Ion Geophysical Corporation (IO) 2006 Q4 法說會逐字稿

Welcome to the Input/Output fourth quarter Conference Call. During today's presentation all parties will be on a listen only mode. Following the presentation, the conference will be open for questions. [OPERATOR INSTRUCTIONS] This conference call is being recorded today, Thursday, March 1, 2007.

I would now like to turn the conference over to Jack Lascar with DRG&E. Please go ahead, sir.

Thank you, Mary, and good morning, everyone, and welcome to the Input/Output Conference Call. We appreciate you joining us today.

Your hosts today are Robert Peebler, President and Chief Executive Officer, who is joining us from London, 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 e-mail distribution list to receive future news releases or experienced a technical problem and did not receive your news release yesterday, please call us and provide us with that information. That number is 713-529-6600. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the Company's website at www.i-o.com, or via a recorded instant replay until March 15th. The information was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, March 1, 2007, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the Company's expected future financial positions, segment sales, results of operations, cash flows, funds from operations, financing plan, gross margin, business strategy, budgets, projected costs and expenses, capital expenditures, competitive position, product offerings, technology developments and growth opportunities are forward-looking statements.

Those forward-looking statements are based on management's current expectation, and include known and unknown risks and certainties 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 defer materially from any future results or performance expressed or implied by those statements. This 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 September 30, 2006.

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

Bob.

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

We had a very good fourth quarter and strong performance for the year. I am pleased to report a very solid 2006 in terms of revenues with year-over-year growth of almost 40% indicating the continuing strong market for our products and services. In fact, we experienced strong revenue performance in all of our divisions. Diluted earnings per share for 2006 came in at $0.33 in the upper end of our revised guidance of $0.25 to $0.36 per share.

This years results when compared to last years include a mix -- 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-based compensation, audit and Sarbanes-Oxley expenses, and significantly increased tax expenses. Brian will cover these and other financial details later in our presentation.

Before we do that, I just want to spend a couple minutes and highlight our major accomplishments for the year. These include the launch of Scorpion, the latest generation of our cable based land acquisition system, designed to improve reliability, reduce manufacturing costs, and to sustain our drive to increase our cable-based system market share. The record sales of 57,000 System Four Analog channels, the successful completion of first FireFly survey with BP, the $60 million plus OMGC contract awarded to provide 14 land recording systems, including 22,000 vector size stations, the continued success of commercial VSO, or VectorSeis Ocean with the delivery of the third system and a most recent $29 million purchase order for the fourth system from our launch partner, RXP.

We initiated new multi-client surveys in India, the Baltic Sea, West Africa and the Arctic demonstrating the success of our 2D spanned program and we won a tender in China for the largest full wave processing project ever awarded. We are very pleased with the progress we have made in 2006 and we look forward to a strong 2007.

Brian will now review the financial results for the quarter and year and then I'll make some additional comments. Brian.

Thank you, Bob. Good morning, everyone.

As we have said previously the business is very lumpy when viewed quarter to quarter. Because of this and because of last year's restatement the comparison of the fourth quarter between 2006 and 2005 isn't very meaningful, so instead I'll focus my comments on a year-over-year comparison which is much more indicative of our business performance and trends. During the fourth quarter of 2006 we generated $166.2 million revenues at 30.4% gross margin, 10.4% operating margin, and $0.15 in earnings on a diluted basis.

For 2006, revenues increased 39% to $503.6 million from $362.7 million in 2005. Gross margin increased from 29.3% in 2005 to 30.6%. Operating margin continued to expand from 6.8% in 2005 to 7.9% in 2006. And finally, EPS on a diluted basis increased 57% from a restated $0.21 in 2005 to $0.33 in 2006.

More important than reviewing quarterly results is reviewing the performance of the business as we continue to make steady progress in capturing the benefits of the strategy and vision that we laid out for the Company in 2003, and have been executing to for the past few years. Since 2004, we have more than doubled the size of the Company from $241 million in 2004 to $504 million in 2006. We have improved our gross margin from 27.3% in 2004 to 30.6 % in 2006.

