Ion Geophysical Corporation (IO) 2006 Q3 法說會逐字稿

Welcome to the Input/Output, third quarter 2006, conference. Ladies and gentlemen, 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 call is being recorded Thursday, November 9, 2006. I would now like to turn the call over to Ms. Karen Roan with DRG&E. Please go ahead.

Thank you Kristin. Good morning and welcome to the Input/Output conference call. We appreciate you're joining us today. Your hosts today are Robert Peebler, 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 or fax list to receive future news releases or if you experience a technical problem and did not receive your news release 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 by web cast by going to the investor relations section of the Company's website at www.i-o.com or via a recorded instant replay until November 16th. The information was provided in yesterday's earnings release for accessing that replay. Information reported on this call speaks only as of today November 9, 2006 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. Before we begin, let me remind you 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, budgets, projected costs and expenses, capital expenditures, competitive positions, product offerings, technology developments 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 differ materially from any future results or performed expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filing with the SEC, including in its quarterly report on Form 10Q for the quarter ended June 30th, 2006, and in its quarterly report on Form 10Q filed today.

Further more, as we start this call, please refer to the statement regarding forward looking statements incorporated in the press release issued yesterday and please note the contents of this conference call this morning are covered by these statements. I will now turn the call over to Bob Peebler.

Good morning and thank you for joining us. We had a solid quarter in terms of revenues with year over year growth of 38% indicating a strong market for our products and services. In fact, we experienced strong revenue performance in all of our divisions. Our earnings per share came in at $0.04 and we had about a $0.02 per share slip into the fourth quarter, due to manufacturing capacity challenges. Quarter's earnings when compared to last year, include a higher mix of lower margin Land business, a significant increase in R&D expenses related mainly to FireFly, increases in G&A related to continuing to build our global operation infrastructure, accounting charges related to stock option and expensing, Sarbanes-Oxley and increase tax expenses.

Brian will cover these and other financial details later in our presentation.

As I mentioned, our Land System sales, including the Scorpion system, was strong in the quarter. It's worthwhile mentioning that we booked orders for over 50,000 analog channels in the quarter, which is equal to all sales since the introduction of the System Four Analog two years ago. This demonstrates that we are making substantial progress with improvements in the quality, reliability, and functionality that our customers want. We are becoming more competitive in the mainstream analog market against our main competitor and the increase in our wins illustrates our progress. Our first priority continues to be driving down costs to obtain better margins. Due to some engineering slippage of about three months, some of the cost reductions that we expected to see in the third quarter did not fully materialize. This issue is having the largest impact on our short term earnings, as Land is a large portion of the mix of our total business and is our lowest margin division at this time. The good news is that our engineering and manufacturing programs are catching up and by the end of the year most of if not all of our higher cost inventory will have been sold and we will enter 2007 with more earnings capacity coming from Land sales.

Our Land revenues are now growing nicely with improved customer acceptance and we know what we need to do to get our cost of goods down and we have work in progress to achieve our goals. Marine had another strong quarter with revenues up 52% from a year ago and its main challenge is primarily manufacturing capacity. Demand for our positioning product remains quite high, driven by the strong marine seismic market and the growth of the seismic fleet, as well as a push for even better resolution. Our new DigiFin product was extremely well received at the most recent Society of Exploration Geophysicist conference. We will be entering 2007 with a strong commercialization plan with both sales and manufacturing to support what we believe will be a robust market. Our acquisition partner RXT is doing well with its first crew fully booked for 2007 in the Gulf of Mexico and strong demand for its second system in the North Sea.

We delivered the first of RXT's third system VSO array cable in the third quarter and will be shipping the balance of that system in this quarter and carrying over into the first quarter of 2007. We also delivered partial orders on equipment for five new towed streamer vessels in the third quarter.

