Ion Geophysical Corporation (IO) 2007 Q3 法說會逐字稿

Welcome to the ION Geophysical conference call. During this presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today Thursday, November 8th, 2007.

I would like to turn the conference over to Jack Lascar. Please go ahead, sir.

Thank you, Violet, and good morning, everyone, and welcome to the ION Geophysical third quarter earnings conference call. We appreciate you joining us today. With us: 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 e-mail distribution list to receive future news releases or experienced a technical problem and didn't receive yours yesterday, please call [DRG&E) and provide us the information. That number is 723-529-6600. If you want 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.iongo.com. We have a recorded instant replay until November 22nd. The information was provided in yesterday's earnings release. Information reported on this call speaks only as of today November 8, 2007, and therefore you're advised the 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. 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 its annual report on Form 10-K for the year ended December 31st, 2006. Furthermore, as we started the call, please also refer to the statement regarding the forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements.

I'll turn the call over now to Bob Peebler.

Thank you Jack. Good morning, everyone, and thank you for joining us. We just announced a very strong third quarter in terms of year-over-year revenue growth of 58% and earnings growth of 340%. In fact, we experienced strong revenue performance in all of our divisions including our marine and data processing businesses, and our land division with solid geofoam vibroseis sales.

Additionally, in our land division we completed the delivery of the remaining five systems for the ONGC order. The third quarter has historically been a difficult one for us due to a general reduction in the velocity of our business related to the summer season. But the continued delivery of the ONGC order and an overall robust market for our customers resulted in solid results. Related to ONGC today we have delayed $0.03 diluted earnings per share into the fourth quarter associated with the commissioning of the remaining noncommissioned ONGC systems. We expect these systems to be commissioned by the end of the year and most if not all revenues to be recognized in 2007.

Looking to the rest of the year, the fourth quarter is stacking up as a very big one for us with the completion of the ONGC order, the delivery of the fourth VSO system to RXP, several large full-wave land system deals and an overall strong marine market. We are also seeing continued strength in our data processing business, particularly in international markets and the multiclient business is very busy on several span projects. Within that context, we are reaffirming our 2007 earnings guidance of $0.45 to $0.60 that we originally issued in December of 2006.

As stated before, the wide range is a function of the timing uncertainty of the various orders, the potential of some slippage into 2008, and the potential for year-end spending for data library purchases that is driven by all company budget considerations where we don't yet have full visibility. Brian will provide more financial details later in our presentation. Before we do that, I would like to spend a few minutes on some key highlights of the quarter.

One importantly strategic event for us was the renaming of the company to ION Geophysical Corporation. We rolled the new name out at the SEG convention in San Antonio, Texas, in September, and I'm pleased to say we have received a very positive response from both our customers and employees. The fundamental reason for the name change to ION is the fact we have outgrown the Input/Output name associated with the seismic equipment business and it was a poor fit for our solution strategy. We are now more fully involved in the full-value chain, the seismic imaging including planning services, acquisition technology, processing, interpretation and high value multiclient programs.

This solution approach has put us in a strategic position with all companies seen throughout our product lines including our acquisition technology. A great example is the Sinopec job, where we have been working directly with their southwest branch in China. This Chinese branch has an aggressive drilling program and a low-porosity fractured gas reservoir with a goal of a substantial increase in gas production for domestic China consumption. The first well drilled using VectorSeis full-wave data processed by GXT and interpreted by our GXT reservoir group in the southwest branch geoscientist teams was a success increasing the production of the field by an estimated 8%.

In addition, they recently announced the success of drilling the second well. These positive results will likely drive more future activity and will deepen our strategic relationship with Sinopec. The southwest project has given us the opportunity to strengthen our technology position as it relates to processing and interpreting high density full wave data.

We have permission from Sinopec to show highlights of our processing and interpretation work, and that was one of our main thrusts at the SEG. We received excellent response from many U.S. and European based oil companies that have resulted in several one-on-one presentations to their exploration groups.

I'm encouraged that we are finally turning the corner on the validation of the value of full wave. This validation combined with other projects such as the BP, Wamsutter, and Apache jobs will provide even more excellent examples.

In general our industry is slow to adopt new technology until provided with the positive proof of the results. Thus these success are critical in validating our strategy and business model.

The status of FireFly has not changed since the last conference call. We are in the process of building our version two, and are in the early stages of manufacturing. We still expect to be in internal field testing during the early part of 2008 with a goal of commercialization in the first half of the year.

