Ion Geophysical Corporation (IO) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Input/Output second-quarter conference call.

At this time, all participants' lines have been placed 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 Thursday, August 10, 2006.

At this time, I'd like to turn the presentation over to Jack Lascar with DRG&E.

Thank you, Andrew. Good morning and welcome to the Input/Output conference call. We appreciate your joining us today. Your hosts today are Bob Peeler, President and Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer.

Before I turn the call over to management, I have a few items to cover. If you would like to be on an e-mail distribution list to receive future news releases or experienced a technical problem and didn't 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 Web site at www.I/O.com, or via recorded instant replay ended August 17. Information was provided in yesterday's earnings release.

Information reported on this call speaks only as today, August 10, 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 operation, financing plans, gross margins, business strategies, budgets, projected costs and expenses, capital expenditures, competitive positions, product offerings, technology development and growth opportunities are for forward-looking statements. These forward-looking statements are based on management's current expectation 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 differ materially from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the Company from time to time in its filings with the SEC, including its annual report on Form 10-K for the year ended December 31, 2005 and 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 our conference call this morning are covered by these statements.

Bob?

Good morning, everyone, and thank you for joining us.

First, I would like to introduce our new Chief Financial Officer, Brian Hanson. Many of you may have read the April 26 press release announcing that Brian would be joining us effective May 22. Brian has 20 years of professional financial experience and brings to I/O a unique mix of financial and operational expertise in imaging technology and manufacturing. With strong capabilities in both areas, along with his public company and Sarbanes-Oxley experience, Brian adds depth and strength to our senior management team.

We're very pleased with our second-quarter results that include a 56% increase in revenues as compared to the second quarter of 2005 and $0.18 per share in basic earnings, $0.16 on a diluted basis. As we mentioned in our previous two calls, we expected the year to start slowly and improve through the year. This is exactly what has happened to us so far. The first quarter started a little slowly, but it was more of a timing issue than an issue with our business. The fact remains that this is a lumpy business with large system and multi-client sales.

During the second quarter, all of our divisions improved significantly with the consolidated revenues up 56% from the second quarter of 2005 and a 7.5 million improvement in net income. This improved performance was led by Marine sales, which rose almost 130% from a year ago. Our Land sales, which include all of our land business, increased 33%, underscoring the growing interest in land exploration in most parts of the world.

GXT recorded strong results in our Seismic Imaging Solutions segment with sales up 46%. The second quarter included one very large library sale, which we have been discussing with a customer but actually occurred sooner than we had anticipated. That sale added $0.05 of earnings per diluted share to the quarter. This is a good example of the lumpy nature of our business.

The only soft spot in our results was in our Land Image Systems margins. Even though our revenues were up quarter-to-quarter, our margins were negatively affected, as anticipated, due to working through some high-cost inventory. Our Land Imaging Systems sales included a very large sale of System IV [analog] to a Chinese customer, demonstrated a growing competence from our customer base in our improvements and quality and reliability of the system. As mentioned in our first-quarter conference call, we are in the process of reengineering System IV to reduce costs and improve reliability, and we expect to see improvements in Land Systems sales and related margins through the balance of the year and in 2007.

Now, Brian will review the financial results for the quarter, and then I will make some additional comments about the quarter and the rest of 2006.

Thanks, Bob. Good morning, everyone.

For the second quarter of 2006, we generated 141 million in revenue, a 56% increase from the second quarter of last year. For the first half of 2006, revenues increased 49% to 227.3 million, from 152.2 million in the first half of 2005.

In the land business, all of the equipment divisions had very robust sales in the quarter, especially Sensor, with overall land revenues of 49.8 million compared to 37.4 million in the second quarter of 2005. Land system sales were up significantly from year-ago levels due to the Chinese sale that Bob mentioned earlier and despite a waiting period by our customers for the new release of System IV, which we started shipping late in the second quarter.

The gross margin in our Land group was lower at 20% compared to 23% in the second quarter of 2005. This lower margin reflects both a higher proportion of lower-margin vibrator trucks in the revenue mix and lower-than-anticipated gross margins for our System IV due to competitive market pressures and higher-cost inventory. We are continuing to take steps to improve quality and reduce manufacturing costs.