GXT delivered another strong quarter although data sales were slower than planned, primarily due to incremental sales that took place in the second quarter that were previously expected in the third quarter and fourth quarters. The softer data sales in the quarter were some what offset by new multi client activities in the Beaufort Sea. Overall, we now have a much better balance between new venture multi-client business and data library sales that in the previous couple of years, when we were much more dependent on library sales. The GXT processing business remains very strong with a solid and growing backlog, with the main constraint to growth being the limited supply of qualified technical people. We are having success in our new college recruiting program to help expand the business, but it will take some time to train new people including the required technical training specific to GXT.

Our Geophone business remains strong with the primary challenge here also being manufacturing capacity. The majority of that business is international and the strength is in Africa and the Middle East, but we have made some breakthrough sales in the former Soviet Union. We expect this business to remain robust, yet highly competitive going into 2007. So our cost initiatives are extremely important to maintain our planned profitability. Concept Systems is enjoying a record year, mainly driven by the increase in the marine fleet and the positive impact on software sales. They are also graining traction with Orca, which lines up nicely with the need for high resolution shooting, including managing the more complex wide-azimuth operations, which is the perfect application for this product. We expect Orca to move from early adopters to the mainstream during 2007.

Now Brian will review the financial results for the quarter and then I will make some additional comments.

Thank you, Bob. Good morning, everyone. For the third quarter of 2006 we generated $110 million in revenues, a 38% increase from $79.5 million in the third quarter of last year. For the first nine months of 2006, revenues increased 46% to $337.3 million, from $231.7 million in the first nine months of 2005. Land Imaging systems revenues in the quarter were $46.1 million, compared to $38.8 million in the third quarter of 2005, a 19% increase. The gross margin in our Land Group was lower at 18% compared to 20% in the third quarter of 2005. This lower margin reflects both Bob's earlier comments as well as a higher portion of lower margin vibrator trucks in the revenue mix.

There was also a significant portion of lower margin sensor revenues in the mix, related to a large order for one major customer. For the first nine months of 2006, our total Land revenues were $130.8 million compared to $106.8 million for 2005, an increase of 22%. Gross margin in our Land business for the nine months was 19% compared to 22% in the first nine months of 2005. Marine Imaging Systems revenues increased 52% to $24.9 million in the third quarter compared to $16.3 million in the third quarter of 2005, driven by continued strength in the marine market and solid demand for both positioning and VSO product lines. Gross margin in the Marine Group was 38% in the third quarter, compared to 42% in last year's third quarter, primarily as a result of product mix.

For the first nine months of 2006, Marine revenues more than doubled to $90 million from $44 million for the first nine months of 2005. Gross margin in the Marine segment for the first nine months of 2006, was 38% compared to 41% in the first nine months of 2005.

Our Concept Systems Data Management Solutions segment revenues increased 41% to $6.7 million in the third quarter compared $4.7 million in the third quarter of 2005. Year-to-date, Concept Systems revenues increased 45% to $16.8 million from $11.6 million in the same period of 2005.

In our Seismic Imaging group, GXT revenues increased to 65% to $32.4 million compared to $19.6 million in the third quarter of last year. Gross margin for the segment was 36% in the third quarter compared to 34% for the third quarter of 2005. For the first nine months of 2006 revenues were $99.7 million compared to $69.4 million [inaudible] percent.