In addition, we've increased operating margins from a negative 1.3% in 2004 to a positive 7.9% in 2006.

In the Land Imaging Systems segment, which including both our Land Systems and Sensor, revenues in the quarter were were $74.9 million. For 2006, our total land revenues were $205.8 million compared to $155.2 million for 2005, an increase of 33%. Gross margin in our land business for 2006 was 19% compared to 22% in 2005. This lower margin reflects significant sales of systems in the fourth quarter of 2006 indicating the higher cost inventory we have spoken about in the last couple of calls.

We are pleased to report significant progress in our COGs reduction initiatives. As a result and because we have finally depleted the higher cost inventory in Q4, we expect our 2007 gross margins in land to improve from the 2006 levels. In the longer term, we expect that our FireFly offering will continue to drive further margin improvement.

Overall, our five year plan calls for margins in the mid 30% in the latter years mainly due to significant improvements in margins in land.

Marine Imaging Systems revenues increased 48% to $37.9 million in the fourth quarter with gross margins of 34%. For 2006, marine revenues increased 84% to $127.9 million from $69.6 million for 2005, driven by continued strength in the Marine Market and solid demand for both our positioning and DSO product lines. Gross margin in the marine segment for 2006 was 37% compared to 41% in 2005, moving mainly as a result of product mix.

Our Concept Systems Data Management Solutions segment revenues increased 45% to $6.4 million in the fourth quarter of 2006. In 2006, Concept Systems revenues increased 45% to $23.2 million from $16 million in 2005. We expect gross margins in our Concept Systems Data Management Solutions segment to remain strong.

In our Seismic Imaging Solutions group, GXT revenues were $47 million during the fourth quarter of 2006, with gross margins of 42%. In 2006, revenues were $146.7 million compared to $121.9 million in 2005, a 20% increase. Gross margin in 2006 increased 800 basis points to 38% from 30% in 2005. We ended the year with a good balance of processing, library , and multi-client business.

Overall, consolidated operating expenses for the fourth quarter of 2006 were 20% of revenues. For the year, operating expenses were flat as a percentage of revenue at 22.7% compared to 22.6% during 2005. We invested $9.7 million in R&D in the fourth quarter of 2006, which includes an additional $2.7 million for FireFly.

For the full year, we invested $32.8 million which represents 6.5% of revenue. Following marketing expenses for the year increased $7.5 million primarily due to the expansion of our international sales organization and related commissions associated with the growth of 2006.

General and administrative expenses increased $12.6 million due to the hiring of additional management and corporate personnel totaling $4.2 million, increased audit and consulting fees of $3.5 million, increased G&A related stock based compensation expense of $2.5 million, and increased bonus expense of $2 million related to our improved results of operations.

In total for the Company, stock based compensation for the year in 2006 increased $3.7 million over 2005. We incurred an income tax expense of approximately $1.8 million in the fourth quarter of 2006 primarily due to tax payments made in foreign jurisdictions. Year-to-date income tax expense was $5.1 million which represents a 15% effective tax rate. Income tax expense consists mainly of foreign taxes since we continue to maintain evaluation allowance for substantially all of our net deferred tax assets in the United States.

Turning to the balance sheet, the combination of a strong fourth quarter and the initial inventory build up on the ONGC order led to an increase in receivables and inventory. Accounts receivable rose by $46.8 million and inventory by $34.1 million from year-end 2005. Capex for 2006 was $52.8 million and our cash position remained relatively flat from $15.9 million at year-end 2005 to $17.1 million at the end of 2006.

Our 2007 guidance remains as we discussed in our December 19th conference call. We expect our revenues to range between $610 million to $670 million. Gross margins should range between 29% to 31%. Improvements in gross margin will be driven primarily from the land business, with increases coming through improvements in COGs due to both manufacturing and supply chain initiatives with our cable systems and the commercialization of [inaudible] and FireFly.

Consolidated operating expenses as a percentage of revenue for 2007 are expected to be in the range of 20% to 22% and unexpected 100 basis point improvement from 2006, reflecting better leverage of our infrastructure as the Company grows. Our expectation is to continue to invest in R&D and sales and marketing at levels consistent with 2006 while leveraging our general and administrative expenses.

