Ion Geophysical Corporation (IO) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Input/Output Second Quarter Conference Call. (Operator Instructions.) 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 Second Quarter Earnings Conference Call. We appreciate you joining us today. Your hosts are Bob 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 email distribution list to receive future news releases, or experienced a technical problem and didn't 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 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 August 22. That information was provided from yesterday's earnings release.

Information reported on this call Information reported on this call speaks only as of today, May 10th, 2007, 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 that certain statements made by Management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the Company's expected future financial positions, segment sales, results of operations, cash flow, funds from operations, financing plans, gross margins, business strategy, budgets, projected costs and expenses, capital expenditures, competitive position, 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 performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the Company from time to time in its filings with the SEC, including in annual report on Form 10-K for the year ended December 31st, 2006. 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 this conference call this morning are covered by these statements. Bob?

Good morning, everyone, and thank you for joining us. I am happy to report a very solid second quarter in terms of revenues with year over year growth of 17% indicating a continuing strong market for our products and services. In fact, for the first half of 2007, we experienced strong revenue performance in all of our divisions except our GXT data library business. The marine imaging systems business, our Concept Systems data management solutions business, and the proprietary data log--data processing segment of I/O Solutions all enjoyed a strong first half. Our land imaging systems business grew 81% year-over-year, including continuing strong geophone, vibroseis truck, and land imaging system sales with the delivery of nine out of the 14 systems for the ONGC order.

However, because of certain provisions in the ONGC contract, 1.7 million, or approximately $0.02 of diluted earnings per share, was deferred until later this year. This example serves as a reminder of the lumpiness of our business and why we cannot give quarterly guidance. Within that context, we reaffirm our 2007 earnings guidance of $0.45 to $0.60 per diluted share.

As we have said on previous calls, we continue to expect the majority of 2007 earnings to be back-end loaded as we start shipping the fourth VSO system to RXT in the fourth quarter, the timing of GXT data library and new venture activities, as influenced by the natural budget and planning cycle. The wide range is mainly a function of the uncertainty and timing of the various orders and the potential of some slippage into 2008.

Brian will provide more financial details later in our presentation. Before we do that, I just wanted to spend a couple of minutes and highlight a few important items. The FireFly Apache job was completed in mid-June, later than expected mainly due to the some initial startup technical problems related to bugs in our [radio] software that had to be corrected before the job could start and extreme weather conditions related to flooding in East Texas, which significantly impacted the logistical operations.

We now have all of the Apache data collected in our GXT Center in Denver, and are in the early processing stages. We are very pleased with the data and, considering the very difficult flooding conditions, it was a significant accomplishment just to finish the job. It would likely not have been possible to finish the job with a cable system due to the floods. I will come back with the FireFly later with additional remarks.

Staying with the land imaging systems, the 60 million-plus ONGC order, which consists of 14 land recording systems, both analog and digital, is going very well. We have delivered over 50% of the order and as originally anticipated, we expect to deliver the rest of the order by the end of the third quarter of this year. The ONGC systems are being staged and tested in Dubai before being shipped to India. The biggest logistical challenge has been related to integration testing [to] such a large order and coordinating shipments related to the timing of vessels heading to India. We are confident that the shipments will be completed as per our contract with all deliveries completed by the end of this quarter, although due to contract requirements we could see some revenues potentially deferred into later this year.

We're also engaged with ONGC to complete crew training to assure they take full advantage of the 22,000 VectorSeis full-wave stations that are included in the order. Our land business has also seen increasing interest in demand for higher density shooting, both analog and digital. We expect this trend to continue and accelerate as FireFly becomes fully commercial, most likely early next year, and allows our customers to move to higher station count more cost effectively. I will be traveling to China next week to review with our Sinopec partners the positive impact of the high density VectorSeis shoot that was processed last year and is continuing to be refined and interpreted in collaboration with GXT and Sinopec's asset team. The first well that was drilled from the VectorSeis data turned out to be a real high performance gas well with several more drilling locations being picked. We expect this success to drive more business for I/O in China.

Related to marine, as I mentioned in the first quarter, we are very pleased with the ongoing RXT relationship that is now slated to continue until 2011, and we look forward to the shipping of the 29 million purchase order for the fourth VSO system commencing the fourth quarter this year. We are seeing strong interest by all companies in our VSO seabed offering from the perspective of both quality full-wave data and the productivity of the RXT crews using VSO. There are many opportunities to further expand the capabilities of the system and we are currently working with RXT to define the R&D priorities on where we want to take the system next.

We also look forward to next year when the royalty from RXT revenue kicks in, which may give us a nice boost in earnings from the VSO business. I am also happy to report that our DigiFIN field tests have gone well and we should be in a position to sell our first commercial systems in Q4. This will position us well to take advantage of the continued robust marine market going into 2008. Our main focus for Q3 and the balance of the year is to close and ship what we have in our forecast, continue to work on getting our manufacturing costs down in our land imaging systems, and work with our partners on refining FireFly.

Brian will now review the financial results of the quarter, and then I will make some additional comments before opening the call to questions. Brian?

Thank you, Bob. Good morning, everyone. During the second quarter of 2007, we generated 165 million in revenues, a 17% increase from the second quarter of 2006. For the first half of 2007, revenues increased 45% to 330 million, as compared to 227 million in last year's first half. Our gross margin in the second quarter improved 450 basis points from the first quarter to 28%. For the first half, gross margin was 25%, 580 basis points below the first half of last year. Approximately 380 basis points of the decline in margin rate was attributable to the overall mix of business, which I'll discuss in more detail, and 200 basis points was associated with three unique one-time low margin transactions we spoke to in the first quarter call - the sale of the first FireFly system, a strategic risk sharing multi-client project, and the sale of a VSO replacement cable on the original VSO system. In aggregate, these three items totaled 34 million in revenue with an average gross margin of 8%.