As stated in our last conference call, our number one priority is to share a high quality commercial system and that will be our focus going into 2008. BP and Apache will also be continuing surveys with the equipment they purchased this year. The tests will incorporate much of the learning to identify during the Wamsutter and east Texas surveys. We are in continued discussions with both oil companies and contractors and the interest in FireFly continues to be high. Most recently we have had several inquiries from investors and analysts related to competition to FireFly.

First, I'm pleased that there are now followers in the market as that validates our fundamental analysis that a cableless system followed by wireless technologies is the wave of the future for land acquisition. It's healthy to have competition since we are in the early market stage where market education is strategically important and having more than one company promoting the fundamental ideas of good faith. The important question is who will emerge as a market leader, and I will share with you my thinking on why I'm very confident that we are in a clear leadership position.

Let's look at the three main reasons for our competitive advantage. The first is the quality of the subsurface image related to the oil company problem they're trying to solve. We believe much of the high end image willing be driven by much more complex reservoir problems, including reservoir characterization for field development and production optimization. A step change in quality is needed compared to most land surveys, and this means much higher station and source point count and more information in the signal itself.

Recording the full wave field, combined with higher station and source point count is needed and FireFly is the only system that was designed from the beginning as an all-digital system that supports multicomponent MIMS technology.

[Sercell] purchased Biotech last year, but Biotech was not architected to support Sercell's version of VectorSeis and therefore they are facing a significant reengineering to go in this direction. It is much easier for FireFly to be retrofitted to support recording with analog Geofoams than others to support digital sectors like VectorSeis.

In addition, ION and Sercell are the only company with digital sensors so the other companies entering the market would have that hurdle to also overcome. They can only argue that while analog Geofoams are acceptable, which is like arguing film cameras are the best approach compared to digital. This is an argument that is harder and harder to make as digital technology continues to progress. The second is that building a system that supports a few thousand channels is relatively simple, but the problem of scaling up is an exponential versus linear problem due to complications of logistics and data management issues. Realizing that the challenge is the integration of electronics, wireless technology, firm wear, software and an intimate knowledge of various operational scenarios, we have viewed the problem from the beginning as way beyond just some yellow boxes with ground electronics and a recording system.

One of the primary reasons that we acquired Concept Systems was a recognized leadership in real time software systems. We have harnessed their expertise in building the software infrastructure that integrates into the recording system and planning system to share high productivity of the field crews and deployed assets. We have had a significant and dedicated Concept team working on this part of the system which we now call Connex.

The Connex team has been embedded in the FireFly development effort including experiencing firsthand the BP and Apache jobs where we gained significant insights into how the system needed to be improved to make it even more robust. I think it's safe to say that the electronics that are in the yellow box will quickly evolve over time as horizontal technologies such as memory, computer power, battery and radio technology progresses, but the integrative firm wear and software combined with our software technology is where the majority of IP and competitive difference will be developed.

We have had our team in place for over three years on a steep learning curve, aided by the continuing field trial experience. So I would suggest that it's logical this is a serious competitive advantage for ION versus the ones that are just now getting their yellow boxes on display at the SEG, but don't yet have digital systems as the supporting software scales up. And third, to change the game in land imaging requires taking on the whole value chain from planning to acquisition, to processing and finally interpretation. ION has clear leadership in experience and technology in planning software via our Denver group of GXT which is called Green Mountain. We have reworked and continued to evolve the planning software to accommodate high station count, full-wave surveys and have integrated the Green Mountain software with Connex to build a seamless integrated system from planning to the field operations.

After the acquisition, the data needs to be processed, and we have been building out unique processing technology at GXT that not only deals with much higher station count and associated very large amounts of data, but also how to take full advantage recording the full wave field. This system approach has not only goals for much improved image quality, but also productivity goals with end to end cycle time production, and field productivity improvements that make high density fully sampled full wave data more accessible from a cost perspective. It's our belief that this will become growing in importance to both oil companies and our contractor customers from a competitive advantage perspective.

We're also investing in a 21st century interpretation system via our partner Transform Software, who are taking on the challenge of making sure that the oil company interpreters can get the most value out of our fully sampled full wave data and do it efficiently. Our reservoir solutions group are successfully applying the transform tools to solve full-wave interpretation problems associated with the recent Sinopec and BP full wave surveys.