Operating margins are planned to improve from the 7.9% level in 2006 to between 9% to 10% of revenues in 2007, as we continue to improve the overall profitability of the business with our longer term goal of achieving operating margins in the mid to upper teens. Although a significant portion of the interest payable in our obligations is variable and subject to fluctuations in LIBOR, and the usage of our credit line, our estimate of interest expense based on current rates is expected to range between $8 million and $8.5 million during 2007. We expect to incur an effective income tax rate of 16% to 17% in 2007, primarily due to tax payments made in foreign jurisdictions as I mentioned earlier.

On a full year basis in 2007, we would expect both our convertible debt and our convertible preferred stock to become fully diluted to the business on a full year basis. On a fully diluted basis, we expect our earnings per share in 2007 to range between $0.45 to $0.60 per share. Our business is not evenly distributed quarter to quarter and there for, as we did for 2006, we have provided annual guidance only. Similar to the past two years we anticipate 2007 to be back end loaded.

This is mainly due to timing issues related to permitting and other operational considerations for GXT's multi-client business, the delivery of the fourth VSO system and the natural budget planning cycle of our larger contractor customers who formulate capital spending plans during the first quarter of each year. As a result, we anticipate that 55% or more of our revenue will come in the second half of the year with the first quarter being the softest of the other three, both in terms of revenues and earnings.

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

Thanks, Brian.

Overall, our business of seismic equipment and processing services remains strong, as the industry continues to refocus on exploration at an accelerated pace, and this bodes well for the next several years. This year, we expect our business to be dominated by international activity, although we do expect to see increasing activity in demand for our land Imaging Systems and processing in North America, particularly around FireFly where we continue to get several inquiries as the timing and availability. We expect to see continued strong Marine activity with additional crews and with increasing activity for high-end surveys.

We are making measurable progress on several fronts.

On land we allowanced late last year the ONGC sale which included 22,000 stations of vector size to be delivered in 2007. This is is the largest full-wave system sale ever. We expect the order to be manufactured and delivered during the second and third quarters of 2007. This demonstrates the progress we've made over the last two years in improving the competitiveness of our System Four recording systems as well as the market acceptance of VectorSeis.

In Marine, as we mentioned previously, we continue to make progress of VectorSeis Ocean. We are currently shipping the last of the third system to acquisition partner, RXT. We have also finalized negotiations and received a purchase order for the fourth system with the bulk of the systems planning to be delivered in 2007. RXT order for the fourth system insures that they will retain their exclusivity for the remainder of 2007.

Also, in Marine code streamer, the trend is towards much more complex acquisition jobs to tackle difficult imaging problems, such as sub-surface salt. Our recent commercial release of Concept Systems Orca and the marine field testing DigiFIN are designed to take code streamer to a higher level of capability and are being established as key technologies to accomplish those goals. We believe that 2007 will be a very successful year for Orca and DigiFIN as we move from field trials to full commercialization.

One of our key strategic thrusts is not only to improve the quality of the reservoir image, but also significantly improve productivity of the delivery systems. The timing of our new offerings designed to increase productivity and lower cost, such as FireFly and VSO appear to be excellent as we are entering the full commercialization stage at the time when we are hearing about the problem of escalating costs for our oil company customers.

Their projects that are not being funded even with high commodity prices due to escalating service costs so it's predictable that oil companies will be focusing more on costs than they have over the last couple of years. The good news about FireFly and VSO is that both the oil company and the contractor can win, since costs could be lowered due to significant improvements in productivity, while the contractor can still maintain or even prove margins by sharing some of the performance gains.

Back to FireFly. I'm happy to report that the BP survey in Wyoming went very well. We finished up the survey in mid January, a little later than originally planned due to very difficult weather conditions. The data has been delivered to GXT for processing and the quality looks excellent. Considering the complexity of the system, and the fact this was FireFly's first commercial job, everyone involved with the project has been impressed that it has worked as well as it has and most importantly, they see the promise of FireFly to change the game and land acquisition as was designed to do.

