Ion Geophysical Corporation (IO) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Input/Output first-quarter 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, May 11, 2006.

I would now like to turn our conference over to Karen Roan, Senior Vice President of DRG&E. Please go ahead, ma'am.

Thank you, Rose, and good morning and welcome to the Input/Output conference call. We appreciate you 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 cover.

If you would like to be on an email distribution list or fax list to receive future news releases, or if you experienced 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 telephonic replay until May 18. That information is provided in the press release.

Information reported on this call speaks only as of today, May 11, 2006. 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 flows, funds from operations, financing plans, gross margins, business strategy, budget, 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 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 in its Annual Report on Form 10-K for the year ended December 31, 2005, and in its Quarterly Report on Form 10-Q filed yesterday.

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 the conference call this morning are covered by these statements.

Now I will turn the call over to Bob.

Thanks, Karen, and thank you for joining us. As we said on our fourth-quarter conference call, we expected to start the year slowly and improve through the year, with a larger portion of the revenues occurring in the last half of the year. In the first quarter, all our divisions, with the exception of land systems sales, improved significantly, with consolidated revenues up almost 40% from the first quarter of 2005 and a $4.7 million improvement in net income.

This improved performance was driven by marine sales, up over 140% from a year ago, and an even larger increase in gross profit. In our land business, our sensor unit sales more than doubled, resulting in a 140% increase in operating income. As expected, our land systems sales were off significantly from last year's first quarter due to a short-term timeout with customers who want the improvements and new functionality included in our next release of System Four, which will be shipping later this quarter.

Concept systems also had excellent results both in revenues and profit, as did the GXT processing group, which recorded strong results with significantly more backlog than this time last year.

We achieved these much-improved results quarter over quarter despite the following -- $4 million of margin from the sale of our next VSO system slipped into the second quarter due to manufacturing delays. We should ship the remainder of the $25 million order during the second quarter.

Also, approximately $1 million of margin from GXT's multi-client Span project slipped into the second quarter due to operational delays caused by a supertanker running over the survey boat streamer. The crew is back up and running and expects to complete most if not all of the survey this quarter.

In addition, a data library deal representing approximately $1 million in margin and that was assumed could be completed in Q1 was booked in the quarter, but will not be recognized until the second or third quarter. And we incurred about $1.6 million of above-planned expenses pertaining to accounting and legal fees related to our 2005 audit, Sarbanes-Oxley compliance and a long jury trial against Paulsson Geophysical Services, which resulted in our favor.

Now Mike will review the financial results for the quarter, and then I will make some additional comments about the quarter and also look forward into 2006.

Thanks, Bob. Looking at 2006 first-quarter results, we generated $86.3 million in revenues. The land business, with the exception of land systems sales, all the equipment divisions had very robust sales in the quarter, especially sensor, with overall land revenues of $34.9 million, compared to $30.6 million a year ago. Land systems sales were significantly off from the year-ago levels due to a waiting period by our customers for the third release of System Four, which we expect to begin shipping later this quarter.

The gross margins in our land group were lower at 18%, compared to 22% in the first quarter of 2005. This lower margin reflects a higher portion of lower-margin vibrator trucks in the revenue mix, as well as lower than planned gross margins for our System Four, due to competitive market pressures and higher third-party manufacturing costs. We are taking steps to address the increased manufacturing costs.

In the marine business, sales were $26.6 million, compared to $10.9 million in the first quarter of 2005, driven by continued improvement in the marine market. This more than doubling in marine revenues occurred despite the fact that approximately 10 million of VSO sales slipped into the second quarter due to manufacturing delays. As the worldwide marine fleet continues to increase in size and utilization, we're seeing more opportunities for revenue growth and expect this to continue throughout 2006 and 2007. Gross margin in the marine group was 41% in the first quarter.

Our concept systems' data management software business had revenues of $4.5 million in the quarter. In our seismic imaging solutions group, which includes GXT and AXIS, revenues improved to $20.3 million, compared to $17.5 million last year. GXT reported a gross margin of 21% in the first quarter, mainly due to the delays due to a boat accident and lower than expected data library sales due to timing issues.

Overall consolidated operating expenses continued to decline, from 30% of revenue in the first quarter of 2005 to 29% of revenue this quarter. However, this reduction is somewhat offset by an increase in R&D expenses of 2.5 million, mainly due to a ramp-up to support FireFly.