In the land imaging systems segment, revenues increased 81% in the second quarter to 90 million, as compared to 50 million in the second quarter of last year. For the first half of 2007, revenues increased 93% to 164 million from 85 million in the same period of 2006. In the quarter, we delivered nine of the 14 land acquisition systems ordered from ONGC and continued to experience strong demand for our vibroseis vehicles.

Gross margin during the second quarter was 16%, up from the 15% in the first quarter of 2007. For the first half, gross margin was 16%, below the first half gross margin rate of 19% for the same period prior year. As Bob mentioned earlier, due to certain contract provisions, we deferred 1.7 million in revenue for the systems shipped on the ONGC order in the second quarter. When adjusted for this entry, our gross margin rate improves 2 percentage points for the quarter, and on a full year basis, is only slightly below that of prior year.

On a full year basis, this slightly lower margin reflects the first FireFly sale and an increase in the overall mix of lower margin vibroseis trucks. Even though vibroseis truck sales have a negative impact on our consolidated gross margin, it is a very good business from an operating margin perspective, as it requires little R&D and overall SG&A to support it.

Marine imaging systems revenues continued to be strong with 36 million in the second quarter, although slightly below the 39 million in the second quarter of 2006. This is due to the timing of a large order for VectorSeis Ocean System 2, which was shipped in the second quarter of last year. In the first six months of 2007, marine revenues increased 23% to 80 million from 65 million for the first six months of 2006. The marine imaging systems business remains very robust due to continued strength in the worldwide marine market and a strong contribution from the Company's DigiCourse positioning and source products for the second quarter of 2007.

Gross margin in the marine group continued to strengthen to 46% in the second quarter, as compared to 38% in the first quarter of 2007. For the first half of 2007, gross margin was 42% compared to 38% in the first half of 2006, a reflection of strong DigiCourse positioning sales, and an improvement in margins and VSO sales. Our Concept Systems data management solution segment revenues increased 88% to 11 million in the second quarter of 2007, from 6 million in the second quarter of 2006. Year to date, our Concept Systems revenues increased 70% to 17 million from 10 million in the first half of 2006. This increase reflects increased industry demand for marine seismic work and for the Company's [Gator] and newly launched Orca product line, towed streamer navigation and data management applications.

In January 2007, the Company created a new division - the I/O Solutions division, which combined the established seismic imaging solutions data processing services and integrated seismic solution service businesses of GXT with two new business units - FireFly solutions and seabed solutions. The I/O Solutions division was created to deliver integrated hardware and services solutions for full-wave imaging in both the land and marine environments. This division will focus on addressing the Company's entire seismic transaction from the data acquisition phase to the data processing phase and will use the Company's latest developments in systems and processing technology.

For clarification, the FireFly and seabed solutions groups will lead the charge integrating FireFly and VSO technology into a broader service offering. However, revenues associated with the specific sale of FireFly or VSO equipment will be recognized in the land and marine imaging system segments, respectively.

In the I/O Solutions division, net revenues decreased to 29 million in the second quarter of 2007, compared to 47 million in the corresponding period of last year. The results for the second quarter of 2006 include one large data library sale. For the first six months of 2007, I/O solutions revenues increased 3% to 69 million, driven by strong data processing and multi-client revenues, which more than offset the large data library sale in the second quarter of 2006.

Gross margin declined to 27% in the second quarter of this year compared to 43% in last year's second quarter. For the first half, gross margin declined to 21% from 37% in the same period of 2006. The decline in gross margin is attributable to the large data library sale in the second quarter of 2006, a low margin yet strategic multi-client survey in the first half of 2007, which we spoke of earlier, partially offset by strong performance in our proprietary data processing business. As we progress through the back half of the year, we anticipate that the mix of the business will improve overall margin rate.

Overall, consolidated operating expenses for the second quarter of 2007, as a percentage of revenue, were 20.6% compared to 21% in the second quarter of 2006. For the first six months of 2007, consolidated operating expenses were 20% of revenue, down from 24% for the first six months of 2006. We continue to invest heavily in R&D, but are beginning the see the benefits of leveraging the SG&A part of our infrastructure as we grow the top line.

We invested 13 million in R&D in the second quarter of 2007, and project an investment in excess of 40 million in R&D during the full year, as we continue to invest heavily in the next generation of our seismic acquisitions products and services, such as the FireFly cableless land data acquisition system platform, our DigiFIN lateral positioning product line, our next generation towed streamer, and the next generation of VectorSeis Ocean, in collaboration with our launch partner, RXT.

We incurred an income tax expense of approximately 2.1 million in the second quarter of 2007 and 3.3 million for the first half of 2007. The income tax expense, which is primarily due to tax payments made in foreign jurisdictions, represents an effective tax rate of 22.8% for the first six months of 2007, as compared to 14% in the same period last year. Income tax expense consists mainly of foreign taxes, since we continue to maintain a valuation allowance for substantially all of our net deferred tax assets in the United States.

Turning to the balance sheet, inventories rose by 31 million from year-end 2006, driven by the ONGC order and the associated bill for the fourth VSO system, or to RXT, which we plan to commence shipping in the fourth quarter. Accounts receivable decreased 26.3 million from year-end as collections focus improved DSO by 15 days. CapEx, excluding our investment in our multi-client data library in the first half of 2007 was 4.3 million. Cash decreased to 11.5 million at the end of the second quarter from 17.1 million at year-end 2006.