For the first six months of 2006, our total Land revenues were 84.8 million, compared to 68 million for the first six months of 2005, an increase of 25%. Gross margin in our Land business for the first six months was 19%, compared to 22% in the first six months of 2005.

In the Marine business, revenues increased 130% to 38.5 million in the quarter compared to 16.8 million in the second quarter of 2005, driven primarily by continued improvement in the Marine market. We benefited from strong sales in both the positioning and VSO product lines with approximately 10 million of VSO sales pushed through the first quarter 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 trend to continue throughout 2007.

Gross margins in the Marine group were over 35% in the second quarter, compared to 43% in last year's second quarter, primarily as a result of product mix.

In the first six months of 2006, Marine revenues more than doubled to 65.1 million from 27.6 million for the first six months of 2005. Gross margin in the Marine segment for the first half of 2006 was 38%, compared to 40% in the first half of 2005.

Our Concept Systems Data Management Solution segment revenues increased 53% to 5.7 million in the second quarter, compared to 3.7 million in the second quarter of 2005. Year-to-date, Concept Systems revenues increased 48% to 10.1 million from 6.9 million in the first half of 2005.

In GXT, our Seismic Imaging Solutions Group, revenues increased 46% to 47 million compared to 32.2 million in the second quarter of last year. Gross margin for this segment was 43% in the second quarter, driven by strong data library sales, compared to 33% for the second quarter of 2005.

For the first six months of 2006, revenues were 67.3 million, compared to 49.7 million, an increase of 35%. Gross margin for the first six months of 2006 was 37%, compared to 20% in the prior year. Overall, consolidated operating expenses for the second quarter and on a year-to-date basis were flat as a percentage of revenue, as compared to the comparable periods of 2005.

We invested 3.4 million more in R&D in the quarter than in the second quarter of 2005, primarily in the FireFly project, 2.9 million more in marketing and sales as we develop a strong global sales and marketing organization, and 4.4 million in general and administrative expenses associated with professional accounting fees, an increase in expected bonus expenses for 2006 based on the results of operations, and 1.4 million related to the expensing of stock option-based compensation. We expect that the change in the accounting treatment of stock option expenses for the year will approximate 3 million of additional expense versus 2005.

For the first six months of 2006, consolidated operating expenses were 24% of revenue, flat with the first six months of 2005. We expect 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 1 million in the second quarter, primarily due to tax payments made in foreign jurisdictions, compared to approximately 400,000 for the second quarter of 2005.

Turning to the balance sheet, inventories rose by 13.6 million from year-end 2005, primarily due to the increase in activity in the Marine business. CapEx for the quarter was 3.3 million, and cash increased from 15.9 million at year-end to 33.9 million at the end of the quarter.

With that -- (technical difficulty).

Thanks, Brian.

I am satisfied that all of our business groups continue to make good progress and furthermore, the underlying business remains strong and will likely remain so for the balance of the year and in 2007.

Just to give you an example of the strength of the seismic acquisition market, in the past year, the industry added 14 land crews to the U.S. alone. We had gone from 44 crews in July 2005 to 58 crews currently. During the past couple of months alone, ten crews were added to the U.S. land crew count with six of the crews coming to the U.S. and Canada. Even more important, we are seeing a growing interest by all companies to improve image quality on land, as there is a realization that today's status quo seismic technology is not sufficient to tackle the tougher challenges of the more complex, deeper formations and emerging unconventional reservoirs such as fractured type gap sands.

The activity story is similar for our Marine business lines, where not only do we expect to see a general expansion of the fleet over the next couple of years and related increase in activity, but we are also seeing a move towards more customized surveys to solve the toughest exploration and development problems. Technologies to support wide-azimuth shooting, tighter spacing with streamers for high-resolution, and ocean bottom full-wave recording are all samples of oil companies looking for a new round of technology to help them find and produce the reservoirs more efficiently.