Gross margin for the first nine months of 2006 was 37% compared to 24% prior year. Overall consolidated operating expenses for the third quarter and on a year-to-date basis was flat as a percentage of revenue at 24% compared to the same periods in 2005. We invested $7.8 million in R&D in the third quarter compared $4.8 million during the third quarter of 2005 which includes an additional $1.3 million for FireFly. Year-to-date, we invested $23 million or 6.8% of revenue, an increase of $8.9 million over 2005. SG&A expenses were also higher for the quarter by approximately $5 million versus a year ago. Sales and marketing increased $2.2 million primarily due to the expansion of our international selling organization and related commissions. In addition, we incurred $400,000 as a result of expensing stock-based compensation, plus increased spending of $1.4 million related to Sarbanes-Oxley and audit fees. Year-to-date SG&A expenses were $16.2 million higher than 2005, of which our investment in sales and marketing represented $5.9 million. In addition, stocks and audit fees increased $3.3 million, legal expenses increased $1 million, as a result of our litigation with Paulsson Geophysical and increased bonus expense of $1.9 million reflecting current year performance. For the quarter, total stock-based compensation expense increased $600,000. Year-to-date, this increase for the Company was $2.5 million. We incurred an income tax expense of approximately $1.4 million in the third quarter of 2006 primarily due to tax payments made in foreign jurisdictions, compared to $650,000 for the third quarter of 2005. Year-to-date income tax expense is $3.3 million, which represents a 17.9% effective tax rate compared to a $200,000 tax benefit in 2005.

Income tax expense consists of mainly foreign taxes since we continue to maintain a valuation allowance for substantially all of our net deferred tax assets.

Turning to the balance sheet, inventories rose by $22.7 million from year end 2005 primarily due to the increasing activity in the Marine business. CapEx for the quarter was $5.8 million and cash increased from $15.9 million at year end to $43.1 million, at the end of the quarter.

Moving to the outlook, based on the first nine months results and our current pipeline of business, we are increasing the previous guidance we provided earlier this year. We now expect 2006 revenues to range between $450 and $490 million with earnings ranging between $0.25 and $0.36 per diluted share. Overall, our business of seismic equipment and processing services is expected to remain strong, as the industry continues to refocus on exploration and this bodes well for the remainder of 2006 and for 2007.

Before I turn it over to Bob, I would like to mention that we plan to hold another conference call in mid-December to provide to you our guidance for 2007. This is not intended as a mid-quarter update, but instead, we would like to provide you with an early view of our thinking for next year. With that, I would now like to turn the call back to Bob.

Thanks, Brian. I'm satisfied that all our business groups continue to make good progress and the underlying business is strong and is expected to remain so for the balance of the year and into 2007. Before we open up for questions, I would like to touch on a few strategic points. First, despite the decline in commodity prices over the last several months, the seismic acquisition market remains strong. While some oilfield service sectors, like drilling for example, are tied quite closely to near-term commodity prices, seismic tends to be correlated more to one's view of the price environment in the period that is three to seven years out.

With many oil and gas companies looking to expand their reservoir base, the level of exploration in seismic activity has tended to remain robust. For example, the number of active land seismic crews, reported by IHS Energy, has increased from a bottom of roughly 150 crews in the second quarter of 2004, to nearly 250 crews in the same quarter this year. In the Marine area we have seen the number of 2D and 3D seismic vessels that will be on the market, increase from 95 in 2005, to an estimated 122 in 2008. Even more important, we continue to see a growing interest by all companies to improve imagine quality on land, as there is a realization that today's seismic technology is not sufficient to tackle the tougher challenges of the more complex deeper formations in the emerging unconventional reservoirs, such as fractured tight gas ends. We are very excited about FireFly which is on track to begin the BP WarmSutter project with an expected start date in late November and with expectations for the 10,000 station shoot to be completed by the end of December.

Integration testing on that project has been nearly completed at our test facility in Sealy, Texas and the Fire Fly team is in the process of shipping the needed equipment to Wyoming for the beginning of the BP field trial. We're also preparing for the first Apache field trial for FireFly, which is planned to start early in the first quarter of 2007 and will likely take place in east Texas. Additionally in Land, we will complete the shipment of the two largest orders in the history of our Land business in the fourth quarter -- an 11,000 channel, System Four order to the Middle East, two System Four orders to the Middle East and a 16,000 channel Six System Four Scorpion order to Russia. GXT continues to show good progress with improved project execution and continued delivery of high quality results, even in the face of rapidly expanding business.

