will basically be deploying the equipment. So we'll have a contractor in there from the very beginning of the shoot, but they will be basically deploying equipment for the venture.

And in terms of -- how are you guys thinking about pricing this -- pricing FireFly? Is it going to be in line with the VectorSeis land systems, or better? And what is the cost structure?

Really haven't put out any pricing information yet on that. Obviously, we have some internal pricing information related to the structure we put together with the team, but we really haven't put that out yet, Thiru.

I can tell you that the one interesting thing as a matter of a way to think or conceptualize what is happening is that more and more, less and less of what we will be selling is iron. The cables go -- if you sort of think about how the world works, a lot of that weight is cables and all kinds of stuff. And it's being replaced by sensor technology software, data management systems, more of an integrated system. And so over time, you get into more value-based pricing, a little bit like software pricing versus cost of manufacturing plus the margins.

So I think if all of you remember last year, we talked about our five-year look forward that sort of supported our strategy. And one of the things we had been talking about is over time the improvements we expect to see in sort of our margins. And some of that was coming through our technical programs. This will be an example -- as we get out there, we should start seeing margin improvements, because if it is as valuable as we think, and we can price it [more on] value, and it's not just a manufacturing plus, it's just a better world to be in. But we have not yet put out pricing information.

[Manny Reisner], Wachovia Securities.

A question regarding the outlook for 2006 and 2007, particularly as it relates to oil pricing. When you have this forecast for next year, we are looking at oil at approximately what price in terms of your outlook -- is it a $50 barrel, 55? What kind of pricing [pointers] do you work with?

I want to answer that question first with saying how we think about the business. The one interesting thing about I/O are that we are providing technology that helps all companies be more efficient in finding oil and gas and to a certain extent, even finding oil and gas when you can't find it with existing technology.

Within that context, we believe that there is a macro trend right now, where oil companies are starting -- they're shifting somewhat of their dollars -- they're increasing their dollars in exploration. They're moving the macrotrend onto land. And more and more of our business is also being directly and indirectly driven by the NOCs. The NOCs, the national oil companies, tend to be a lot less oil price sensitive than the publicly traded multi -- the IOCs.

So for example -- I'll just give you a couple of examples. For example, we have a growing business in Russia. We have growing businesses in North Africa. We have growing businesses in Indonesia. All of those places are NOCs. And they are really more being driven by nation requirements of increasing their energy to meet their nation's needs.

So we don't really see the technology we're building -- we're not like supply boats and drilling rigs that are sort of -- so much driven by those short-term corrections. We're really driven more by technology cycles.

So I think the only thing that stops us would be a real -- if I go back to the '80s, when I was involved with 3-D, at Landmark, we grew every year through the '80s. If you remember, oil prices were pretty tough through there. The only time we stopped was in '86, when oil prices [dropped] to $8. And we had six months of bad times, because everybody just hit the brakes.

That being said, I think our own internal view of oil prices is we think it's probably going to be around 50 -- 40, $50 just conservatively. We're not really saying it's going to be 70 or 80. But we're really not -- I guess we're really not quite as linked to oil price, commodity price, as, say, if [you were an] oil company where you were directly getting off the commodity pricing or some of the more price sensitive businesses out there. Does that make sense to you?

It definitely does, Bob, and your answer is quite comprehensive. As a follow-up to that, what percentage would you say of the -- let's say, FireFly potential would be related to the NOCs as compared to a BP?

BP is quite important, because they're working all around the world. And they have a lot of ventures where they're hooked up with the NOCs. For example, TNK-BP is Russia -- they're one of the technology leaders in Russia. I think in BP's mind, if it works here -- they tend to have a really efficient way of field trial, test some technology, and then take it around the world. They are in places like Algeria. So there's a lot of places that they can provide leadership, take the technology into the country, and then you just quickly get hooked up to the NOC.

That being said, I also believe once we sort of get this thing -- the kinks worked out of it, as we will through this year, we're a little closer to home. Obviously, it just makes it more practical. But once we do that, we look forward in '07 to be taking it out there. And that 80% of the world of reserves that are on land -- probably only about 5% of that or less than 5% is in the U.S. So we know the real play is going to be ultimately all the way from India to North Africa to Russia to China. It's going to be everywhere. So we will have the usual cast of characters, which are all those people one way or another being involved with us.

Thank you, my final question is more of a housekeeping question, Bob. Can we have a timetable that you might be able to share with us regarding the naming of a permanent CFO?

We're working -- if I had an exact timetable, I'd already have the person named. But we are working hard on that. I would certainly hope that we will have that concluded sometime in the second quarter. Obviously, when you have people involved, you never know if they get the deal done. But we have candidates, and we're working hard on it. I can tell you, for my own personal relief, I'll be happy to get that -- I've sort of got two hats on right now.

Understand. Thank you very much, Bob, and best of luck.

Joe Agular.

I was wondering if I could ask you a question on sort of the traditional marine streamer market for a second. 12 boats or so under construction are planned. What is the outlook for I/O's participation in the construction of those new vessels -- you know, for the (multiple speakers) equipment sales?

We have technology -- there's hardly a new vessel that goes into the water -- I can almost speculate there is none, but there probably are a few -- but if you consider Concept Systems, who provides -- who are absolutely the leaders in the data management systems on these boats, and then you consider the leadership position we have with the Digi product line in our marine group, there's hardly a boat in the world that won't have some form or fashion of I/O technology.