One concern we have for both land and marine acquisition is the rapidly escalating acquisition service prices that oil companies are experiencing due to crew shortages and the effect that could have on future activity. We believe technology that improves image quality and also introduces step changes in productivity and underlying costs will become a much more important area of focus in the new future. This underpins many of our current R&D programs. Our goal is to introduce not only a step change in image quality but also significant improvements to the productivity of field crews that drive image costs down.

Operationally, I am pleased to report on the progress we continue to make at GXT. We saw strong results at GXT this quarter across the board with strong processing data, strong library sales, and strong new multi-client work. The pipeline continues to grow, both domestically and internationally, with the largest challenge being increasing our data-processing global capacity while maintaining our reputation of technical excellence. In addition to GXT's normal depth imaging, we are also seeing client interest in the recently introduced Reverse Time Migration, which we expect to accelerate in growth as new computing technology drives down processing costs.

GXT also is starting to see an expansion in its land processing business, highlighted by the large China full-wave processing job that resulted from last year's very large vector size chute. We do not plan on competing for the [lower-end] generic land-processing business but rather for opportunities that leverage our technical focus, including depth imaging and full-wave processing.

In addition to GXT's processing business, during Q2, GXT essentially completed a very large span project in India that has been well-received by all companies, which bodes well for additional oil company participation on the survey, plus strong data sales in the future. GXT is generating excellence results and I expect a strong performance from GXT for the remainder of the year, including both its processing and multi-client businesses. But I caution that the exact timing of revenues for Q3 versus Q4 is undetermined, due to the lumpiness of the multi-client business.

A few additional comments on the land imaging business. The rapidly expanding geophone business highlights the general crew expansion going on around the world. Many of the new crews are aimed at large 2D exploration projects in areas such as Libya, where even good-quality base seismic surveys are in short supply. We are optimistic that more dense, high-quality 3D and often full-wave 3D will increasingly be needed by oil companies to get the quality of reservoir images to solve their problems. However, in the short term, the rate of expansion of the higher-end market has not kept pace with the general overall market growth, and part of the reason is that people are full-stop just covering their basic needs. In our business, this has been highlighted by being nearly sold out in our vibrator truck and geophone businesses, where our System IV VectorSeis business has been slower than planned year-to-date. We do have sufficient pipeline of opportunities, including our FireFly project, to make our 2006 VectorSeis land target of 30 million in bookings but believe that the majority of our System IV sales will be mainly to serve the mainstream analog business. We are in a good position to increase market share in this growing market with the previously mentioned improvements in quality and costs and recent large sales to both BEP and a large western contractor. Our primary focus for future VectorSeis full-wave will be on FireFly, where significant improvements in productivity enables the higher shooting density, which in return enables much better applications of the full-wave measurement.

Related to FireFly, we continue to make good progress with ongoing internal field tests at I/O's test facilities in Sealy, Texas with plans for even more robust tests during August and September, including expanding the number of active FireFly field recording stations. We are quickly moving into the manufacturing mode where the main challenge is ramping up to complete sufficient number of FireFly units for the BP Q4 test. We believe we are on a solid path to make that goal, assuming our field tests continue on the present successful path.

Related to the market for FireFly, we have already received several inquiries from oil companies around the world on the availability of FireFly. We expect that interest to continue to grow as we move into full early commercial mode with BP and Apache.

Moving on, our Marine division, as mentioned, also had an excellent second quarter with revenues up across all major product lines. It's worth mentioning that in addition to delivering the balance of the second VSO system during the quarter, we did get the third purchase order from RXP as expected, which should be delivered during the fourth and first quarter of next year. As a consequence of timing, we will likely see Marine weaker during Q3 due to lack of any VSO products being shipped, then picking back up in Q4 as we start delivering the third system to RXP. What is a bit unpredictable is the amount of additional positioning in streamers sales we might have in Q3 and Q4 due to the general increasing activity in that market.