Based on our first half results and our current pipeline of business, we are reiterating the earnings guidance we provided on February 28, 2007, although increasing our revenue guidance as the overall mix of our business is different than originally anticipated. We expect 2007 consolidated revenues to now be between 660 and 710 million, with much of the incremental revenue growth being driven by higher than anticipated sales in vibroseis vehicles, marine positioning and source products, and strong performance in our Concept Systems data management solution segment.

In addition, we expect consolidated gross margin rate to decrease from our original guidance, as a result of the strategic low margin multi-client survey, the FireFly systems sold in the first quarter, and the overall mix of our business, as previously discussed. Accordingly, we continue to anticipate 2007 earnings to be between $0.45 and $0.60 per diluted share, and net earnings will be back-end loaded due to the timing issues related to permitting and other operational considerations for the I/O Solutions multi-client business, the influence of natural budgeting cycles on our data library business, and the delivery of the fourth VSO system to RXT later this year.

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

Thanks, Brian. As I have mentioned in the past several quarters, our business of seismic equipment and processing services remains strong as the industry continues to refocus on exploration and an accelerated pace and this bodes well for the next several years. All of our businesses are enjoying the strong activity from a revenue perspective, and we're optimistic about the new products and services we are rolling out over the next several months, including FireFly, DigiFIN, and improvements on VSO.

As we expected, our first half of the year had solid revenue growth, and the second half of the year will not only continue the revenue trend, but is projected to deliver the majority of our 2007 earnings. Our main focus for the balance of the year and in 2008 will be to start converting more of our revenues into earnings, and that will come with the maturing of products and services, such as FireFly, DigiFIN, and full-wave [lamp] processing at GXT, combined with the continued effort to lower manufacturing costs in our land systems offerings.

On balance, our year is unfolding very close to our original internal plan, with the main variances being related to timing and mix, but we expect the year to come out close to our original plan developed last fall. Within the context of our plan, we are also making solid progress on our new technology initiatives, and related to that, I would like to make a few comments. I normally don't respond to rumors for obvious reasons, but I've recently had several investors and analysts call with concerns about FireFly. Frankly, some of the rumors are so bizarre they are almost funny. I don't care to speculate on the motivations of the people behind the rumors, but I would like to remind everyone that the purpose of the BP Apache co-investment was to build a large scale first generation FireFly system that could be used in field trials to provide a system shake out, and therefore, shorten the time to full commercialization for the next generation high density full-wave acquisition system.

It was understood by all parties involved that the purpose of the first few jobs was to shake out the system, while getting data in otherwise hard to acquire areas. We have accomplished both those objectives during both the BP and Apache surveys. We believe that much of what we have learned on these first jobs will ultimately become a competitive advantage for I/O as our learning about our system has been significant and is leading to many improvements, both software and hardware changes, that will be in our next generation system. We are very confident in the soundness of our fundamental architecture, and have made significant strides in understanding the system to share its robust and--reliability.

We have been spending the last several weeks analyzing the BP and Apache jobs, and are approximately 95% complete in developing the engineering specification and design upgrades for the next version of the system, called FireFly Version 2, which will be available for commercial sales to contractors in early 2008. We are in the early stages of manufacturing for Version 2 and have several contractors identified who have expressed a strong interest in purchasing FireFly systems once we have Version 2 available. We believe it's more important to share quality and reliability than to rush to make a sale in 2007. Again, I would like to personally thank our partners, BP Apache and SES, for the support of FireFly and their vision to participate in helping develop this exciting technology. We look forward to our continuing relationship in the next field trials to gain even more experience with the system.

Also in the new technology area, another noteworthy event was our announcement in early June of our joint venture with Hydro Technology Ventures and Reservoir Innovation for the purpose of developing, pilot testing, and commercializing the full-wave seismic system for prudent monitoring of offshore reservoirs. Hydro Technology is the venture capital arm of Hydro Oil Energy and a subsidiary of Norsk Hydro, an energy and mining company. Reservoir Innovation is a privately-held company based in Bergen, Norway, and develops and commercializes technology for the exploration, development, and production of offshore hydrocarbon reservoirs.

Under the terms of the agreement, we have licensed certain of our technologies to the JV and have agreed to sell certain products and provide temporary employee support to the JV. We believe that permanent monitoring is a market that has the potential for significant future growth, and this venture has the potential to allow us to participate with our technology without having to make significant front-end investments. What is particularly attractive about the venture is having Norsk Hydro involved, which is now part of Statoil. We believe in a business model where we have strong oil company involvement, and this one has both oil company investment and a willingness to be the first customer for the venture. That is almost always a winning combination and we are delighted to be a part of it.

Wrapping up, we have made good progress in all of our businesses and will spend the balance of the year focused on making our internal plan, which is reflected in our guidance. Our revenues are stronger than planned, but with lower margins, mainly due to mix, although we still have some work to do in our land systems business margin. I would also like to continue to remind everyone that our business is lumpy and can be best measured within the context of a full year. We will also continue to work hard to turn our sizeable R&D investment in our new technologies, such as FireFly and DigiFIN, into high margin revenue streams, mainly starting next year. I remain confident of ending with a solid year's forecast and entering 2008 in an even stronger position due to our invested--investment in leading edge technology.

And with that, I will turn it over to the operator for questions. Operator?

Thank you. (Operator Instructions.) And our first question comes from James West with Lehman Brothers. Please go ahead.

Hey, good morning, guys.

Hi, Jim.

Bob, on the FireFly system, you've had two very successful test shoots. Now at this point I'm sure you've learned a ton from both of these shoots and you'll have a much improved commercial version when you roll it out later this year, probably early next year. On the commercial rollout here, have you made any significant decisions as to how you want to commercialize the product? I guess the real question is do you want to do something similar to your agreement with RXT or would you rather place it in the hands of a larger group of early adopter type of companies?