In summary, ION has had a system approach that is tackling next generation digital sensor technology, cableless ground and recording system electronics and the end to end solutions started with planning and ending with interpretation. FireFly represents much more than some ground electronics, but it is a complete ecosystem that is aimed at providing the best answer for the industry resulting in a highly productive system that delivers a much improved image. I'm confident that after investing over $100 million U.S. in the sensor technology VectorSeis and over four years of investing in FireFly with over 160 man years of R&D combined with a very unique field test where we deployed up to 10,000 stations has put us into a leadership position that will be very hard to overtake.

We do have competition and that's only a good thing as it only makes us run faster, but we have done up a very significant learning curve and are on our second generation of FireFly that takes advantage of the learnings. I'm sure what is so difficult for investors to understand is that the most value in FireFly is almost invisible as it's mainly in the MIMS technology, the supporting ASIC, millions (technical difficulty) code in firm wear and software integrated with the complex radio and computer system, and the know-how that has come through the years of experience in our teams combined with the large scale field trials. And all of that is why we feel very good about our competitive position.

In marine, we again had a very robust quarter driven by continued strong customer activity. Even though some oil field services firms have seen some weakness in their business, it's not evident that the seismic industry, which is mainly being driven by international activity has experienced any signs of slowing down. To further illustrate this point, even though Schlumberger reported some softness in their North American operations very recently, they reported strong seismic performance in the marine group.

Internal market analysis suggests strong seismic activity in both marine and land particularly in the higher technology end such as wide Azimuth and deep water -- for deep water. We are benefiting from this trend through both ORCA and DigiFIN. A Concepts system, ORCA commercialization is being pulled by the market's need for more complex high density wide Azimuth surveys and we already have strong interest in our new DigiFIN line.

We had our first DigiFIN sale to our launch partner PGS and expect to enter 2008 with a strong demand for our positioning products including Digi[bird], DigiFIN and ORCA. The marine group also completed their first alpha test of the new Digi[Stream] product and we look forward to full commercialization in 2008. Our legacy streamer needed a major upgrade and this DigiStream should help us be more competitive in the marketplace.

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

Thank you, Bob. Good morning, everyone. During the third quarter of 2007, we generated $174 million in revenues, a 58% increase from the third quarter of 2006. This has been the best revenue generating quarter for ION in at least the past 10 years. For the first nine months of 2007, revenues increased 49% to $504 million as compared to $337 million for the first nine months of the prior year. Our gross margin in the third quarter of 2007 was essentially flat with 2006 at 30%.

For the first nine months, gross margin was 27%, four points lower than the same period last year as a result of the overall mix of business and the inclusion of three unique low margin transactions we spoke to in the prior quarter's call. The sale of the first FireFly system and on going strategic risk sharing multiclient project and the sale of a VSO replacement cable on the original VSO system. In aggregate, these three items totaled $36 million revenue with an average gross margin of 8%. They account for approximately two of the four margin point decrease.

In the land imaging systems segment revenues increased 72% in the third quarter to $79 million compared to $46 million in the third quarter of last year. For the first nine months of 2007, revenues increased 86% to $243 million from $131 million in the same period of 2006. During the remaining five of the 14 land acquisitions systems ordered from [ONGC] and continued to experience strong demand for Vibroseis trucks.

Even though Vibroseis truck sales have a negative impact on our consolidated gross margin rate it is a very good business from an operating margin perspective, as it requires little R&D and overall SG&A to support it. Gross margin in the land group for the third quarter was 17% as compared to 18% in the third quarter of 2006. For the first nine months gross margin was 17% compared to 19% in the first nine months of the prior year.

We are clearly not satisfied with current margins in our land group and are continuing to focus our attention on the goal of getting them more in line with our other higher margin businesses.

Green imaging systems revenues continued to be strong with $37 million in the third quarter, a 49% increase over the $25 million in revenues in the third quarter of 2006. This was driven primarily by the increased demand for our positioning equipment and some additional VSO equipment sales in the quarter to RXT.

In the first nine months of 2007, marine revenues increased 30% to $117 million from $90 million for the first nine months of 2006. The marine imaging systems business remains very robust due to continued strength in the worldwide marine market, a strong contribution from the company's DigiCOURSE positioning and source products and the commercialization of DigiFIN during the third quarter of 2007. Gross margin in the marine group continued to strength to 42% from 38% for both the third quarter and the full year as compared to the similar years in 2006, a reflection of strong DigiCOURSE positioning sales and an improvement in margins on VSO sales.

Our Concept Systems data management solutions segment revenue increased 64% to $11 million in the third quarter of 2007, from $7 million in the third quarter of 2006. Year-to-date, our data management solutions revenues increased 67% to $28 million from $17 million in the first nine months of 2006. The increase reflects strong industry demand for marine seismic work and for the company's GATOR and newly launched ORCA product line towed streamer navigation and data applications, which Bob mentioned earlier.