As Bob mentioned, we also had $1.6 million in higher than expected accounting fees related to our 2005 audit and Sarbanes-Oxley compliance and $400,000 related to legal fees in connection with our recent trial against Paulsson. We also recorded $700,000 related to the expensing of stock options. We expect that stock option expenses for the year will total closer to $3 million than our original estimate of $2 million given at last conference call.

We still expect to gain additional leverage and profitability going forward as revenues increase faster than operating expenses during the remainder of the year.

We incurred an income tax expense of approximately $900,000 in the first quarter, primarily due to tax payments made in foreign jurisdictions.

Turning to the balance sheet, inventories rose by approximately $14 million from year end 2005 due to $5 million in additional inventories due to the delay in shipments of VSO, $5 million increase in marine inventories due to increased activity levels, and a $3 million increase in land inventory resulting from lower System Four sales.

CapEx for the quarter was $1.4 million and additions to the data library were $9.1 million. Cash increased by $15.9 million from year end to $31.7 million at March 31.

With that, I'll turn the call back over to Bob.

Thanks, Mike. As an overview, Q1 was slightly lower than earnings than we had expected, primarily due to the delay in revenues due to the aforementioned reasons and the higher than expected nonrecurring G&A cost.

Notwithstanding these short-term issues, I am satisfied that all of our business groups are making good progress, which will be the foundation of both improved 2006 results as well as continued long-term success. For example, I am pleased to report on the progress we continue to make at GXT. We saw strong process results at GXT this quarter and backlog continues to grow both domestically and internationally.

Looking back one year go, our processing revenues were 40% lower than they were in this quarter. We are also making some significant strategic strides in our proprietary processing business, including the commercialization of reverse time migration with backlog growing for this next-generation depth imaging offering.

In addition, we were awarded a significant processing job by the Chinese oil company Sinopec for the largest full-wave survey ever that was completed last year using our VectorSeis System Four for the data acquisition. This was a major milestone, as we're starting to be recognized as the technical experts in not only full-wave systems, but also processing full-wave data.

In addition to GXT's processing business, GXT started a very large span project in India in Q1 that will continue on into Q2 and has been well-received by oil companies, which bodes well for additional company participation on the survey plus strong data sales in the future. I view GXT's financial loss in Q1 as no more than a reflection of the lumpy nature of their business. And I still expect a strong performance by GXT for the entire year, including both their processing and multiclient businesses.

In our imaging systems group, we had strong revenue growth, which is expected to continue throughout the year. The only weakness in land systems sales was due to the aforementioned short-term timeout related to customers waiting on our next version of System Four. As mentioned during last quarter's conference call, we're making progress on System Four in both functionality and quality, which is being demonstrated by high performance numbers measured in shots recorded per day in some most recent desert shooting jobs.

We are also making the engineering changes to lower manufacturing costs so that, when combined with improvements in our supply chain management, should result in improving margins as we move into the second half of the year. Due to these improvements, we look forward to improving System Four sales and margins during the remainder of the year.

Related to our land imaging business, our next-generation cableless system, FireFly, continues to make good strides towards commercialization. Last week, we announced Apache's participation in the multiyear, 10,000-station FireFly program to deploy and test the FireFly seismic acquisition system on its key E&P assets around the world.

This is in conjunction with the previously announced BP FireFly project, where Apache and BP will cooperate in the multiyear high-density full-wave land imaging pilot. Apache's participation is another strong indicator of industry excitement for the potential of FireFly, both from an image quality and productivity perspective. The FireFly engineering program is on schedule, with the goal of shooting the first program for BP in the fourth quarter of this year.

Under the agreement, BP, Apache and equipment rental company SES are acquiring the initial FireFly equipment from I/O. The companies have also chosen a launch partner contractor who will be paid by the oil companies to provide the crews and non-FireFly equipment for their surveys. I/O is providing the FireFly operations management software through its content systems division and will also be using GXT planning and processing technologies specifically designed for high-density full-wave surveys.

This project represents a breakthrough for the industry on how to better introduce new technology with the goal to accelerate what have been historically slow diffusion rates. I would like to thank BP, Apache and SES for having the vision to take on this exciting project, which will benefit all parties.