GXT recently won the Exploration Technology of the Year award from World Oil for its reverse tie migration, or RTM, offering. In addition to this acknowledgement of GXT's technical accomplishments, the service has grown nicely over the last year with appropriately 10% of its total processing business coming from RTM. We expect this ratio to increase as we find additional ways to make it less expensive and shorten the delivery time.

We think that RTM can be similar to where depth imagining was eight years ago and will likely become at least an important part of next generation imagining technology.

We are pleased to have such a strong leadership position thanks to the creativity of our GXT technical staff and we look forward to driving forward with our commercialization efforts in 2007. GXT was also awarded the processing project by BP behind the WarmSutter shoot and is continuing to build new processing technology to take advantage of FireFly's features. GXT's new international centers are coming online and its pipeline continues to grow both domestically and internationally. Operator, we are now ready for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Your first question comes from Joe Agular, with Johnson Rice and Company. Please go with your question.

Thanks, and good morning Bob. I just wanted to focus on your updated expectations for 2006. You all have moved into I guess a 25 to 36 range, which is kind of a wide range, which I think, the fourth quarter is $0.08 to $0.19 if I'm doing the math correctly. I just wondered if you could maybe give us some of the factors that might influence the fourth quarter, one way or the other to either end of that range?

Yeah, Joe, one way we think about the range is we work different scenarios, and as you know, we still have very large sales. For example, in the fourth quarter we're shipping a very large part of the Marine business as a shipment of the RXT system. So, obviously there is a -- we have the order, there's just a strong manufacturing and delivery component of that and so there's some variability on how much that we get into this year and how much could fall into next year. So, that would be one example. In the GXT side, obviously, we have on going multi client ventures and data sales and of course, obviously those also tend to be big ticket items that are variables. What is unique for us this year is that mainly the balance of the year is more about shipping, manufacturing and shipping, than closing business. We have some business we still have to close, but compared to where we normally are at this stage in the quarter, it really is more around delivery, although we still have a few moving parts around businesses that also need to be closed, mainly in the system area. The way we think about those numbers is again, we look at it sort of from a large systems sale. We stack them up in different ways. And we try to say there's sort of -- on each end of the spectrum there are lower probabilities and towards the middle is where we typically try to put the middle of the range, but we do have scenarios that could put you on either end.

Okay, and I guess either for you, Bob, or Brian, you mentioned in your introductory remarks that there were some manufacturing issues that cost you $0.02 in the quarter. I was wondering if you could discuss that. And also, I guess maybe tie that in, if you could, with your commentary on trying to get your Land System margins up closer to the margins of the other divisions. Is it possible the get Land System margins up that high or?

Yeah, I think the Land -- let me take your first question, then your second question. First question was the little bit of -- and, basically, the business that slipped was mainly just a little bit of manufacturing capacity issues, I believe actually maybe in the Geophone area. You might speak to that, Brian.

Geophone and Marine, I believe. It was just more of timing. It's just things we expected that could have -- Q3 -- are going to slide into the early part of Q4.

The amount of -- the volumes that we are currently manufacturing and delivering are new levels of volumes for us, so we're still tuning our capacity, our supply chain and all of that to handle it frankly. So we're just not as precise as ultimately we would like to be. On the Land business, first there is today really two major parts of that business. One is the systems sales themselves, in the systems business and the margins within that business and then the vibrator business and the margins in that business. The vibrator business is our lowest margin business but there is very little R&D, so in fact we still make pretty good money even though the margins are not as great and even the operating income, because our revenue is not as high as some of the other areas, but we're not having to spend nearly the amount in R&D. On the systems side, where I think our greatest opportunities for improvement are and we have the most focus on our programs, has two components. One is the actually re-engineering of some of our components related to Scorpion from a product manufacturing point of view. It's not really from a feature function point of view but it's just ways of taking additional costs out of the system and those are ongoing. We've had a little bit of slippage in those programs about three months from where we thought we were going to be and so that gets us a little bit of a by way on cost through the system and our associated inventories, but we're working our way through that. In addition, we're also looking at our supply chain and how we can frankly get more cost leverage in the supply chain and as our volumes go up, we have more negotiating capabilities. And also, we're adding a lot of effort and some new people in that area to bring more professionalism into how better to work the supply chain. The third part, which we will not see this year, but strategically will see going forward in the outer years, will be FireFly, which just by the nature of FireFly will have a technical leadership position and have the ability to have higher margins going forward. Right now, FireFly is in the early stages of commercialization, and so again, we'll be looking for ways to be more cost effective with FireFly into 2007 and 2008 and on out. So I think we have enough things in motion in the Land business and in with our expected increase of volumes in system sales and ultimately adding FireFly to that, we can see the systems part of the business increasing in mix, which then starts moving the margins. That's where you know we look forward to those continuing to improve over time.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. We have Thiru Ramakrishnan from Simmons and Company.