In our ION solutions division net revenues increased 44% to $47 million in the third quarter of 2007. For the first nine months of 2007, revenues increased 16% to $116 million, driven by strong data processing and multiclient revenues which more than offset a large data library sale in the third quarter of 2006.

Gross margin in ION solutions declined to 33% in the third quarter of this year compared to 36% in last year's third quarter. For the first nine months of 2007, gross margin declined to 26% from 37% in the same period of 2006.

The decline in gross margin is attributable to a large higher-margin data library sale in the second quarter of 2006, and a low-margin yet strategic multiclient survey in 2007, which we spoke of earlier. This decrease was partially offset by strong performance in our proprietary data processing business.

Overall, consolidated operating expenses for the third quarter and the first nine month of 2007 as a percentage of revenue declined to 20% from 24%. We continue to invest heavily in R&D, but continue to see the benefits of leveraging the SG&A part of our infrastructure as we grow the top line.

We invested approximately $12 million in R&D in the third quarter of 2007 and project an investment in excess of $45 million in R&D during the full year, as we continue to invest heavily in the next generation of our seismic acquisition products and services, such as FireFly, our next-generation towed streamer DigiStream and the next generation of VectorSeis [ocean] in collaboration with our partner RXT.

We incurred an income tax expense of approximately $1.3 million in the third quarter of 2007 and $4.7 million for the first nine months of 2007. The income tax expense represents an effective tax rate of 16% for the first nine months of 2007 as compared to 18% 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 $26 million from year end 2006, driven by the natural growth of the business and the associated bill for the fourth VSO system order to RXT which we plan to commence shipping in the fourth quarter.

Accounts receivable decreased $53 million from year end as collections focused improved DSO by 10 days.

CapEx excluding our investment in the multiclient data library in the first few months of 2007 was $7 million. Cash increased to $26 million at the end of the third quarter from $17 million at year end 2006, and at the end of the third quarter, we had no borrowings on our line of credit.

Based on our year-to-date results and our current pipeline of business we are reiterating the earnings guidance we provided in September of 2006, including the increased revenue guidance provided in August of 2007. We continue to expect 2007 consolidated revenues to be between $660 million 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 solutions segment.

Accordingly, we continue to anticipate 2007 earnings to be between $0.45 and $0.60 per diluted share. We anticipate a very strong fourth quarter, driven by the influence of natural budgeting cycles on our data library business and the delivery of the fourth VSO system to RXT. And with that I'll turn the call back over to Bob.

Thanks, Brian. I'd like to take a few minutes to reflect on some overall business trends and how they're likely to impact on ION. When we built our strategic plan back in 2003, we assumed that there would be continued tightness in all gas supply compared to demand which would cause higher prices and increased oil field activity to follow. With oil prices approaching a $100 million -- or $100 a barrel we realize we were correct in direction but we underestimated the risk premium that will be paid do to access problems in various parts of the world.

We view the access problem as two-fold, with the first being geopolitical where NOCs, or national oil companies, have a growing advantage over the western IOCs, or international oil companies, due to political consideration and political instability causing disruption concerns in places like Nigeria and Iraq.

The second problem is related to environmental issues particularly in North America, but spreading to many parts of the world where the green movement is keeping oil companies out of some of the most promising exploration opportunities. Our view is that the IOCs will be increasingly driven to get more out of what they have and to go back into places such as North America where they can still gain access. The resulting technology cycle will be required to get more out of existing fields by drilling deeper and by having a more detailed characterization of the producing reservoirs in order to bring out -- more out of them.

Also the field operations will need a smaller footprint will to be more environmentally friendly to help the access problem. These needs are driving a new technology cycle in geophysics in both land and marine and will continue to require the collection of new data and all of the related pre and post services such as planning, processing and interpretation. We believe that these large amounts of new data and the nature of these new data -- of these new measurements, such as higher resolution and recording the full wave field will ultimately drive the need for new data management, processing and interpretation infrastructures. This data explosion will likely be greater than when the industry went from 2D to 3D, and those of us who are in the technology business are experiencing significant opportunities.

We also believe that we are in a very long activity cycle for the oil field services industry that will be characterized by two phases. I call the first phase a commodity face, where all boats rise due to strong activity in escalating prices, but new capacity coming into the market will likely deflate prices, and that will make the end -- that will mark the end of the easy money for the folks in more of the commodity end of the business.