I would also like to comment the successful survey was completed in some of the most difficult weather conditions that could be imagined, with the largest amount of snow in Wyoming in 20 years and extremely cold weather. It's doubtful that with the weather and the environmental conditions the crew faced, that this job could have ever been completed with the cable system in the time allocated.

We are currently assimilating the experienced gain from the job and making technical and operational modifications to further improve the system before using the system on Apache job in the latter part of March in east Texas. We will continue to spend heavily in R&D during 2007, as we continue to expand FireFly's capabilities and push FireFly into other markets.

The word is getting out on FireFly and we're getting frequent inquiries from both oil companies and contractors on future availability of the system. Operationally, we expect that land will have an exceptional year in 2007, where we expect to gain share with our Scorpion systems and widen our leadership position in cable systems with FireFly.

The recent $60 million plus ONGC contract, which to our knowledge as the largest ever land system sale, is a major win for IO in a market previously dominated by our major systems competitor. This is an excellent first step on the road to gaining back land system market share leadership for IO. We expect continued improvement in land margins.

The main gains in land margins during 2007 will come through continued manufacturing and supply chain initiatives which should add significantly to our bottom line from the land group. In addition we expect GXT to continue to grow in its proprietary data processing business with emphasis on expanding the fleet and reverse time migration and land processing targeting the higher end jobs that leverages the stepped imaging capability and full wave high density shooting. Also, several new span projects have been initiated by GXT during 2007 and data library cells should be solid with a portfolio of new shoots completed in 2006.

Moving back to our Seabed offering, VectorSeis Ocean, or VSO. We will not only be busy delivering the fourth system, we are also working closely with RXT to define the next generation VSO, building on the current system but taking it to new levels of both imaging and productivity performance. We have seen sufficient evidence of VSO image quality and performance that we are confident that our original strategy of expanding the OBC market with our new technology platform will be realized.

Overall, we are pleased with the way 2007 is shaping up. Everything I just mentioned points to year with higher revenues, improved margins and increased market penetration. Operator, we are now ready for questions.

Thank you. Ladies and Gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS] And our first question comes from Joe Agular with Johnson Rice. Please go ahead.

Thank you, good morning. Bob, I was wondering if when you all released your results of FireFly, there was some data points in there with regard to, I guess basically efficiency of how the acquisition went. I was wondering if you could put some of these numbers that you gave in there into context.

You mentioned that you thought that it would be hard for a cable system to do the job that you just completed, but in terms of some of the efficiencies that you have noted in that one job, and how it might apply to other jobs that you're in, help us sort of put it in context if you could, please?

Yes, Joe. One is related to the Wamsutter job. If I described or broke it into sort of segments, so there was a certain amount of time that was lost time, mainly to weather.

We had, coming up on Christmas, if we would have had good weather for five more days we would have finished the shoot before Christmas and they would have been picking up the boxes at the end of Christmas. But if you remember, it was a heck of a snowstorm up and we effectively didn't get restarted until after the first of the year. So when we look to the complete time of the job, which was started at the beginning of November, we probably lost nearly a month in total time, just weather related, all the way from safety issues where the crew couldn't get to the well site -- to the survey site to times where the weather conditions even when the crew was out there was just too poor, so we had that dimension.

If you factor out there and if you factor out this was the first time the system had ever been used, so you have the normal training of people, creating new workflows, creating new ways of moving equipment around. And, in addition, just the normal start up issues, we probably also in that -- there was probably two weeks or more that was just lost to the learning curve, if you want to call it that. So if we sort of back out weather-related and then back out what we would consider your normal learning curve experiences, I think our original ambition of having a system that would be at least twice as productive as a like cable system will be realized, and in fact I think in our own minds if anything we're a little bit conservative.