I am asked constantly the question, when can we expect to see increased acceptance of full-wave? At a recent technology panel discussion in Washington, D.C., Steve Cassiani, the President of ExxonMobil's Research Company, stated the following -- advanced seismic imaging technology will be a major component to the successful exploration in years to come. The challenges we're going to face will require the next generation of imaging technology with significant advances in several areas. We will need tools and procedures to acquire seismic data with substantially higher resolution in all three dimensions.

He further predicted that future imaging technology will use advanced processing techniques that will capture multiple types of data. He also stated -- in many cases, we only record and use wave pressure data. The next generation of seismic processors will use [all recurring] energy to develop more accurate images.

We were pleased to hear that ExxonMobil agrees with I/O that the industry needs next-generation seismic imaging technology to solve the problems ahead of us. And it will be based on substantially higher resolution and measuring the full wave field. That is the essence of VectorSeis full-wave for both land and sea data applications.

Moving on, our marine division also had an excellent first quarter, in spite of the VSO delays. We will deliver the balance of the second VSO system by the end of this quarter. Additionally, we are in negotiations for the purchase from RXT for a third VSO system to be delivered in the fourth quarter. This is in line with our 2006 expectations and our exclusive deal with RXT.

Also in our marine group, we've recently announced the completion of field trials with Veritas for DigiFIN and the first system sale of Orca, which is the replacement for the flagship product of Spectra from Concept Systems. The integration of DigiBIRD, DigiFIN and Orca will result in a leadership offering for a high-resolution towed streamer aimed at more complex surveys such as wide-azimuth and 4-D.

In addition to our new offerings, we are seeing strong sales of our mainstream marine products, which are being driven by increasing fleet size and replacement needs as more vessels are in operation.

Our sensor division, which is the market leader in geophones, had an excellent first quarter. The same can be said for Concept, which is also enjoying the increased business from a growing marine seismic market.

On April 26, we were very pleased to announce the hiring of our new CFO, Brian Hanson, who will begin on March 22, and we look forward to having him on board. Brian has unique credentials for I/O, including a strong background in both financial and operations related to designing, manufacturing and selling complex high-technology systems.

I was also [technical difficulty] experience in the highly priced competitive medical imaging systems business, where he learned how to drive costs out of complex businesses. I look forward to handing over the keys to the financial department to Brian.

Now moving on to our outlook, even though we've started more slowly than planned, we expect to begin catching up this quarter, with strong business prospects for the balance of the year. And our guidance is still for 2006 revenues to range between 410 and $450 million.

We expect ongoing margin improvement as we continue to focus on quality and reducing cost of goods sold, with full-year 2006 gross margins expected to range between 30 and 32%, with the main variables being land system improvements, a solid performance at GXT's ISS business, or the multiclient business, and revenue mix.

We anticipate operating expenses as a percentage of revenues to be between 20 and 24% for the year. And as a result, we continue to anticipate 2006 earnings to range between $0.20 and $0.35 per share.

Operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS). Joe Agular, Johnson Rice.

Bob, I was wondering with the development of the new land system, if -- you mentioned that you may have -- you experienced some sort of delay in customers wanting to spend money until the new system comes out -- could start to impact Q2, it sounded like? And I was just wondering if you had any orders already for that system.

We don't -- Joe, as you know, we don't comment on the quarter's specifics. But I will tell you -- I will give you an example just to give you some insight. For example, we have one company that is very much contemplating System Four, but they wanted to do a quality or audit on a system with the new release before they could commit to a purchase. And we are actually -- the company is inside the house right now going through checks on the system.

So there's clearly enthusiasm and interest in the system. I can never -- I just never try to predict exactly when these things are going to fall, because they are very large systems. But it is a very important release for us. It is one that we announced at the SEG. It has to do with some functionality particularly that is important to us in desert shooting. But it also has a lot of quality improvements. So we are very much looking forward to getting it out there. And obviously, our salespeople are looking forward, too.

And it is something that I guess sort of spans the current technology to FireFly, sort of GAAP, I guess? It's a transitional system.

Yes, it is our mainstream offering. It competes pretty much heads-up with our competitor. It is really the backbone -- it is our cable system. It is our backbone both for our analog systems sales and for cable full-wave sales. So it is a very important -- it is basically our main system we are selling this year, with the exception of what we're doing with FireFly and our partners.

Has a contractor been selected for the BP shoot yet? And who selected it -- would it have been BP or would it be you?