The second phase of the long cycle system is the technology phase. I believe that the technology will be required to make oil companies more productive by reducing dry holes, getting more oil and gas out of existing reservoirs and allowing oil companies to operate in more difficult and environmentally sensitive areas. The most prized technology must also bring greater productivity to build operations, reduce costs and open up the more marginal products -- projects in today's current high oil field service crisis.

Our strategy has been to position ourselves in the technology phase with strong investments in R&D in programs such as VectorSeis for full wave recording, VectorSeis ocean, DigiFIN and our recent joint ventures in 4D monitoring with Statoil hydro and FireFly. We are starting to see sign posts that we are in the late stages of the commodity phase of the business and the beginning phase of the technology portion of the long cycle.

We look forward to 2008 and beyond as we are positioned for leadership in that phase of the cycle due to our aggressive R&D and marketing investments over the last couple of years. We will speak more to this in our 2008 guidance call that will be held in the second half of December. I'm optimistic that we will entering 2008 in a strong position due to our investment in leading-edge technology that will help oil companies and exploration and exploitation and our contractors in creating more productive field operations.

With that I will turn the call over to the operator for questions.

Thank you, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of James West. Please go ahead. Please ask one question and one follow-up. Re-queue for additional questions.

Thanks, and good morning, Bob, and good morning, Brian.

Hi, James.

I first had a question on the cableless land technology, and, Bob, you laid out a lot of key points on why the FireFly system is further along in the technology process here, and I tend to agree that competition here will be a good thing and will help to defuse the technology more rapidly. I guess the question I had is what do you think your lead time is now vis--vis your competitors?

I think it's at least two years. And you have to look at it in a system perspective. It's not to say -- I think people can confuse on when someone is going to have some commercialization available versus having an offering that really hits the mark. So I can't -- I can't guess when someone may have the ability to pass some technology on the ground, but I would say the fundamental lead time is looking at that whole system and the capability for better image, more productive systems and scalable to hire channel count, and I think in that context I still feel comfortable we have a two year lead.

And with the sensor technology, do you own the IP there or is that owned by your manufacturer, the MEMS Sensors?

No. We own the technology in the sense that we have a license for this vertical. You're talking about the MEMS technology itself?

Right.

And actually the MEMS device is only one small part of the sensor. If you go beyond that it's a structure of the recording system, it's the ASIC, it's the whole integrated system and there's IP all through that. But even the MEMS themselves, through the agreement, we're the only ones that sell that technology into this vertical.

Okay. Understand. Then switching gears here, in the marine business, your agreement with RXT, I know you're going to deliver the fourth VSO system this current quarter. You also have an agreement for a minimum purchase requirement, I guess, over the next four years. When should we expect to see orders flow through for that new agreement?

Well, there's two parts of the agreement. One is the royalty component itself. And that starts in January of 2008. And then the pace of which, the agreement has some specifics on rate of purchase and there's about one system a year, I think, sort of a minimum purchase built into that.

Okay. And then just one last question. With the commercialization on the DigiFIN product now, I think this is the only product lateral positioning device that is competitive with the Q marine system. Oil companies today at least to my knowledge haven't been specking a lateral position in a lot of the seismic tenders that have been outstanding. Do you think that that changes here and forces some additional adoption by some of your customers?

I think two things are going on. One is they will be specking in tighter, sort of tighter recording requirements. If you go back to why you have DigiFIN it does have to do with having tighter streamer, higher density shooting. So that's where they'll be aiming I think their specs. And of course that drives the technology. Whether or not they'll spec exactly DigiFIN I'm not sure.

The other thing I think is important is that DigiFIN is one element of our offering. ORCA is also very important to this whole scheme. ORCA allows people to really manage these very large complex projects. So we're seeing ORCA being placed on several vessels. So as we integrate DigiFIN and Digibird and eventually DigiStream into it we'll have a more and more integrated system that will be even more precise.

Okay. Excellent. Thanks, Bob.

Yes.

Thank you. Our next question comes from the line of Terese Fabian with Sidoti & Company. Please go ahead.

Hi. I have a follow-up sort of on the marine seismic. There's good visibility on the new vessels -- marine seismic vessels coming online. Can you talk a little bit about how you price your various products, what kind -- without getting into competitive deals, but how you price them, what kind of revenue flow you'll be seeing? Do you have much visibility in your sales on this?