Related to marine activity, Concept Systems is also having a stellar year not only with strong growth in its base software businesses but early success in the introduction of ORKA to several marine contractors. The sales of ORKA are a reflection of the system's advanced capabilities of managing more complex marine chutes, such as wide-azimuth surveys that are becoming a much more important part of the mix of the marine imaging business. In addition to the stand-alone potential of the ORKA product, it becomes even more robust as part of a marine integrated system, which will include DigiBIRD, DigiFIN, and ORKA, all combined with the objective to create a leadership offering for high-resolution code streamer imaging.

Moving now to the outlook, based on our results for the first half of the year and the current pipeline of business, we are optimistic about the original 2006 guidance we provided earlier this year. Because of the lumpiness of the business and the fact that we don't expect any VSO sales until the fourth quarter, we expect second-half results to be more skewed towards the fourth quarter. We still expect our 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%, and the main variable being land system improvements, a solid performance of GXT's ISS business and revenue mix. We intend to take operating expenses as a percent of revenues to be between 20 and 24% for the year. As a result, we have growing confidence that our 2000 earnings will range between $0.20 and $0.35 per diluted share.

Operator, we now are ready for questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Michael Marino, Johnson Rice & Company.

Good morning, Bob. My question relates to the Land business. Revenues were obviously -- well, they were a lot higher than we were looking for; margins were a little lower. You said you had some inventory kind of things you were working through there. How long before we see a margin improvement in that segment? Is that something we can expect in the back half of the year?

The answer to that is yes. We should see improvements for margin in the back half of the year.

Okay. Can you get margins as high as, say, the land business there? I mean as high as the Marine business?

Not likely. In the Marine business, particularly in our positioning products, those are just really strong margins. We would love to get there and I won't say never but not this year. But I do think we will see nice improvements in the Land margins.

Okay, fair enough. Obviously, at GXT, you are seeing a lot of interest in your Gulf span shoot and that is starting to show up in the numbers, now. For the international spans, are you already seeing the interest in terms of the library sales maybe? Is that something we could see this year or early next year -- (multiple speakers)?

(multiple speakers) -- actually we are -- some of the library sales are in the West Africa and some of the West African spans, and so I believe in fact one of the large sales we had this quarter was more -- had a little bit of Gulf span but it is mainly West Africa, I believe.

Also, as the year goes forward -- right now, we're basically in the process of shooting -- almost finished but we still have a little bit to finish up in India. So I guess that as the year -- I'm sure this year but perhaps towards (indiscernible) we could see some library sales for that. But yes, the important thing is that we now have a portfolio and a growing portfolio of span products that are being well received.

Okay, good. Back to the land business -- the BGP shoot that you all announced I guess a few months ago now in Saudi, when can we expect to see deliveries of those products?

Well, actually the shoot itself was at -- actually took place last year. That was actually Sinopec and BGP were the company that actually acquired the data with our System IV VectorSeis. If you recall, we talked about that was one of the largest if not the largest full-wave shoot ever. We just most recently won the processing for that job, and we are processing currently. We are already starting to look at early data and early images out of that. We are still in very, very early stages but I can tell you that we are quite pleased with the data. It's validating what we've believed that as you increase the density of shooting, or the density of receivers, and you combine that with full-wave, we are really seeing image quality that we had been expecting and are just really looking forward to -- it will be, you know, probably two months or so before we are fully into the dataset and having sort of more than just preliminary results. But we've seen enough to know that the data is excellent and we are quite encouraged about what we're going to be able to pull out of that dataset.

Thiru Ramakrishnan, Simmons.

Bob, you touched on this briefly, the marine market. I think it has been pretty well-documented, the expected increase in kind of 3D capacity from a vessel perspective and more specifically from a streamer perspective -- plus six streamers on the vessel defining 3D. What type of marketshare do you think you have in that opportunity set?

Let me first segment that market a little more and then I will give you more or less quantified versus qualified the share.

One of the most important things I see going on in 3D is a move from what -- if you go back in the last boom, the boom was lead more by real spec shooting. What we're seeing now is a significant trend towards more customized shooting that includes tightening of the spacing, includes things like wide-azimuth shooting, which are, as you think about it, are much more complex surveys. You are using multiple boats in multiple different ways. What brings about is a significant increase in needs for another turn of the crank of positioning technology, another turn of the crank of quality of streamer. So I think the good news for all of us is in the technology business is that there's a real drive and I think it's just really more at the beginning than the end of really taking the quality up another notch.