Thank you, James. The biggest difference between RXP and the VSO in land is that in the VSO markets [audio glitch] market. And so, it made sense to have one partner we were aligned with. I think with land, because of the regional nature of land, that model specifically doesn't fit. But what does fit is our learning that we're better to go with some early what we call launch partners. And so, what we're looking at is who within the contractor base are most likely to be supportive of the product in its first commercial stages. And then, how can we effectively and practically support them. We certainly are not going to try to sell to multiple people right out of the gate. We'll probably have a few versus a bunch. And mainly, that's because it's a new way of--it's a new way of doing land acquisition. It's going to require a lot of training and support at the beginning. And also, we want to make sure that we get lots of good feedback from the partners. So it will be--I'm going to guess it will be a hybrid between the VSO and what we learned from that, and just the nature of the land business, which is regional, and there's lots of players in the land business.

Okay, that makes sense. One question on the GXT business on the processing side. I know you've been somewhat constrained by people and perhaps some computing capabilities. It sounds like the second half should be very strong. Have you been successful in adding additional qualified people or expanding your [indiscernible] in that business?

Yes, we have. Actually, I'm proud to the GXT guys that they've really done a good in recruiting new people in. I think the brand--GXT brand is strong. The projects they've worked on are interesting. And so, we found it relatively easy considering it's a constrained market to attract really top talent. So we--we're building up a good pipeline of people and bringing on new people, both in the U.S., but by the way, we now have such a large presence international--we'll also recruiting pretty heavily in the international market in our center in London and other places.

Okay, great. Thanks, guys.

Thank you. The next question comes from [Michael Morino] with Johnson Rice and Company. Please go ahead.

Good morning, Bob.

Hi, Michael.

If you could follow-up--following up on the FireFly, with the shoots now complete and you being able to look at the system and how it performed, you mentioned one of the shoots probably wouldn't have even been done if it weren't for FireFly's capabilities. Can you maybe in that aspect, if we just look at a normal shoot going forward, if it were going to be say a 30-day shoot, how much quicker do you think FireFly could get it done and how are you selling that to your customers? And I guess in a follow-on with that, are you more excited about FireFly today than you maybe were nine months ago before you had done any trial shoots with it?

Yes. Let me--you've asked two questions. One is my excitement level and, two, is the first question is what we've learned and sort of the productivity of the system. I think one of the--one thing we've learned is that we really have to segment the market. The BP--we couldn't have picked two jobs that were more different. The BP job, its uniqueness was it was in an environmentally sensitive area, but it was very--but it was more of a West Texas type--big sky type area. We didn't have a lot of what we call canopy, which is trees and obstacles and all of that. But we were up against extreme weather conditions. There it turned out to be cold weather and lots of snow. It was a very large shoot in a very concentrated way. Contrasted to the BP shoot--or excuse me--the Apache shoot, which turns--was in the hills of East Texas, part of it's almost swamp, even in normal conditions, lots of landowners, lots of obstructions. We even had areas where we had bison, believe it or not. And so, you had farmers, bison, people [mowing]. And then, we laid on top of that enough lighting that we were looking for Noah's Ark. And so, when you--those are two very, very different logistical problems.

And so, we've learned from both of those and our big learning is that every--we're sort of segmenting the market now, and looking at the different markets and what the requirements will be unique to each of those markets. But what we did see first in the BP and now in the Apache job, that when we back out what we would consider the things we're learning about the system from a technology point of view, our software, our firmware, all the things you shake out, if we can sort of back out the issues that we have--we've had with those parts of our system, which is sort of expected in field trials, and say, if the system was working as we decided and we weren't dealing with sort of self-inflicted problems that are just having to do with the state of the system at the point of the field trial, what would the performance look like. And we're still very optimistic that we'll see good solid performance gains.

And for example, I believe in the Apache job, how do you measure--we were literally where we had people wading in water and we had to put the FireFly units on floaters basically, almost like being in transition zone, where the sensor itself was underwater. And if you had been in cables, you would have had to try to have all the cables and the batteries and the hardware laid out underwater--you wouldn't even be able to see it--and service it. So you would probably have had to have the crew sitting waiting for the water to recede before you could've gone back in and completed the job.

So in that case, it's hard to quantify it exactly. But just the people of experience said it was remarkable we got the data, even with--we had some of our own internal issues we were just trying to overcome that were more just system related that--problems we're fixing.

I can't give you exact numbers because each job is a little bit different. Some--in some cases, the advantage will be that you can get data in areas that are environmentally sensitive and you don't necessarily maybe because of the logistics you can't speed it up that much, but you can get data where you couldn't get it before. In other cases, like in Wyoming, we can really blow and go. You can just really--you can get 50% or more productivity gains. But I think that what we're learning is that each segment is going to be a little bit different. Each one will have a little bit different value proposition. And then, with the contractors, most of them have a portfolio of different segments within their area. So we'll have to sort of educate them on this circumstance, this is the advantage of the system, and this circumstance, this is the advantage of the system.

The other thing I want to remind people is at the end of the day it's about getting quality data. And FireFly brings up the productivity advantages, which is good, but we should not forget how valuable the data itself is. And although we've--like I said, we've heard some bizarre stories about the data. The data at Apache has turned out to be really good. And we're excited about the quality of data, as we're excited about the quality of data we got at BP. And at the end, that's what the oil companies are--the number one primary interest. We could have the most productive system in the world and not have good data and it wouldn't matter.