The cable system, we had estimated originally, and in fact it was a real issue for us because we had estimated that it would take almost 90 days at best case to shoot Wamsutter and with about half the channels deployed. And in fact we had to take a decision fairly early in the process of whether or not to move cable equipment out as a back up plan. And so BP and IO and our contractor together took that decision, I think it was the first week in December to not deploy, because at that point, like by the time we got to the first week in December, if we didn't start then with the cable system, we had a hard stop towards the end of January. So it just basically -- we couldn't have gotten it done.

Once you throw in the weather it was almost certain it wouldn't be done. So if I just summarized quickly on productivity, we were probably as in efficient as you'll be with this first job, mainly because it was the first job. Secondly, as always happens, for our first job we couldn't have picked worse weather, and so that impacted the time. But net-net, we're very pleased and also, we're making a lot of improvements to the system that will deal with a lot of the issues we faced on the first job.

Okay, I think there was a number in there regarding shots per day?

Okay, the shots per day is a -- if you look at the total time, there's the time of deployment and that means you got to go find the locations, put the boxes out. Then you have the actual shooting time itself. And the shooting time in this case, because it's dynamite, we had about 7,000 shots, meaning think was 7,000 holes that had been drilled previously, loaded with explosives and in a coordinated way using our system to manage the field crews to go out to the shot holes, find them, shoot the explosive and go the next hole. And we normally, if you can get 250 shots a day in those kind of environment, you're doing pretty well. And we were seeing up to 1,000 maximum, I think it was 1,000 shots in a five hour period, and again, that was with crews that had never used the system. So that's one part of the productivity gains and a very, very promising -- we sort of -- we can't really imagine once we get even better organized what that ultimately could be.

For a follow-up question, you mentioned the commercialization of DigiFIN this year. Could you tell us what quarter you think it might happen in?

It would certainly be in the second half. I think we're currently still in beta test, but mainly, we've tested it fairly extensively last year. We have a few issues we're dealing with but we should see -- I think our current plan is pretty much the second half. We could see some sales in the quarter we're in, but we're mainly looking at the second half.

Thank you.

Yes.

Thank you. [OPERATOR INSTRUCTIONS] One moment please, for the first question. [OPERATOR INSTRUCTIONS] Our next question comes from George Gaspar with Robert W. Baird. Please go ahead.

Yes. You may have commented on this, but could you reiterate your thoughts on your manufacturing side, your capacity to get the equipment out that you have on order, or are you outsourcing or can you tell us a little bit about how you're processing these orders?

Yes. It varies. The majority of what we manufacture is outsourced, although we do have some exceptions to that. We have in our Geofoam business, although we have a lot of outsourced labor, we still project manage and have our own facilities. But other than that, our systems is primarily outsourced.

We have a tight supply chain. We work closely with our suppliers, and in a lot of ways, we have more capacity because of that than if we had to build our own plants and have people and all that. So we work closely with our supply chain. Probably the biggest bubble, if you want to say of delivery would be the ONGC contract and we review that weekly, and right now, we look right on schedule.

Okay. And then second question on your ocean bottom cabling area, and then one on streamers. Where are the technology breakthroughs, for example, on the streamer side in terms of alignment and what are you doing on that to provide additional momentum in terms of your revenue stream?

On the code streamer, because the emphasis more and more is on tighter spacing, which brings you higher resolution and then some variances to that, which brings even a greater need for control, IO has a leadership position in positioning technology, both in the hardware, which can originally we have the DigiBIRD and now we're building the DigiFIN, which gives you -- if you think of it the DigiBIRD, so it gives you vertical and the DigiFIN gives you horizontal, so with the DigiFIN you'll be able to put the cables closer together, tighter spacing and also you get productivity because you can turn the boat sharper, so that's what we're field testing right now when we talk about DigiFIN, that will be commercialized in the second half.

In addition to that, our software company, Concept Systems had a whole other generation of software that's effectively the command control data management for these large scale integrated systems. And Orca is really aimed at being able to better manage these complex surveys, again for higher resolution, things like the wide [inaudible] survey and that product is also coming from beta into commercialization this year, and there's a lot of interest in that. And then there's there ultimately the possibility and probability of integrating the complete system where you have Orca, DigiFIN, DigiBIRD and we're also working on our own solid streamer that goes along with that.