This is -- today, interesting enough, is more aimed towards exploration, whereas a year or two ago, it was more aimed towards 4D work. In fact, we're speculating that we've seen a little bit of falloff on 4D (indiscernible) streamer mainly because people were shifting capacity to their bigger need, which is exploration. We will guess that 4D will strengthen back up at some point and that also requires high-resolution, tighter spacing.

So if you talk about the share of the new technology and you look at our ORKA, our DigiFIN, our DigiCOMPASS, DigiBIRD, Digi product line and think of it as an integrated system, I think you're going to see us have a very high share of the sort of new technology plays and the part of the business that people sell equipment into that. We are the only company that really has all those pieces commercial and our equipment together in an integrated way, and as you know, we are in different stages of the field test. speakers).

What about just from a towed streamer perspective?

Well, that is towed streamer. I'm just talking about towed streamer. And I am just segmenting the towed streamer business.

Now, you also have just sort of the general accruing up of new boats. We have a very high marketshare. Every new boat that comes on a towed streamer has all that equipment I'm talking about. You have the software, which is either SPECTRA or ORKA; you have the streamer itself; and you have all the equipment that goes on the streamer. The streamer itself, which would be the -- whether it's gel-filled or solid, or oil-filled, we had a relatively small marketshare on that. We have a new offering that we're working on, which is our version of solid, which is gel, and we actually have quite a bit of interest in that and we are actually making some sales in that. I'm not going to give you specific share because we would consider that proprietary to the Company, but we have, relative to our position -- it's a low share but I think it's a growing share. I think it will continue to grow as we build integrated systems.

What's pricing per streamer looking like these days?

I don't actually have that; I don't have that on the top of my head to be honest. We can come back around to you later on, if that's important to you (indiscernible). I just don't have it in my head.

Okay. Then the shoot in India, for GXT, what was the prefunding rates on that? (multiple speakers)

(indiscernible).

Do you have any -- it sounds like you guys are almost finished with it, right?

Yes, we are just finishing it up. We are sort of in the monsoon season, so we have to sort of poke around that, but it's nearly finished.

You think sales will hit early '07?

Yes. That's all -- we are all fine there.

Then lastly, on the VSO, is your exclusive contract with RXT -- anything change there at all?

No.

So, how many more systems are -- (multiple speakers)?

No, no. Well, we have the one that we've just taken the order for, and (indiscernible) and mainly talking about that system. I think mainly they have an obligation. It's not really systems but it's total numbers of a raise they're purchasing. We sort of defined an average system, and I don't actually have track of that right now off the top of my head, but there would be some further obligations next year (indiscernible). I think the real question is how fast that market is going to grow and what additionally they may need, and also we're looking at some additional turns of the crank on that technology also.

I guess what I'm getting too is, at the end of '07, when the contract expires -- (multiple speakers).

Yes, at the end of '07, the contract expires.

What kind of -- have you been getting interest from other customers besides -- (multiple speakers)?

There's lots of interest out there in VSO. Our primary focus has been making this one really work well with RXP and growing their business as rapidly as we can, but obviously there is interest. I think that as these guys get into the North Sea and other places, and they are in the North Sea now, just really started on a new project, I think it's just going to grow interest. The data quality we are seeing is fantastic, so that can only bode well for the future.

Great, guys. Thanks.

George Gaspar, Robert W. Baird.

I hope this isn't redundant but can you give us a benchmark on the progress on ocean bottom cabling systems deployment? How far along are you against -- (multiple speakers)?

Yes, that would be our VectorSeis Ocean.

Yes.

There's two kinds of ocean bottom or what we could call seabed. One is retrievable, which is VectorSeis Ocean, and the other is permit. We are basically in the retrievable business, so that would be VectorSeis Ocean. That was the one we were just discussing. We delivered the second system, completed that in Q2. We just got the order for the third system, which the delivery of that should start in Q4 and it will likely carry on into the first quarter of next year.