Good morning, guys.

Good morning.

Question first on Marine side--nice work on the towed streamer sales. What's your outlook there for the fourth quarter and beyond?

We don't really give specification sales guidance by quarter for product lines. But, I'll give you some general feel for it. We do have visibility not only this year but into next year that the towed streamer part of our market is strong. And of course, towed streamer has different components to it. Positioning technology is a big part of that, which is our Digi product line. Again, in Marine mainly for the quarter we're sold out. We're basically scrambling just to cover and ship the orders we have in hand with very little additional capacity in that quarter to ship -- to get orders that will be billed in backlog mainly. We have a few areas we can still bump up. Again, another big part of the Marine increment for the quarter will be the System 3 delivery.

How many towed streamers, can you only do roughly five to six towed streamers per quarter, deliver, I guess?

It isn't really like that because If you look at the Digi product line, some of the DigiBIRDs go back into the installed base, some of it goes to replacements -- back in the installed base and replacements. Either they're expanding the fleet or expanding or they're adding new BIRDs or replacement BIRDs for where they have had accidents and lost BIRDs and those kinds of things. Then you have the positioning sales related to new capacity coming on board. I frankly, right now in front of me don't really have the split between how much of what we're shipping is expansion of existing fleets plus new fleets, and all of that. We do have and we'll probably speak to our views of 2007 and what we're seeing on fleet sizes and all that, in the conference call that Brian mentioned in December. That's when we are going to get out and really talk about what we see in front of us in 2007 and we will bring some additional statistics on the Marine fleet.

Then, with respect to VectorSeis Ocean, you're delivering the third piece of equipment for RXT. What's your sense for their plans in '07? And I believe that the exclusivity deal ends at the end of '07. Is that correct?

We do have -- they have a commitment for an additional system that we are discussing with them currently, and yes, as the way the contract reads, the exclusivity runs through '07. It ends at the end of '07. Their business -- as I said -- their business is good. I think our combined view of that market is it's robust. I believe that they have had some real success with their crew in the North Sea. I think the oil companies are seeing not only the image quality that we've expected. If anything, it's exceeding peoples' expectations, but also the crew productivity has been quite good.

Last question. Land margins I would think would be up in the fourth quarter because of the mix is going to get better. You're delivering some large channel systems. Is that a--?

We'll see a little bit of improvement again. Part of our challenge this year is just this issue of working through the inventory we've got. So, we would expect to see a little bit of improvement in the Land margins. I think most of the margin improvement we're going to see in Land is going to be when we move out into '07.

Okay, great, thanks.

Next question is from Brad Evans with Heartland. Please go ahead.

Hi, Brad.

Hi, good morning. Could you just give us your expectations for tax rate in the fourth quarter? What are you assuming?

I'll turn that over to Brian.

I think you're pretty safe taking our year-to-date effective tax rate and projecting it.

Okay, fair enough. You mentioned that the FireFly investment in the fourth quarter was -- I think you said $1.3 million. Is that correct for the third quarter?

That's correct. That was the incremental investment.