Okay. And then on the ocean bottom cabling, in the terms of the equipment sold into Norway, where is the breakthrough on this as far as performance? Can you describe a little bit about the success they are having?

Yes. Well there's two ways to look at OBC. One is that the quality of the measurement itself. When you put our VectorSeis sensor on the seabed, you get the advantage of measuring the full-wave field and you get good coupling with our system. And so from an improvement in image quality, we now have example after example where they 're getting really good data. And so our contractor partner, RXT are really now getting the attention of the BPs, the Shells, the Exxon Mobiles, the [inaudible] on the quality of data and that's driving their business, and that's why they have been able to buy systems at the rate they are buying from us just because of the advantage.

The second important part of VSO, historically, OBC has been 5 to10 times more expensive but with this buoy-based system we've developed, the whole strategy is to start approaching the cost of code streamer from the acquisition point of view in the development area. And we're not there yet but we are getting close enough where the costs and therefore the price is getting a lot more competitive with code streamer. We believe the market is elastic. If you have a better management and you bring costs down, then the market should grow.

Okay, and all these systems that you're deploying are the fourth -- three on order and the fourth, are these all deployed in the North Sea?

No. They have one system in the Gulf of Mexico. I believe they have one system in the North Sea, I believe maybe the third one going to West Africa, and I know they are going into the Caspian Sea, so they actually are getting quite a global foot print already.

Thank you.

Yes.

Thank you. Your next question comes from Rick Johnson with Thai Capital. Please go ahead.

Could you tell me what you think your land gross margins are going to be for '07, up from the 19% you had in 06?

Rick, this is Brian. Actually, we don't give segment specific guidance on gross margins.

Okay. Well, you said it would be higher, right?

Yes. We expect an improvement in margins from '06 levels, yes.

So the overall gross margin guidance of 29% to 31% is actually -- I mean, you did 31% in '06, so why are you not seeing improvement in gross margin '07?

One of the components that's going to put a little bit of drag on margin rates this year is the fact that -- you almost have to take a look at the ONGC tender in isolation. That's a $60 million plus award, and although that award was done at done at a rate that was greater than the margin rate for system sales in 2006, overall, relative land margins where we'd expect to be is going to provide a little bit of drag on our margin rates. So big award bringing our rate down a bit.

Okay, and that is land systems, so your land margins --

So if you exclude the ONGC deal --

Yes.

If you exclude the ONGC tender, which is such a large event, then you'll see the remaining land segment margins improve.

Yes, I think another sort of way of looking at it is that even though the large margins are improving and will improve this year, compared to our marine margins and our GXT margins they're still lower. Yet with the ONGC sale as a mix, they are just a bigger part of our business. So it's one of those that on one hand, that part of the business is growing faster particularly with the ONGC sale. We're making progress in the margins, but until we get the margins up more comparable to the other groups, if that piece of the business growing faster than other groups it drags the aggregate margin down a bit.

Right. Okay, thank you.

Thank you. Your next question is a follow up from Joe Agular. Please go ahead.

I was wondering, Bob, if you have had any discussions on VSO being used in reservoir monitoring?

We have, and there's interest in that. In fact, I believe at RXP themselves would like to get into that. What we have seen in reservoir monitoring, and I think mainly because of just general exploration and development activity, is that the oil companies have sort of backed off a bit in the marine. We aren't seeing growth at the rate that we were seeing, particularly when you compete against code streamer, and RXT pretty much has their crews loaded. So I think it's one that we believe will be coming back and looking at.

There's also a little bit of technical challenge in when you -- because of the referable system, you want to get the position of the censors as close each time. And so we're looking at how to even sharpen up the ability to know exactly where they're at, and position them even closer, but I think we'll see that market eventually with VSO.

And I guess on FireFly, the whole discussion on land margins going forward, the commercialization, I guess, could you give us an update on what your schedule is on when you think?

Yes. We'll be for the rest of the first half, we're pretty much still ringing out the system. We'll be on the Apache job and then SES is a rental partner, so they effectively own the equipment vis-a-vis Apache and BP and some of their own cash, and we do know that they already have backlog, there's people that want that system in between the Apache and the BP jobs. There's some time slots, so we're looking at the second half likely before we have new commercial sales.