We look at -- the way we sort of build our models for the business, is obviously we look at the vessels coming on as everyone does. We've been surprised at -- I guess if I compared a year ago what we thought that market is even stronger than we expected, and then we -- our products are pretty much set. The prices are already out there in the market, and so it's really looking at how many streamers, how big the vessel, how many positioning devices and then how many of them we think will be at the very high end and how many of them will be in the middle tier. That's how we do it.

Beyond that, I really can't get into specific pricing or specific forecasts looking out into next year because we haven't given that information. We'll probably touch on that briefly in our guidance call in December. We'll give some information.

Okay. And then just a follow-up still in the marine field, but in terms of the data library sales. Some of the other seismic companies reported lower data library sales in the third quarter, but you seemed to have had a good uptake there. Which areas did you see interest in, in terms of regions?

One thing I can say is that the companies that were U.S. centric, which we still have a significant part of operating in the U.S., but U.S. centric was impact by the very large lease sales. A lot of the oil companies were just timed out doing -- preparing for the lease sale and we all felt -- we ourselves got some feedback from some companies where they had interest, but just couldn't spend the time to really assess. I think the companies that have a much bigger portfolio than us, particularly ones in North America probably felt than more us than us and I'm just speculating on what was causing that.

Our -- we're sort of a niche player in this world, if you look at the total spend of multicomponent, not multicomponent, but data libraries. We're relatively small in total, and so we're really more affected by just specifically where our library sales are, and since we're in spans, spans which are regional surveys that help people with regional geology and are very much in some emerging markets. We've been driven by those interests. So I would say we're probably not going to follow the average or the aggregate of the total market just because we're sort of a niche player. And it is going to be really more or less ours may be down when theirs are up and ours are up when theirs are down. It's really more influenced by our specific case.

Okay. Great. I'll queue for my next question. Thank you.

Thank you. Our next question comes from the line of Michael Marino with Johnson Rice & Company. Please go ahead.

Good morning, Bob. Good morning, Brian.

Good morning.

I was wondering if you could give us an update on the JV you have with hydro and for the permanent seabed monitoring system and kind of the reminders again of the development time line and when you expect to have a commercial product.

Just to remind people, what that -- what that venture is, there's really three companies involved. There's now Statoil [Hydro] I believe is the way they have named themselves and their venture fund is in it. What they're bringing to the party is some money and even more importantly, they'll be bringing an asset into the venture for our first implementation. There's another company that's a technology company that has some interest and some expertise that's in it with some capital, and obviously ION. And our main investment is intellectual property and capital, not really capital, but our intellectual property and capital kind in the sense of people supporting the project.

We're in the -- I would say the -- not the early stages, we had already [specked] out a permanent system and had actually had some engineering work done on it, but we had slowed that project down, really realizing until we had a customer and oil company, we just didn't want to build this thing out on spec.

So we have now been firing that back up, we'll be back into entering '08 with the thing fully funded through the partners, and our oil company partner is still promising an asset. And I think they're going through their portfolio to figure out which one. We'll probably update more on this in December, because the plan are really just now getting a little more tightened up, and again, we'll give more information out when we have it in a little more detail then.

Okay. Well, I'll wait for more in December.

Okay.

Brian, as a quick follow-up, what should we assume for tax rate in Q4?

Not speaking to give you guidance on Q4, which I wouldn't do, but I think, in general, our tax rates have been fairly consistent on an almost an LTM basis. So I would -- and I'd just like at our tax rate from an LTM perspective.

Okay. Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions (OPERATOR INSTRUCTIONS). Our next question comes from the line of George Gaspar with Robert W. Baird. Please go ahead.

Good morning. A couple of questions quick. One is, can you site any areas of product sales, weakness in your whole overview of product development?

Not really. I think on a broad category basis we see strength in every category. The one that has been stronger than we had planned for, if I look back at this time last year, one would be we planned for a strong marine and it's turned out to be even stronger than we expected. I think everyone knows that story. And then, on the land side, our buy business has been stronger than we expected, which is just a reflection, I think, of the global activity. And that continues to be strong, but all of our lines have been relatively strong.

Okay. And then a question on the seismic vessel market. Can you sum up what you see as the number of vessels being built and what the number of vessels you would hope to sell DigiFIN equipment into?

We'll speak to that in our December call when we look forward beyond the year.

And then just quick on your development expenses on FireFly going forward for this past quarter and the fourth quarter, up. Can you sum up what you think you'll be spending on FireFly past the initial two tests that were accomplished in the field with BP and Apache.

Yes. Actually we really don't give forward-looking guidance on those metrics.

Can you identify what it cost you in the third quarter?