Did that support the BP rollout-- is that what that money is being spent on?

We have -- that is the R&D portion of it. So within the R&D spend, the number we gave was that, compared to a year ago, which we had FireFly R&D, the total increase in spending had gone up that $1.3 million. I think if you go back and look at the beginning of the year and then through year we have given guidance that the total FireFly R&D spend, I believe we said is $9 to $10 million for the year and that will continue. We're basically, we'll be taking feedback from the tests and as any kind of new system -- when you're commercial you still have -- you get feedback and you start continuing to make improvements to the new system. We expect FireFly R&D spending to continue. The good news is, right now, we don't have any revenues to offset it, but in the future that will not be the case. We'll obviously be generating revenues.

I think the question that's on everybody's mind Bob is, you've raised the guidance on the top line by I guess at the midpoint cost $40 million, and yet you haven't really raised the earnings guidance. Now, I know in the past you've articulated a goal to get the consolidated operating margins for the business up to the 15 to 20% range and that's a function of what I think most people think within the IO organization is a fair amount of operating leverage. And clearly, I think there's a little bit of concern this morning that we did not see with a higher revenue guidance a material amount of operating leverage, in terms of the revised earnings guidance. Could you just speak to why that is and can you just talk about your longer-term goals?

It's our Land -- if you look at the increase in revenue, and you're right, we haven't increased the earnings guidance; that is mainly our Land division that we are not getting the margin improvements that we had -- as you say, we're not getting the margin we originally had planned for. We've realized that as the year has unfolded. In other words, we have been talking about that for the last quarter or two and have been aggressively putting programs in place to address that. It takes a while to work through that. The increase in the Land -- I think the good news about the Land sales is we've really now started getting traction in the market with a product. The analog market, we have not been all that competitive from a feature/function/reliability/quality point of view, and all of those things have fallen into place. So we're now starting to see the revenues increase, which is being reflected in our revenue numbers, but we're basically still carrying -- we're still basically delivering the product with our old cost basis. In other words, it's taken us time to engineer, to get the manufacturing and supply chain lined up to deal with those increased volumes. So as we enter into '07, we'll see as we have higher Land sales, which we expect, we're going to see with materially different improved Land margins.

If I could just interrupt. Are you still confident of the Company's ability to get to a 15 to 20% operating margin this cycle?

Hey, Brad, this is Brian. Maybe I could also just intervene, and a couple of points. One is, when you look at our actual guidance for 2006, we have been consistently performing to our guidance. Our margins year-to-date are 31%, our range was 30 to 32, and our operating expense range was 20 to 24 and we're at 24. One of the things I think in addition to the Land business that is driving down our net income is this tremendous incremental expense associated with SOX audit, legal and stock option expensing, and if you look at that on a year-to-date basis, that's about $6.8 million, or almost $0.085 of drag on our EPS.

There is no doubt, I mean your EBITDA adding back stock-based compensation in the quarter was almost $21 million, so it is almost a couple of million dollars higher than the EBITDA you have in your press release. Could you just answer the question? Do you feel comfortable or competent that the company should achieve its -- your targeted margin goals this cycle?

Yeah, you're talking about the margin on our guidance? Yes.

We're executing that now.

I'm sorry?

No, I think Brian's point is really good, is that I think when I put ourselves back a year ago, November, December when we built the original plan, what we did also underestimate, we were a little bit off on the Land margins and our ability to progress at the rate we thought we could, but also, we did underestimate the jump up in costs related to all those sort of G&A activities that we just didn't bake in. Now, the good news about that is that that -- it's sort of like yet one more little step we had to take on our cost basis that we're not really operationally oriented. But that should not be a -- that should be a step that we don't have to take another step. We're also paying a little more taxes than we thought we would have to pay and that's just the mix of international versus U.S. business.

Let me just try one more time then I guess, because I'm trying to give you an opportunity to talk about longer term and I'm not saying next year, but two or three years in the future, what are your targeted margin goals for the business?