Then we have our streamer technology, sort of the more generic stuff, but we also participate in a smaller marketshare way. But we have some technical programs there. We have a gel-filled solid streamer that we're putting into the market, and we have some pretty aggressive programs to continue with all those product lines.

So I would say that one -- that our plan, just the overall all boats are rising. In this case, we can actually -- all boats are rising is truly boats. And within that context, we are seeing increase in activity.

The other thing that happens is that when people get busy, stuff happens. So the replacement parts come in, streamers get [some] -- there's all kinds of things that just your normal, underlying replacement business also increases. So I think we're going to see -- and I believe the towed streamer business is going to continue to increase.

The other trend we see is that -- I don't know what percent is, but there's a fairly significant percent of towed streamer work that is aimed at high-resolution activities, all the way from 4-D activity in the North Sea, to even people now doing what is called [wide avenue shooting] using several boats in these deep, complex areas. So we are expecting to see some reshoots in some areas of West Africa, even in the deep Gulf of Mexico.

That brings into play new technology. We've got a whole other technology turn of the crank, (multiple speakers) both at Concept with a new product called ORCA. And also we have some new technology I talked about briefly called DigiFIN, which puts some of our (technical difficulty) in a better position competitively against the good technology that Western Geco has been introducing under the umbrella Q.

Byron Pope, Pickering Energy Partners.

Historically, you guys have sold a fair amount of equipment to BGP, and I know that those guys tended to be early adopters of technology. I was wondering if you could just speak to what you're hearing and seeing out of those guys, given that they seem to be continuing to expand their footprint outside China?

BGP continues to be an excellent customer of ours. And in fact, we are constantly talking to them. Now, with BGP, I would be very surprised if -- you know, probably out there in '07 sometime, they won't be involved with us with FireFly, for example. Obviously, just for purposes of shaking out new technology, we just need to be closer to home. And so we're starting out in the U.S., and probably a U.S. contractor, but over time -- they're probably going to be sort of in there, I suspect, as sort of the second wave of that.

BGP are all around the world. We see them in all the way from Libya to Indonesia to -- about anyplace; the Middle East, Saudi Arabia. So they are every place you could imagine. And they are going to continue to be a great customer of ours. We got a lot of ideas, and talking to them continuously. In fact, I'm sure that I'm going to be over in China pretty soon at senior levels talking about other possibilities working with them.

Patrick Flavin.

Bob, could you give us some -- if you want to call it horizontal perspective in terms of what is going on in the business overall, and where your efforts are -- how they fit in there. It would appear that Sercel is not very active at all in other than the prosaic-type old seismic equipment field, whereas I am intrigued by these purchases by BP of Geospace's permanent sea-floor product. Can you help sort of fit in where full wave fits amongst all these players, and who is doing what where?

Sure. Just a comment about Sercel -- I have a lot of respect for those guys; they run a good business. They are a good competitor. They have been very successful with their land system, and I am a bit of a paranoid. I'm always looking over my shoulder. And so we have a lot of respect for them. And I'm sure that those guys there are not going to fall asleep on us. So we're going to continue to assume that they're going to be out there.

That being said, today, if you look at our diffusion, we estimate that about 70% of the full wave shoots that were in place in 2005 was done with our technology. So we are building up quite a body of leadership around the core technology.

I will also say that in VectorSeis Ocean, even more than land, just because of the nature of getting on a seabed, the imaging results we're seeing our just phenomenal. And I think we have a substantial lead on that around VectorSeis. But also, [this inventive] system that we've built and are working with our launch partner, RXT.

There's the permanent imaging market and there's the exploration market. And the permanent market -- the (indiscernible) guys have done a good job. They have got out there, and they have got themselves in a nice position. They got the experience curve. I think at I/O, we only have so much capacity to pioneer so many things. And I am happy to see -- there's a few places I wouldn't (technical difficulty).

I do believe that there's going to be that -- that permanent market really goes. It's a slow-growing market, but it tends to be a very large market, and we are in active conversations, and would hope to have a project going one way or another. And it will be around full wave.

So I think we can take the knowledge and the gains we're learning from the seabed retrievable and start applying that, and will be applying that ultimately in some kind of a permanent system in the Marine. And then in the land, I think you're going to see some land monitoring for the results that will lever our technology.

I'm not going to really say who is what, but I'll just say I'm very comfortable with I/O and our leadership and our technology. And I think our goal obviously is to get out in front of the pack and stay out ahead of them.

Well if there are others around too, then visibility improves and interest improves. So hopefully, this is a --

Right now, when you're making a market, having other folks in there is not a bad thing.

Agreed. Thanks.

Thank you. (multiple speakers) There are no further questions. [Do you want to do] your closing comments?

Okay. While we continue to make significant progress, there is still much more we can do to improve our execution, both technical and business development, especially in our land business. We're going to continue to concentrate on proving the superiority of digital full wave while developing to introduce new game-changing seismic technology. We think this will help us with improving our market position and market penetration with the objective of further raising our gross margins.

I'd really like to thank you for taking the time to attend the conference call, and I look forward to talking to you at our first-quarter conference call, which will be here before we know it. So thanks.

Ladies and gentlemen, that does conclude the Input/Output fourth-quarter earnings conference call. Thank you for again for your participation. And at this time, you may disconnect.