But in terms of your deliverability, your --

We can -- yes, the deliverability with our outsource supplier, right now, it's called Flextronics, they have a very large operation in Dallas, but they also a global manufacturer, so it won't be a problem of cranking out the boxes. We just want to make sure when we crank out the boxes they are exactly like we want them so we'll do fine tuning. Most of the fine tuning we're doing have firm wear, frankly.

Could you also -- in terms of training crews on FireFly, is it pretty similar with the other equipment they've been using, or is there any big --

It's very different. A field operation looks nothing like a cable operation.

The good news, what we discovered on the Wamsutter job, we were worried just the every day field hand handling like GPS system, where it would tell them where to go put the positioning down and sort of how to use the system, and we found we could train what is called the juggies, which is basically an old term for the field hands, but we found these are young guys and we found you could train them up on a day or two on just the basic mechanics of their job.

And I think a lot of that is, if you think about people in their early 20s, most of them, if they haven't done anything else they've played video games, and so they're very comfortable with a handheld device that -- in fact it makes it a little bit more interesting for them. So I don't think that's going to be an issue and even though it's a very complex system, our guys have done a really good job at making it simple to use. So I think the training field crews, the biggest challenge is just sort of rewiring the way they think about a job.

Okay, last question. You mentioned that there were other -- there were interest or inquiries from other oil companies I think?

Both contractors and oil companies.

Well how do they -- or what are -- where are they hearing this from? Where are they getting --

Well, one is that I guess we've talked about the project enough and it's a big industry but it's a small industry and so the word is sort of out there. I just came back from Libya, and the NOC at Libya, the first question he asked was about FireFly. So we've got a brand that's already out there and I think an awareness of the new technology and some excitement around it.

Well I was just wondering if the word was getting out also on some of the results.

Well, it really hasn't yet, because we've only started talking about it.

Okay, thanks, Bob.

Yes.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please. Our next question comes from Howard Flinker from Flinker & Co. Please go ahead.

Hi, Bob. You mentioned Libya, did you hear that from the Libyans or from the U.S. Contractors like Marathon, [Amerato]?

No. It was, well actually it was from two -- one was a company called ENI, which is the old guys based in Libya, but also the Libyans --

[Inaudible]

The exploration manager for the NOC was also aware of it. I think he had seen it at the SEG.

Oh, okay. That's all I wanted to know.

Thanks.

Thank you. Next question comes from Greg Parcella. Please go ahead.

Hi, guys. Congratulations on everything. Had a question in relation to RXT. Obviously, you guys have said that things appear to be going really well. I was wondering what your intentions were in terms of extending that exclusivity.

Right now, the contract we have with RXT expires at the end of this year and they basically held it in place through the required committment. We would not, not consider looking at that, and obviously we have conversations with them, but currently -- we're currently on the path pretty much honoring the contract.

Okay, thanks, guys.

Thank you. Your next question comes from David Phillips with HSBC. Please go ahead.

Thanks, guys. A couple of questions. Could you talk about the time scale for FireFly testing with PGS, and secondly looking at the smaller seismic plays in that region, do you have any other interaction with some of the other guys, like [Wayfield], or do you leave that interaction to be dealt with by RXT. And finally maybe it's a time difference, but I don't understand the answer to the ONGC contract effect on margins. Could you run through that, please? Thank you.

Okay there was three questions I believe, FireFly question, VSO question and ONGC question. On the FireFly, when will they be the PGS -- when will they be -- their first job is with Apache, which looks like it will be sort of mid to late March. The main timing with Apache is that the area we're wanting to shoot in is extremely muddy right now, so they are having trouble drilling holes. So as soon as they get through that we'll be out there.

Now, PGS, we've been already training the PGS folks over the last month, and they are really getting acquainted with the system, and so I believe by the time we get to the field operation, they are going to be well up the curve and of course we're sharing with them all the learning experiences we got off of the BP job, so in a certain way get an advantage of just coming up the curve faster.