We give guidance. If you go back, Brad, we have given guidance, and to this point that's still what our plan is. The gross margin of this year is 30 to 32%. Operating expense for December is 20 to 24%. We have been very consistent on that. We've said the shape of the business, I think people-- we said it's a lumpy business, we've said continuously that this year was going to be back-end loaded and particularly fourth-quarter loaded. So I think if you'll listen to what we're saying, we're pretty much giving you the information we've given you.

Brad, this is Brian again. I think to help you, I think you're looking out three, four, five years. We have on our investor portion of our website, we have our latest presentation there, which really does take a look at our strategic plan. One of the things that I think we have been fairly consistent in saying is that over the long term of that strategic plan, we would expect to get this business to be in about a mid 30's area for gross margin.

And total operating expenses should go where longer term as you leverage the business?

We should be able to leverage our operating expense, but we haven't given specific guidance on that.

Would it be something below 20% of sales?

I couldn't speak to that today.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from George Gaspar of Robert Baird. Please go ahead.

Good morning. My first question is on FireFly. Can you give us some markers that you're going to be looking for on the initial shoot? And what distance do you see the initial shoot covering? I assume it's a 10,000 unit deployment situation?

Yeah, the coverage, it's about 6 square miles -- 6 by 6, so it's actually quite the advanced shoot from that perspective. For the ones of you that I don't know -- I've used this term before. We have a term in our industry called fold, which is a measurement of resolution, I tell people it's a little bit like pixels in a camera. A typical land shoot fold is around 40 to 60. We'll be shooting a fold of 1,000. So that ratio tells you how much increase in density of shoot compared to how land is normally shot. So, it's a substantial increase. Our expectation, what BP is doing is they've taken a fairly small patch -- 6 square mile, 6-mile by 6-mile -- that's 36 square miles -- and they have taken that within a very large area. This is a very small part of the whole WarmSutter field that they are going to be shooting over time and we are going to be working that data to get a sense of what the optimum fold should be. Our expectation is, as they expand the shoot over the next couple of years, it will likely not be that dense. It will be dense, but it probably won't be that dense. We just don't know what the optimum is and we will be experimenting with them to determine after we get the data.

Okay, so further on the technical-- is one of the particular technology elements here that you're going to be looking for is the actual transmission per Geophone to your central system to see that they all are in sync -- is this particularly a technology leap that you have to be able to correlate them Geophone to Geophone? Is that a marker that is important in terms of acquiring the data?

The system-- I think we have to be careful because we have a lot of people on the line and it's a technically complicated system. Fundamentally, it's a cableless system. It's a combination of radio, flash memory, micro batteries, wireless technology. The whole idea is that you can put all these sensors out on the ground, which are vector site sensors, and through your sensors through the wireless system, you can control all of those, both from the shooting sequences, when you listen, battery management, quality control data that comes back, et cetera. Then, the nature of the job will be all about working now. We have been doing that -- we've been having our own field tests for quite some time and our own work. So this is a commercial job where we're actually taking the system that's been tested do those things. But obviously, it's a very large survey, so it will be a great way to get more information on the performance of the system.

Okay, good, thank you. Now, one question on your manufacturing assembly. Now with this very nice pickup that you're experiencing across product line, are you capable of manufacturing internally everything you need, or are you outsourcing more to get your componentry manufactured and assembled?

It's almost completely outsourced. We do all the engineering design and product engineering here, but the actual manufacturing is outsourced. We will likely be putting our own quality control--well, we do already have people in their plant and we'll have our own quality control, but ultimately we'll be drop-shipping from the factory after it goes through quality control there.

Okay. Thank you.

Management, at this time there are no further questions. Please continue with any further remarks you would like to make.

Well thanks for taking the time to attend the conference call and I look forward to talking with you during our fourth quarter earnings call.

Ladies and gentlemen, this concludes the Input/Output third quarter conference. You may now disconnect.