Question two, how do I feel? I feel--I guess the difficulty that I have as far as my passion is I've had passion for this thing from the very beginning. And I don't think I can get any more passion. So I'll say I feel about the same. We're now--I guess where I'm excited is that until you get a system into the market, you really don't understand its capabilities fully and you really also need that feedback from the customers and our own people on how to make the system even better. So I'm excited to have this kind of an opportunity to do these large scale system field trials. It's--in my whole experience in the industry, I never got to do this. Normally, you start out with little small tests and then you grow off of that. So to have the opportunity to do very large scale testing at this early stage in the technology is exciting for me. And it's exciting for me to see our guys working with our customers to make a better system.

As a follow-up, you mentioned both the productivity gains and the better data. Who are you getting more interest from, or who's watching FireFly more closely? Is it the contractors or the oil companies?

That's a good question. I would say it's a little bit of both. I think the oil companies are very interested from the perspective of the data, the ability to shoot in environmentally sensitive areas, which is a growing problem for them. The ability--once you get [untethered] from the cables, if you can start doing some creative designs--and I think from the geoscience point of view, they are very attracted to that. And obviously, the icing on the cake for them, one is--it's not even icing--to be able to collect data where they just can't get into is very important to them. And so, they have that angle that I think is more important to them than ultimately the cost of the survey.

I think the contractors that we've been involved with, most recently, PGS, the guys in the field and the guys in those companies see the problem [is] the FireFly and they had a long list from the experiences we've had with them, these are the 15 things guys you need to fix. And it's going to be a great system if you get those fixed. And the list is typically the kind of list you get at this stage of a test, and that's what we're doing. As I said, we're about 95% complete. As we have been involved with the tests, our engineering guys have been obviously in real time collecting data, collecting information and feeding that into the version that we'll be releasing end of the year or early next year that will be--sort of the first offering will be going with contractors more in a general sale mode.

Okay, thanks. And if I could follow-up with--on a different vein. The land margins, you all--those have been weak I guess recently, and you all have talked about some things on the manufacturing side you can do to improve that. I was wondering if you could give us a little more color on what exactly you're doing on the manufacturing side and when we might see some of those benefits on the income statement.

Yes. We have made gains on it. One of the--I think one of the things that has obscured it a little bit is that as we've talked about the ONGC order in the last couple of conference calls, although we've made healthy margins compared to our normal land business on ONGC, because of the size of the order, the [competitiveness] of the order, it's still not the margins we're striving for ultimately. The progress--the progression we are making is we're just constantly looking at the designs and making some changes to take costs out. And obviously, the difficult is from the time you make changes till it finally rolls through your inventory, it just takes time.

We've also continuously--we've continuously made improvements in staff and people on the manufacturing side to better understand the supply chain management. One of our most recent moves also we have a fellow that we just moved over in--that's right now running the land division - a guy named [Chuck LeDay] - that actually has spent most of his time running our marine division. He's one of our top executives and Chuck brings a lot of experience--I/O experience on some of these same issues. He was a--he's--he led the team that basically helped us get VSO completely at its current commercial situation. And Chuck's bringing that experience into land, so we've got another senior guy in there that's helping us improve.

Now we would expect--and I would just suggest is it's going to get better over time. I don't--I can't give you an exact date, but I know that we're working on many areas that we'll just continuously see that thing improve. I don't know, Brian if you have any other comments on--.

--Well, the only other thing I'd add is that we're also--when we look at our outsourcing manufacturing strategy, we're shifting quite a bit of activity to low cost manufacturing centers--.

--Yes--.

--Closer to our customers in places like India and China.

Yes, that's a big part of it.

Okay. Thanks, guys.

Thank you. Your next question comes from Neal Dingmann with [Dohman Rose]. Please go ahead.

Good morning, guys. My question just centers around your marine imaging systems. You talk about being robust, but I noticed it was down just year-over-year. I was wondering if you could maybe comment on sort of just the general outlook on that marine side. And then, more particularly, I guess sort of looking at that, if you could give a little color on the marine on sort of what you're seeing in sort of the streamer versus the sleeve gun versus the digital source of control?

Yes. Maybe I can ask--answer the first--this is Brian--I can answer the first part of your question. Then maybe Bob can give his thoughts around streamer source gun, et cetera. If you step back and look at the marine business, again, it's so lump, a quarter-over-quarter comparison doesn't make sense. Bu if you look at the first half of the year, when we classify it as robust, it's--there are two things going on there. One is, you've got very strong growth in that business. That business has grown at 23%. And in addition, the VSO part of the business pretty much year-over-year is flat because of the nature of a large size of the VSO orders. So we had about an equivalent volume go through last year in the first half and the first half of this year. So a lot of that growth has come from the positioning in source product lines, which are very nice margin product lines.

And in addition, we've seen considerable improvement in the margin rate in that business, as both the mix has shifted and we've focused on improving our margins on the VSO side. So when we classify it as robust, it's strong sales activity and margin improvement.

Yes. I think on the sort of the technology side, if I understand your question, on towed streamer, one--obviously, one big driver of towed streamer is there's just new vessels coming out and that's continuing. And so, that's helping drive both the--or positioning business at marine, and now, included in marine, the Concept part of the business is also being driven by that.

In addition, the trend in marine, it's really segmented out. There's a very high-end and growing part of the marine market that's really going for accuracy and very complex, sometimes multi-vessel operations. It's called wide [indiscernible] shooting. And that is also underpinning some of our growth for our higher-end products. Obviously, the positioning of the streamer, getting them closer together, being able to turn with shorter turning radiuses, are all very important. And so, that plays right into our strength. We have a leadership in positioning. And we have the DigiFIN, which is also an important part of that. Now, the DigiSHOT, which is the gun itself, an example place where that's really important is, for example, in 4D work where the repeatability is extremely important. And so, we're seeing a growing interest in that.