On VSO, we have basically dealt with RXT, obviously because they are our launch partner and really today our only contractor using equipment, and we deal also with oil companies in helping to educate the value of the VSO. And so that's been where our main focus and we've pretty much left it at the moment to RXT to be dealing with other folks that may have an interest. And I guess your third question was the ONGC, and I think the main point that we covered the last call was that we basically cleared market, we cleared market at market price, meaning that we didn't leave a whole lot on the table. On an order that size, just a few percent difference in price. And, in fact, if you looked at the total order in aggregate that was that way, if you looked at the digital piece of the order we actually had a higher price in than our competitor.

So we're very, very comfortable that we didn't go look at all of the money we left on the table, so the margin is sort of what the margin is, but it was a tender in India, so you don't get -- you typically, on an order that size you don't get your retail price that you would get if you sell in smaller system.

Yes, Bob, maybe I can just add a couple of points to make sure we've gotten some clarification here.

Right.

When you look at the margin of the business in 2006, in total we were at 30.6%.

Our guidance for '07 is 29% to 31%, and what we're suggesting is when people look at that they are saying okay, it's relatively flat, why? If you look at the margin of the land business in 2006, it was 19%, so the comment is land is becoming a much greater piece of the business and we would expect to have improvements in land margins at a rate better than 2006. And I think what we're, the component and the ONGC component is, although -- if you took ONGC out we would expect land margins to improve even better, because although the margins at ONGC are good and better than the '06 land margin rates, they are not our overall target land systems margin rates. Does that help?

Yes, it does. It's very helpful indeed, actually, and just one quick follow-up question. Maybe it's unfair to ask you guys and I know you would never comment on your competitors. But do you get any feeling looking at your major competitor in equipment, do you get any feeling that there's any echos, or reverberations through them from what's happening from their ultimate parents.

I don't know. Obviously, we have a lot of respect for our competitor. They are a good company. They have good products. We're playing catch up on the sort of the land based systems. I think there's a certain advantage we have in the sense of, on the analog part of the business is their mainstream business ,which they have a very high market share.

We don't have to claw back a lot of market share to be a big thing for us. I think that -- if you just look at how markets normally work, if you have a large share, it's not real good idea to try to be too aggressive on price, or you upset your whole market and nor do we.

We basically want to compete on value, quality, performance of our systems. We do believe that as we improve the quality of our systems and get more competitive with the system, it's just natural that there's a penned up -- we do know there's a penned up demand out there of people wanting to have more choice, and I'm talking about in the mainstream analog system. So I think on that side of the business, if we execute on our plan and we're smart about the way we do our deals, we ought to have sort of the analog, cable systems improving with better margins.

At the same time, I think where we'll really be able to help our land margins is on the front end of the curve once we get into the commercialization, higher volumes on FireFly, we'll have -- we should with the value that we're delivering to market there is where we can start really making a breakthrough on margins and land. So I think we'll see margins slowly improve just because of improvements on the base systems, and then they should improve -- they should increase even more probably out towards the end of this year and certainly in '08 where when we start getting more of the percent of the total in FireFly.

Thanks a lot, guys.

Yes.

Thank you. Your next question is a follow up from George Gaspar, please go ahead.

Yes, just an additional question on your guidance for the year. And can you zero in any further on the first quarter here as to what that might look like on a relative basis? I know that you're suggesting that the year is going to be second half back loaded, so to speak, and --

George, we really don't give -- we try to give people a sense of the shape, but if we drill down on the quarter we might as well start giving quarterly guidance, and we know we're not very good at that because our business is just lumpy. So we probably won't give you anymore than what we have given you.

Okay, thank you.

Thank you. And, management, there are no further questions. I'll turn it back to you for any concluding comments you two might have.

Okay, well, thank you for taking the time to attend the conference, and I look forward to talking to you during our first quarter earnings call, not that far off. Thanks.

Thank you. Ladies and Gentlemen, that will conclude today's teleconference. We do thank you for your participation and at this time you may disconnect.