The process of selecting a contractor -- at the end, the final decision falls with both BP and Apache. I think the two decided it was wise for them to use the same contractor, as you could imagine.

There is a whole array of issues in selecting a contractor. One would be their own record in things like health and safety, environment. And obviously, oil companies are very sensitive to that. So they very much had to sort of go through that hurdle of registration of being qualified by those companies.

And then secondly, we're looking for companies that really believe in the vision of the product line and do have excitement for the future of cableless. The company has been selected, but it has not been announced yet. So we will let that sort of come out when it comes out.

[Mary Saffron], Burnham Securities.

I have sort of a general question about the synergies between your businesses. You're talking about them, and I know -- I understand about the processing and the software and the acquisition part. But how are these things all going together? And what can you expect to benefit -- how can you benefit from their working together?

Well, there's two benefits. One benefit is in the development of the technology itself. For example, if you are building the systems like FireFly that is being designed to better image the reservoir, the more you are involved with the actual understanding of the data, then the smarter you are in building those systems. So there's a very synergetic loop between the experience of working with the oil company, the experience of processing the data, and then back into the technology itself.

Also, we're finding that having that expertise with our geoscientists, geophysicists, particularly the critical mass being at GXT, allows us to execute our strategy where we can come into the oil company and talk to them about their problems -- their geophysical problems. And then it allows us to recommend what kind of technology they should use that is in our toolkit.

So I think the FireFly -- this FireFly example, what we're doing with the oil company is a great example that we are not only working with them on the delivery of the ground electronics and collecting the data, but we also have the software, the expertise to plan the surveys. So we are in collaboration with the oil company in planning the survey.

We are actually working with the oil company, both oil companies on the technology we will be using on processing. We are building out some new technology to support it in collaboration with the oil companies. And then we will be the guys that is going to process the data. And we're even going to be helping with some of the technology around the interpretation.

So all of that becomes -- moves us much more into a solution mode, where we understand the problem, we can recommend, and then it pulls through our technology. In addition, we get services around it.

Can you imagine ever planning a survey and then using somebody else's equipment or something like that? Are you consulting ever? Or is it all together when they come to you and then they talk about this survey, they're going to use your equipment and your --

The only place that happens is in our multiclient business. And in the multiclient business, we've intentionally told our GXT guys that they look at the problem and they reach for whatever technology that makes the most sense for the customer.

And there are times -- I will give you an example. For example, they may be in a deepwater area where there is nodes -- you need node technology. And we don't have node technology in our toolkit. So we would not say, don't do it. If you put together a deepwater multiclient use of nodes and can solve the customer's problem, then we ought to do that.

So we don't restrict ourselves in that. But at the same time, it gives us insights into what we don't have and where we ought to be building technology, etc. But I would say 80% of what we do, or 70% of what we do, more and more will have certainly elements of our technology, both on the systems side and the processing side.

(OPERATOR INSTRUCTIONS). [Ted Bates, Canal] Capital.

I was hoping you guys could walk me through your plan or what has to happen for you guys to reach your full-year EPS target? And then also, what accounts for the wide gap between the two numbers?

I'm not sure I understood the question. I think the first question -- was the first question what is it going to take --

Yes, your plan to achieve another $0.20 to $0.35?

What are the key elements in that?

Yes, and then second part being just could you walk me through why there is such a -- $0.20 to $0.35 -- why that whole $0.15 -- what accounts for the variance?

Well, the key drivers in the forecast -- one, in the marine side, we have some very large sales. In the marine business right now, part of our offering is VectorSeis Ocean. These are plus or minus $20 million systems.

We currently have a delivery of one of those systems set up for Q4, which we are on target to deliver that. But that is a big order, and we have to go through the manufacturing of it and delivery of it and finalize the negotiation with RXT. At this moment, we have no reason to believe we won't get that done. But there's variables in that. So that is an important part of it.

In addition, the whole marine business, as you can see from the numbers, have gotten quite strong. And so we also have a lot of business looking forward, and their main business is DigiBIRD -- all their streamer products. And that business seems to be growing nicely. The one thing that is not totally predictable for us is as people get more active, then have things happen and they need replacement equipment. And so that whole business has just strengthened nicely.

The other main variable in our business, if you think about things that are lumpy, would be our data library sales and the multiclient ventures themselves.