All right, are these still running in that 10 million range in terms of a sales revenue number?

No, they are more like 20, plus or minus 1 million, each.

Okay. All right. You are saying that the successes there -- are you needing to continue to upscale the technology as you are getting a little deployment now on this -- (multiple speakers)?

Well, what happens -- first, there's two parts to the system. One part of the system is the center itself and the image quality. Then the second part is the scalability of the system, the areas you can go into. On the image side, things are looking great. On the operations side, as they move into different water depths and different parts of the world, we are looking at different ways we need to expand the system to accommodate those places they are wanting to take the system. So it's a very normal, natural evolution of technology.

Okay. Then a question on FireFly -- in terms of preparing for deployment, I think that, in the last quarter, the implication was it would be deployed by late third quarter. Correct me if I'm wrong. It sounds like it's drifting into the fourth quarter. Exactly how far along are you in terms of employment objectives -- deployment objectives? What's your initial number of geophones that will be in the FireFly system for -- (multiple speakers)?

Well, first to -- as a matter of fact, we've never said Q3. We're right on what we've always said. We said that we will be field testing internally through Q2, Q3, and then in Q4 is when the BP project starts. That is what we said and that's the way it still is. We are on schedule, according to our plans, and should be out there in the fourth quarter on the project.

As far as looking forward, we are in that stage where, again, we're mainly focused on a pilot. It will be the first time we've had very large data sets with FireFly, and we're going to learn a lot from that. Then going into '07, we will be also working with Apache on their project. In the meantime, we are getting expressions of interest from a lot of companies around the world, so I think the challenge for us in the short-term is to get the system working, work with the oil companies. I am confident that the market will grow rapidly once we get through these early field tests and get the results.

(OPERATOR INSTRUCTIONS). [Ted Beady], [150].

I was hoping you guys could just go into a little greater depth in the unbilled increase this quarter. I saw the 10-Q but just I was hoping to get a little more color, please.

You're going to have to restate the question. We didn't quite pick up on that.

Unbilleds -- I was just hoping you could just give me a little more detail like to the increase this quarter.

Oh, it was -- more detail on the -- (multiple speakers).

Unbilled receivables?

Yes, I can help you with that. We had a particular piece of business we did with a large customer who just deferred those revenues in the third quarter.

Okay, thank you.

George Gaspar.

Yes, I never got the answer on the number of units in the geophone system FireFly that will be deployed initially. Then once it's deployed with BP, how long do you see the initial seismic data acquisition run to determine where you are at going forward?

We're going to be deploying someplace initially between 7 to 10,000 stations, and that really is -- we will be prepared to deploy 10,000 but it really is a -- it will be an artifact of the actual design of the survey. That will likely take about three months to acquire the data, plus or minus a month. We would like to have that done probably into early January, latest late January. There's sort of a window up there from a winter season point of view that we really need to hit. Then obviously from that, we will be processing the data, and we are also going to be doing that and working with BP on the interpretation of that data.

We will be rolling from that project -- we will be rolling into an Apache project. They are still determining exactly what that's going to be. We are working with them on that currently. So we will have a very good sense of where we are at from any operational issues and any other issues we may have as we work through Q4 and early next year.

We view this as very much the pilot phase of the project. It will carry on into 2007. Pretty much the first half of 2007, we will be working with those two companies on their projects. Obviously, any program of this magnitude at the pilot phase we're going to find things that we need to improve on and all of that, and that's the purpose of it.

Now, the follow-on project for Apache will be the same system deployed correctly?

Yes, yes.

So it won't be a second system or --?

That's correct.

Okay. Then a question on your manufacturing status -- with your increasing volumes, the level of your incoming business looks favorable. Is this requiring you to go to the outside for added manufacturing assembly? What are you doing on trying to keep up with what is required to get assembled and delivered?