So I think our product line is strong. It's going to be even further strengthened, as I mentioned, with DigiFIN. We've been in field tests with that. We've had some quite--good successful field tests. We'll be likely having our sort of first commercial sale at the--around the end of the year with one of the launch partners. And then, we'll be entering '08 with that product offering pretty much for general consumption, and we think it's hitting the market pretty good for the timing of interest.

Okay. So I guess just sort of a follow-up. On--just looking at the DigiSHOT alone, is that just sort of--you were saying growing--because of the overall business or are you actually taking some market share there as well?

Well, we have a very high market share with the Digi products. And so, I don't think it's as much market share as it is just the growth--the underlying just growth of the business. What is going to be--it's not really taking share, it's actually increasing an offering--the DigiFIN, there isn't really a like competitor to it that's on the market. And so, when we get that in the market, effectively, it helps the companies that are competing against [indiscernible] marine to be more competitive. And we'll be the only one at that point in time that has a fully commercial offering at that point in time. That will be an expansion to the product line.

Thank you.

Thank you. Your next question comes from Terese Fabian with Sidoti and Company. Please go ahead.

Good morning. I'm just going to get back to FireFly for one minute. We've heard a lot about how slow the petroleum industry is to accept new technologies. Can you talk a little bit about how you structured the FireFly pilot program? What do your launch partners give and what do they get from the arrangement?

We haven't gone into the commercial details of our pilot, and I really don't want to express that basically in the public. I mean, a lot of the strategy is--our competitor would love to know what our exact strategy is and what the relationships and the commercial terms are going to have with those launch partners. And in fact, part of that is currently in discussion. So we haven't completely baked it anyway. So I really don't want to get into the commercial details like that.

Okay, but even vaguely. I mean, will they be doing more testing with you? Is that something that you have talked about before?

The last partner--I think by definition what you want to do is you hook up with contractors that have the vision of the product and in effect help you with the commercialization of it. And what's unique about FireFly is that there are some real advantages to the contractor and advantages to the oil companies. So once they've made the commercial investment, they're going to help market it. And we'll be out there with them, obviously, creating umbrella marketing. But that will be a part of the effort very much. If you look at the early stages of the VSO, really before we had the proprietary arrangement we have now, we were still hooked side by side helping sell the product line, because they had made an investment, so it's to their best interest to help promote it.

Okay. Well, that's help. My next question concerns some of your more conventional products. I know you don't give backlog numbers as such, but can you talk about what kind of visibility you have for orders going ahead in your products? And also, in the seismic sector as a whole--you mentioned marine--but in land--.

--The marine--I'll give you--I'm not going to give backlog, like you said, but I'll give you my general feeling and generally the way it works. The marine is probably our longest lead--our longest lead visibility because it--much of the business is driven by vessels coming on or vessels being expanded. And because that's a long-term investment for the customers, they're out there talking to us way early. So we pretty much know what's out there. Now, you'll often have competitive situations, so we're not certain who's going to get the deal, but at least we have visibility of what's coming. And I would say that extends--at base level that extends out as far as two years. What's been surprising in marine is that we've seen deals come forward and people getting in the business that we didn't know about. So we still have new entrants in the market that adds to the pipeline of opportunities.

On the land side, it tends to be shorter because the contractors are pretty much driven by land projects, which are driven by the oil companies. And the oil companies themselves, their visibility on exact timing is fairly short. So the way we deal with that is through our channel--our channel tries to stay close to the oil companies and the contractors. So we try to anticipate where the major projects are going to be. But we're looking often--even like on a system sale, we may not have visibility more than six months. Our pipeline that we manage in land typically it reaches out more than six months. But it really sometimes is three months to six months before we're really well into the sale cycle on land. It's much shorter than marine.

The data processing is a backlog business, basically. Particularly when the market's tight, the customers know that it's tight, so they tend to get in the [queue]. And so, in that area, we have good visibility almost through the end of the year and even into next year on data processing. Again, on the new ventures business, which feeds the data processing, those tend to be a little bit longer term because we have to get out and organize, put the deals together, get the boats organized--the vessels organized, do the shoot, and the crews. And so, today, we're already working on ideas for next year as we're trying to complete things this year and manage the opportunities we have through this year.

So for the new venture business, it tends to be execution in the year you're in and building the business for the next year, and lining up vessels and all that. And then, the data library business is the most uncertain we have in the short-term. We have a lot of--a big pipeline of customers that likely have an interest because of working in an area, but they tend to treat data library as a discretionary expenditure. And so, often--and often their timing because it typically can be longer term projects, their timing is not that quarterly sensitive. And so, they may have a notion of buying a data library and decide they want to drill a well instead and wait six months before they buy the data library. So that one is just basically having a big old pipeline of opportunities and constantly working it. It's a little bit like being in the software business, that piece of our business. It's the most unpredictable - timing-wise - piece of our business.

As your portfolio grows, it becomes--you have more opportunities and you can start balancing that a bit. But trying to predict exactly when those things come in is pretty bad--is pretty hard for us.

That's very helpful. Thank you. Could I just sneak in one little number question for Brian maybe?

Sure.

Can you repeat your R&D guidance? And also, did you say anything about the tax rate for the second half of the year?

No, I didn't say anything on the tax rate for the second half of the year. The R&D--and that's a little bit difficult because of the mix of the business. The tax rate, obviously, is driven by earnings in foreign jurisdictions and that mix shifts around quite bit. It just--it's kind of lumpy quarter to quarter. So we haven't really changed our tax guidance.

Okay.

On a full year basis. The R&D, we're pretty much committed to spending R&D at the same rate that we suggested in our guidance call at the end of December. We're going to spending at somewhere around 7% of revenues. So that will be in excess of 40 million.