One example -- and this is again why we sort of stay away from quarterly guidance -- one example is we are doing this very large span project. We had a supertanker that ran over some streamers and it delayed the guys four weeks. It did nothing to the impact of revenues, but four weeks of production is a very big number for us relative to our size, so that just shifts into the next quarter.

But we do have a couple other of those kinds of projects that are on our radar screen and in our plans. And so that is why we have those fairly large swings right now, where you go $0.20 to $0.35, because any one of those moving one way or the other can move the numbers.

But I would say those are our biggest -- our processing business is a lot more predictable today because we have -- the backlog is very, very strong and growing. Our main issue in processing is basically the delivery of the service, how much more could we expand. There is a shortage of people in the industry, particularly in the area of geophysicists. We are doing everything we can to improve our computing infrastructures to give us more productivity in our systems. But that business is pretty predictable.

And then we have our standard geophone businesses. And those are just moving right along with the general level of activity. So again, the main variable is our multiclient business, which has the two parts -- the new venture piece, where we are recording new surveys, and the data library sales, and then the second piece is the very large orders by the marine. We also have -- we do believe we are going to have good, solid systems sales with our System Four with the new improvements, and that is pretty much weighted in the second half.

I guess just one follow-up. This span project, how much revenue do you usually record from those -- the generic number?

The total -- those projects vary, but they run anyplace from 10 to $15 million.

(OPERATOR INSTRUCTIONS). [Andy Reiser], Wachovia Securities.

A few questions here, housekeeping type of questions. In the first quarter, the G&A expenses were up a bit, and you broke it down. You said $1.6 million was for accounting and there's some legal expenses. What do you expect in the future quarters regarding that area?

Just that -- the thing that is sort of baked into that number -- Mike, you can correct me if I miss something -- there is two changes, year-over-year comparison. That is a big jump. One is that we had $700,000 in stock option expenses. As you know, this is the first year we have expensed stock options. So that is a number that is now baked into that G&A number.

The second in that number, we will see an ongoing cost of compliance, if you want to call it that, Sarbanes-Oxley-related, those kinds of things. And we will probably, compared to last year, we will probably be picking up 200, 250,000 of additional run rate expenses related to that.

The legal expense, that was a one-time event. The 1.5, $1.6 million was pretty much a one-time event. So I think that is pretty much -- I think we have pretty much said the nonrecurring part of the expense is $1.6 million.

And also, R&D expenses were up in the quarter. Do you --?

Yes, that will continue. What that is -- it is almost totally FireFly. It was about $2.5 million for the quarter. For the year, it will probably be slightly more than $7 million year over year. And that is mainly a ramp-up in R&D. We are now in a very aggressive productization phase, plus the -- if you want to call it technical marketing and support of the project itself that we are doing.

And you said most of this is related to FireFly?

Yes. Probably 90% of that is related to FireFly.

And also related to FireFly, do you expect 2007 to show us some revenues from the FireFly venture?

We have not put that -- that is not in our -- that is currently not in our forecast. There is a possibility of some upside there. Obviously, when we have the range we have, it can also be beneficial one way or the other. But we do not have that in there for a couple of reasons.

One is that it is an R&D program. We've got a lot that has to happen. The program currently is slated to start in the fourth quarter. We just don't think it is prudent to be forecasting revenues with that kind of a backdrop. And so that is mainly there. So there could be some upside in that. We'll just have to see how that unfolds.

Also, on the balance sheet, there was a $15 million increase in cash for the first quarter. What would you expect the balance sheet to look like as we go forward? Interest expense dropped in this quarter. Should we look for a continuation of a decline on interest expense and a buildup on cash? Or is this more a first-quarter item?

It is going to be -- our balance sheet will be lumpy, just like our revenue patterns. As you know, we had a very strong fourth quarter. A lot of it was booked and closed in the end of the quarter. And so we have been monetizing a lot of that through Q1. I think year over year, we should see that cash -- we should be in a good solid cash position. The interest expense should be flat pretty much through the year.

And there are no further audio questions at this time. Do you have any concluding comments?

Is that it? Okay, well, thank you for taking the time to attend the conference call. And I look forward to talking to you during our second-quarter earnings call.

Thank you. Ladies and gentlemen, that concludes the Input/Output first-quarter conference call. You may now disconnect. Thank you for your participation and please have a pleasant day.