Well, we've identified our total R&D budget at $12 million for the third quarter. We specifically don't break out the individual components of that R&D.

Okay. Thank you.

Thank you. Our next question comes from the line of Mark [Delavino] with River Asset Management. Please go ahead.

Hi. Thanks. I wanted to get a better sense for your -- the visibility that you have heading into 2008. I know you're not going to be giving guidance until December, but I was curious about what you might have in backlog now as you look into 2008, or how -- what kind of large contracts that are out there that you've already signed that give you -- can kind of give us some help, I know the street's out there with 16% sales and some pretty significant margin gains next year.

Yes, Mark. It's Brian. You're actually stealing our thunder for our December call.

I know. I'm just trying to get a sense for the project and how much of what is -- what you might hope for in 2008 is already kind of in backlog or in contracts with some of these large deals.

Yes. Mark, we have a fairly complex business. It's obviously a portfolio of products. Each of those products behaves differently. When we get into dialogue around what backlog looks like, we'd almost have to get into a detailed conversation by product line within the portfolio to make it meaningful. We'll do a little bit of that on the guidance call, but we couldn't even begin to broach that subject today.

Thank you. Our next question comes from the line of Terese Fabian with Sidoti and Company. Please go ahead.

Hi. I have a question of consolidation and acquisitions going on within the seismic industry. A number of companies have bought a portion of an interest or companies in the electromagnetic technologies. You have paid down some of your debt. You haven't drawn on your credit facility. Are you looking at anything, or would you be?

We don't really speculate on what we may be looking at or not looking at. Obviously, we're constantly -- we're in the market and we're constantly looking at technology and different things, but we just don't really comment on -- that would just be us speculating.

I could probably add one thing to that, Terese. Our position on investments or acquisitions hasn't changed. We think we've pretty much assembled the building blocks to execute our currently strategy. If there's something there that was strategic and priced right we may look at it. But in general we're not necessarily out there hunting for something because we feel the need to fill an opening in our portfolio.

Okay. That's helpful. And how does the electromagnetic acquisition technologies fit into your seismic, in terms of processing, in terms of the type of improvement in profiling of underground reservoirs?

Well, it's another measurement, and in our industry anytime you have an additional measurement that's a good [day]. The problems that we're trying to solve are so complex that you almost always have more variables than you have knowns. I think, in the electromagnetic side, we don't at this moment see much of an equipment business, but we do see that we have to start accommodating the integration of the electromagnetic measurement into the seismic.

I don't believe that you're going to see -- I've heard people talk about it replacing seismic. I don't believe that at all. In fact, I would say that typically what happens when you get another measurement, you end up with even more questions, and so integrating those measurements in -- and we'll track that and do what we need to do, algorithmically to accommodate that. But beyond that it's an exciting technology. I think it's going to -- it has its place. There's a lot of interest, as everyone can see, and we'll, as it unfolds, we'll see what we need to do to make sure that we can take advantage of it.

Okay. I've heard of it referred to as sort of a complementary, that it adds more to the picture, but in terms of processing, data processing something that you're working on or something that you have now? I mean, where do you stand?

Well, there's not enough volume. When you look at it today, even though there's a lot of -- a lot of -- I won't use the word hype, because that's not really the right expression of it. There's just a lot of interest around it. The volume of the number of jobs that has electromagnetics in it is quite small. So we're not really seeing that many opportunities to bring the measurement into the day to day processing. We do have our people looking at it. We understand the technology reasonably well. I'd say it's one that we'll address as we need to.

Okay. And just very quick last one. In terms of your data processing head count, I mean, are you increasing the numbers of people? Are you building up that segment?

Yes, we are, and actually, we've been pleasantly -- we've been pleased, one, that in a very competitive environment, we've managed to keep most of our employees. We have a very low attrition rate which I think speaks to the technology we have, and the company that we've built. Secondly, we've been successful in recruiting new people in, including people right out of the universities where we have recruiting programs and training programs.

We think it's important to build up a base of people that are younger, and we're also having good success in the international markets for places like our London center. And we'll continue to do that. That's a business -- to scale the business you have got to have people in addition to finding more productive ways with computing technology to get more bang for your buck out of the people.

How many international locations do you have now?

We have about 10, but the major centers we have is North America, here in Houston, Denver. We have a center in Canada, and then we have London, but then out of that we now are in Nigeria and we're just expanding Trinidad. So we're expanding around the world. It's a little -- the way it works today, because the -- of the communication technology and virtual tools, more and more you move data around centers and rather than moving people and even the need to open complete centers. So it's a very different world from a computing point of view than we had, say, 10 years ago, where if you wanted to be someplace you absolutely had to have an infrastructure -- a full infrastructure in that place.