Thank you.

Thank you. Your next question comes from Amit Shah with Thomas Weisel. Please go ahead.

Hey, guys.

Hi.

A quick question on the--on these gross margins. You said that you're going to improve--like land imaging will be one of the key areas where you could improve gross margin. But what other segments do you think will assist in contributing, or will you be able to leverage on the SG&A line for improving the bottom line?

Yes, I mean--this is Brian. Obviously, if you break down the business, the margins in general are strong across all of the divisions, with the exception of land and the first half performance of the I/O Solutions business. So we would expect as the mix of business shifts in I/O Solutions in the back half, and we see an increase of data library sales, you'll see margin improve there. And on the land side, you'll see margin improve as a result of some of the manufacturing costs that we're working on. And over the longer term, you'll see margin improved as we shift the mix towards some of this leading technology - so FireFly, DigiFIN on the marine side, et cetera. They are obviously high margin product lines.

And then, in addition to your point, absolutely, we fully expect over time to continue to leverage the SG&A part of our infrastructure to contribute to operating margins.

Can I give you, Brian, one more question on the--going forward in FY'08, once the RXT order hits, will that be similar margins, or as a result of a bulk order we might see some margin trimming going into '08, once the 160 million orders start--like the 40 million for your [indiscernible - accented]?

Well, the--we anticipate to see the VSO product line at the consistent margins that we've experienced in 2007. There's nothing that would suggest we're going to deteriorate margins there.

Yes, it should be the same. And actually--yes, the icing on the cake will be we do have the royalty component. So if you think of that as the VSO business for us, which now is equipment plus a royalty, then that in a way increases the margin on the--the revenues and margin on the--on that business line for us.

Yes. Just to put that in perspective, if you take a look at a typical crew, rough numbers, a typical crew--a VSO crew will generate about 50 million in VSO revenue. And the royalty agreement calls for us to get 2.1% of that revenue as a royalty payment 2008 and moving forward. So as we're successful [rolling] our crews in RXT and they're successful putting them to work, that can be a fairly meaningful contribution to the VSO margins in our business.

Great. That helps a lot. And one more, just a refresher. The 29 million RXT order will be delivered in Q4, right? The whole of it--or we might see some spilling over in '08?

Yes. Currently, we are planning--we start filling the order in Q4. There's a possibility we could get it all in Q4. We just are hesitant to say we're absolutely going to be sure we're going to get it all in Q4. So some of it could spill in. As I mentioned, one of the reasons we have that range in our guidance is that we do have these large sales and you can't predict exactly when something's going to fall. We've seen--I can just give you a real quick example. For example, even the ONGC order and timing of vessels and having vibroseis' to dock that may or may not go on a certain vessel--I mean, this quarter we could have just as easily been $0.12 to $0.14 to $0.15 as we were $0.08. It's just a variation of what you can get out the door and ship and do it--and still make sure you're doing things in a quality way. And that's the dilemma we have is we have that--that's why we put out those ranges, and that's sort of why we say we're not very good on a quarter by quarter basis.

I think both Brian and I actually have a lot of empathy for our analysts who are trying to make those quarterly calls. Because we have a hard--we have a very hard time inside doing it.

And the other thing I'd add to that is it's not just filling the orders, it's also we have a very complex RevReq environment and the larger these orders are, and you get into sort of the multiple element transactions and doing partial deliveries, and it becomes very difficult sometimes to even recognize the revenue. So we can do all of the work and ship the product, even sometimes get paid for it, but we can't book it in that quarter. We're going to have to wait for a future quarter to recognize it. So welcome to our nightmare.

And just one last question. On the--like when you guys have orders like the ONGC order and [indiscernible - accented], is that the reason why--do you have to give like bulk discounts, or is that a factor that the costs are increasing? Or is it just like for market share basically you have to leave some on the table?

No, we--specific to the ONGC order, what we said about that ONGC order, when we got the order, we didn't--we felt very comfortable although we didn't leave any money on the table. Although it was such a large order, it was unique in its size, that it was somewhat competitive the way that we priced it [up]. But if you took a look at the margins that we experienced in our land business in 2006, we actually saw a slight margin improvement on that ONGC order, so we didn't leave anything on the table. But due to the nature of the size of it, we didn't necessarily show strong margin gains either. But that order doesn't necessarily reflect the way transactions occur in this sector.

Okay. So that helps. And just one last housekeeping question. On the depreciation and amortization number of 10.7 million, can you give us a split between depreciation and multi-client amortization?

I can't specifically give you the split because we don't want to get to that level of granularity. But what I can tell you is when you look at the drop from the first quarter to the second quarter, there's about a $5 million drop. I can tell you that the majority of that is associated with the amortization of data library sales. So because we had such a soft quarter in data library, we didn't realize the relative amortization associated with it. And that's just--that's just the nature of the lumpiness of the business.

Okay. Thanks a lot, Brian. Thanks, Bob.

Thank you. Our next question comes from Cindy Du with Jefferies and Company. Please go ahead.

Thank you, guys, and good morning. With the visibility that you have and the pipeline that you have, as you look into 2008, is there any reason to think that revenue would not grow at current levels? And then, in terms of the product mix, do you see that improving in 2008 compared to 2007 levels?

We haven't yet. We'll be giving 2008 guidance in I guess the November/December timeframe. The only thing I would--the only thing I'll say is just from an industry perspective. Our view of the industry looking out as far as we care to plan right now is we think it's a strong market. We believe whether it's marine or land or whatever, we think it's a strong market. We believe we have a good set of products and strategies to play to that market. But we'll really be giving '08 guidance more or less when we--we're currently in our planning process ourselves. And so, we'll be rolling that up, and as we did last year, we'll give something in December that gives us--our views of it.