One of the almost strategic decisions we took three years ago was to move mainly to outsourcing, and so there are some exceptions to that but even those exceptions, we're doing what we call insourcing, where it's a lot of contract involvement. We've been working it for a couple of years, really with this idea that with the suppliers we're working with, they have large capacities. So we feel like we are in pretty good shape now in the oil field services and things like vibrator trucks. We are in a queue -- just because of the nature of that business, we are in the queue with a lot of other companies that are trying to expand fleets, etc. But even there, we're looking at how to expand lines of capacity. So we have been a little bit behind on capacity. We could sell more than we could sell today just because of capacity but we should -- we are working our way through that.

Okay. So, on the outsourcing side, do you feel comfortable that you then have the capacities in place or are you going to have to broaden your relationships to cover what you have to do?

No. Well, we have, as all companies right now, expanding markets. We are talking to all of our suppliers. We do have a substantial supply chain and we are projecting forward and look at the (indiscernible). Our goal obviously is to meet the demand.

Okay. In terms of your field operations worldwide, from a data interpretation point of view, do you have any designs to expand your office complexes to try to raise the level of that area of your business?

Well, we aren't in the interpretation business, except in a very small way. We are mainly in the processing business, and we are expanding. If you've been tracking our company and our announcements, we've been announcing global expansion pretty -- I think, in the last call, we talked about we gave some locations -- go back and look at that; it talks about it. But yes, we are expanding globally.

I think I did mean processing as opposed to interpretation. Do you find that there's opportunity in this area for you to expand beyond where you are located currently? Is this -- (multiple speakers)?

Well, the world of processing is not just a physical location any longer. The beauty in this world is you can move data around. So for example, we are actually doing the majority of the Chinese processing in Denver. We are doing processing in North Africa in our London office. We are doing some of the Canadian work in London and we probably eventually will be doing some West Texas stuff in China. And so I think the question is can we -- is there business, sufficient business in this high end to continue to expand? The answer is yes. The biggest throttle on expansion is being able to hire the quality people we need in this space we are in and hiring them at a rapid enough rate. So we are pacing that to make sure we don't lose where our strength is, and that is a leadership position in the technology and the quality of our answers. So yes, we can expand. It's not about having physical facilities. It's about having the right people and the right training in place, and that's where we are mainly focused.

A follow-up question from -- (technical difficulty). Go ahead.

Bob, I know you guys aren't really in this business at all, the permanent ocean bed systems -- (multiple speakers).

Correct.

But what's your kind of -- what's your belief in those systems and where they kind of lie in the seismic value chain?

I think the industry is debating with themselves. A lot of that debate is going on inside the oil companies of how robust that market will be.

There's really -- there's a lot of questions about towed streamer versus retrievable but permanent, and how to best serve that market. One of the challenges you have is that it's a fairly large sell, an a priori sell to one of the more conservative industries, which is the production side of the house. So I think the market -- if I go back and look at -- when we looked at the market three years ago, and I looked at the market data and what people were forecasting, the market has not expended quite at the rate that people had expected. So frankly, we're still talking to oil companies. We're still trying to figure out what we believe the best -- what's going to win over time. It will probably be a combination, frankly, of those things. So we are looking at it. We are mainly focused on, as you know, on retrievable and towed streamer. We will continue to watch that market and do have conversations off and on with various oil companies about potentially doing something on the seabed.

There's no way to make it dual capabilities, permanent and retrievable?

To make it what -- I'm sorry?

To make it both.

Oh, both. Well, that's the kind of things we are looking at. Is there a hybrid solution? That's why I say I suspect that, at some point, it may be that, where you may have permanent in some parts of the installations and you may cover the rest with retrievable or towed streamer. I think it carries out -- the other thing I'd just notice is that the -- as I mentioned briefly -- is that right now, there's so much refocus on exploration that in a way, in the oil companies' focus, it seems like the permanent stuff has sort of taken a back seat.

Thanks a lot.

Management, at this time, I'd like to turn the conference back to you for any closing remarks.

Okay, well, thanks for taking the time to attend this conference call and we look forward to talking to you during our third-quarter earnings call. Thanks.

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