Great. Thank you.

Thank you. Our next question comes from the line of Nathaniel [Pocifer] with Pocifer & Associates. Please go ahead.

Thank you, Bob. Good morning. I'm very impressed with the attention paid to technology, and in particular your reference to the late-phase of ones and the emerges phase two in your work. To this end, what is your head count in research and development now, and where do you see that going in a couple of years? Not necessarily as numbers, but in percent of total employment?

I would rather -- what I would say is that we have given people, in terms of our guidance over five-year models is sort of our spending as a percent of revenue, and we've been saying that we'll probably spend 6% to 7% of our revenue just from a modeling point of view. And obviously, if you imagine the revenue increasing -- and we put out our last model. We sort of showed revenues almost doubling again over the next five years. And so you can sort of, with that -- if you're sort of keeping the revenue R&D spend about flat in percent, you can imagine it -- in head count pretty much what you spend on R&D. So you can pretty much imagine that you're going to see a pretty substantial increase in head count over that period.

Now we don't have a -- we have a very project-oriented way of running R&D, and so we won't spend -- we are not going to spend it if we don't have a project to put this money on. But we believe we're in a technology business. It's a quickly evolving technology business. We think we're still in the early cycle of a major wave. And so we're going to continue to invest. We think it's basically who we are.

Well, you've outlined a number of very interesting fields and the possibility of bringing electromagnetic technology work in a greater way. Certainly we'll tax your research people. But in this regard, another question. Has any university or nonpetroleum client suggested testing the applicability of ION's technology in the search for water?

No, well -- I don't -- it's obviously not a focus area of ours. We've had people visit with us about the application of water, and I can say that we don't always know exactly what people are doing with our technology out there. And so it is seismic, acoustics, and you're describing -- you're describing the subsurface. So it's certainly not out of the realm, but I'm not aware -- I'm not aware of anything commercially in that area from our perspective.

Thank you. Good quarter.

Yes.

Thank you. Our next question is a follow-up question from the line of George Gaspar with Robert W. Baird. Please go ahead.

Yes. Thank you. First of all, on a follow-up on the personnel questions and your comments, can you update on key management changes, moves that you've made in the past few months, and where you're concentrating your employment enhancement at this time, division to division?

Most of our employee movement have really been, like I say, hiring into the technical groups, hiring into our processing groups. On a management -- on a management sense, probably the only significant changes we've made, we have -- as you know, we've been over time, consolidating -- when we got here, we had seven or eight little companies, and we pretty much now have a marine group, and a land group, and then our solutions group. We have a fellow by the name of Jim Hollis who's running our solution group which has your processing data management and that in it. Today we still have the land division, marine division. We have announced that we are -- our intent to put a person over that that will be sort of Jim's counterpart.

And then from a business development, it's a global business. We've been very aggressive and will continue in building out a global infrastructure. If you're going to sell in China, you have got to have presence in China. You've got to have senior people there. If you're going to sell in Russia, you have to have an office in Russia and people there. And so a lot of our work has been if you want to think as a globalization of our business and making sure we have strong people in those parts of the world.

We try to -- we use the X'd-out model to jump-start but our goal is to have the face of the nation we operate in. So in China, our goal would be ultimately we would have Chinese managers, which, in fact, we do. And on and on. So that's pretty much -- that's pretty much what's going on. No other real big changes besides your normal day to day stuff that you'd be doing to grow a business.

Okay. And then also, on the DigiFIN area, can you outline what an average deployment might go for on a revenue basis as you're looking forward? I know that there's probably a broad range of potential, depending upon --

Yes. One, I really don't want to get -- it gets very close into pricing, and second it's hard to speculate, because it depends on the number of streamers, the length of streamers, size of boat. There's just -- there's so many variables on that. We'll try -- I think probably in our December call, we'll try to get some sense -- people how to think about a marine vessel, and we've given some information there, but it's pretty difficult to give you specifics on one specific product.

Okay. All right. Thank you.

Thank you. There are no further questions in the queue. I'll turn it back to management for closing remarks.

Okay. Well, thank you for taking the time to attend the conference call, and I look forward to talking to you and I guess the next one will be in the latter part of December. We'll be announcing that on our guidance -- 2008 guidance. Thank you.

Thank you. Ladies and gentlemen, that does concluding today's ION Geophysical conference call. Thank you for your participation. You may now disconnect.