Okay. Fair enough. And then, switching back to FireFly, now that you've completed the two commercial field trials and you've overcome a lot of weather issues that are prevalent in cable systems, have you been getting more calls from interested contractors now versus say six months ago?

I think mainly it's about the same. Our industry is--there's a certain "wait and see." And so, I think basically, there's a big interest in the market. Everybody gets it in the sense of value of the system when it works well. I think the thing that will--at the end of the day, the thing that's really going to make the market go commercially is when we get a system that's been fully engineered will be our next--we'll call our next generation, which is the Version 2. And that's going to capture all the learnings we've had in the field trials that are still going on. And I think once we get it out there and people really see it, a solid system working well, that will generate a lot of interest. Because the interest is already there, if you know what I mean. In other words, everybody gets the concept and everybody--but people wait and see till they make sure that the system works.

Are you getting closer to signing on launch partners? Do you [feel confident] on--?

--We're having a lot of conversations with a lot of people.

And then, I think this was covered, but can you tell me again what drove the [moving] margins in the quarter?

Yes. The margins were driven by two things. One was just general mix, so higher margin positioning of source product lines. We had a strong volume of those. And in addition, we had margin improvement on our VSO sales.

All right. Thank you.

Thank you. (Operator Instructions.) And our next question comes from [Dorian Levy] with Lehman Brothers. Please go ahead.

Hey. Good morning, guys. My question revolves around the competitive landscape. I guess my questions are in two parts. One, in terms of market share, clearly as next year some of the products come--the launch--the market share should improve. I'll ask you where you see that going, especially in light of some comments recently by some competitors that have been taking some share; and (b) where you see that taking your market--your margins relative to your peers as you go forward with that.

Well, first, from a market share point of view, we almost have to talk--we swim in more than one market. And so, we almost have to make a broad--sort of a broad--not a broad--we can't make a broad-brush statement about share. It's a little bit about this mix of the business. If I just walk down the broad categories, if I look at land first, there are elements of land that were quite strong share-wise. So, for example, we don't talk about it much, but it's a great business - our geophone business is growing. It's a good cash generator. It's a good earnings generator. We're quite competitive. We have a very strong brand.

We're constantly working to get our costs down, because we know that's where that market--it's price [indiscernible] quality. We've got--but we're in a good competitive position. And if anything, we're picking up some share in some markets that we have not participated in all that well, and that's because we're getting our costs down and keeping our quality up and being more competitive. So I think we're fine in that business. There's a lot of competitors in that business.

The [vibe] business, we have a leadership product. I'd say that we probably split the market with our main competitor in that business, but we're holding our own there. We would argue that we have the most reliable system in some of the more difficult areas. I'm sure they have their pitch. But we sell--[maybe] that business is more or less how many we can crank out. I don't see that changing a whole lot. And our land business, there's no question that we're behind the power curve. In the base land business our competitor has an advantage of a big install base. He has the advantage--if you have an install base, you [sell them] back into that base where people are expanding. But even there we're making headway. I think the ONGC order is one example. And in some of the other markets, we've made progress and we're continually improving that system. And we still have a ways to go on the--on mainly getting costs down. And obviously, our big play there is the FireFly. And that's where we're heading with that.

In marine, we have very strong positioning. I don't see that changing. We have good leadership. We're--this is the case where we have the install base and we're building off that in the positioning area. Within marine, we don't have--we're a very small player in the streamer business, which is quite large right now because of all these ships coming on. But we are moving to where we think we're going to have a good offering. And we've actually sold some [streamer], more than we thought we would, and don't have that--particularly a strong position. But we're going to--we'll strengthen our position there with entry into that market next year.

On--if I go back around and look at the--our solutions business, we have a very strong position in the high end processing business. Now, the processing business is quite large, if you look at the total dollars. We're a small market share, if you broad brushed it and say all the [processing] goes. If you narrow the definition, in the market we serve, which is a very high-end depth imaging full-wave on land, we have a good solid market share there and recognize the technical leader in--with the R&D investment and our approach, we should be fine there.

The data library business, I don't even think of it as a market share business. We're really more or less in the value creation business. We originate deals. What we're doing is fairly unique. I'd say we have a very high market share in the [scan] business, which was sort of originated by GXT. And that business is more or less picking our spots and executing. And actually, we don't really think of that as a market share gain. So I'd say, if I aggregated all of that, I'd say the worst case is we hold our own and best case is we pick up some share in the areas we're targeting. Of course, that's always your objective.

Right. And are you setting some sort of margin target as you begin to take share with the FireFly?

Better--yes, our margin target is to be better. My--sort of our--my goal is to get our--eventually get our land margins--if I exclude--Brian talked about the vibe business.

Right.

And we're not going to turn that business down. We'll have as much of that as we get, and if it blends and affects our [inaudible], [so be it]. But in the land systems part of our business, obviously, we'd like to get that business more attuned to the rest of our other businesses. So that's our longer term goal is to improve margins in that business.

Great. Thank you very much.

Thank you. Your next question comes from [Emal Aman] with Simmons and Company. Please go ahead.

Hey, guys. Good morning. I've got a quick question--housekeeping here. Your share count looked like it jumped pretty significantly quarter over quarter, which also happened last year. I was wondering, what was the driver behind that?

Just--it's just--it wasn't that--it jumped a little bit, but it was primarily just people exercising options.

Okay. All right. That's really all I had. Thank you.

Thank you. Gentlemen, I am showing there are no further questions. I'll turn it back to you for any closing comments you might have.

Okay. Well, thanks for taking the time to attend the conference call and we look forward to talking to you during our third quarter earnings call in a few months. Thank you.

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