Ion Geophysical Corporation (IO) 2007 Q4 法說會逐字稿

Welcome to the ION Geophysical's fourth quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, February 21st, 2008.

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

Thank you, Mitch, and good morning everyone, and welcome to the ION Geophysical Corporation's fourth quarter earnings conference call. We appreciate your joining us today. Your hosts today 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 yours yesterday, please call us and provide us with that information. That number is 713-529-6600. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the company's website at www.IONGeo.com, or via a recorded instant replay until March 6th. The information was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, February 21, 2008, 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 start this 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'd like to turn the call over now to Bob Peebler.

Good morning, everyone, and thank you for joining us. Before Brian gets into the details of our financial results, I would like to speak to both the highlights of the quarter and the year in general.

We had a record quarter for the company and every business segment had solid results, including several strategic successes. Contrasted to many oilfield service companies who are experiencing earnings de-acceleration due to margin and cost pressures, we are enjoying an acceleration of our earnings and profitability. This is mainly due to our strong investment in R&D and international infrastructure over the last five years, which is now starting to bear fruit. We expect to continue leveraging these investments into 2008 and beyond.

There were several important events in Q4 that are notable for their short-term results, as well as their strategic implications for ION. First, we shipped the fourth VSO system on schedule to our partner RXT. This is important, because it reflects the increasing demand for VectorSeis Ocean. This demand is further driven by the growing industry recognition of VectorSeis' high quality measurements, both on the seabed and in the productivity of the system .

Additionally, we are delighted to see RXT starting to be awarded large-scale programs by super majors, such as the multiyear program they were recently awarded off the shore of Nigeria. ION was also awarded the full length processing for this job, which is another example of our solutions approach involving the complete value chain.

As a reminder, starting January 2008, we will get approximately a 2.1% royalty on all RXT revenues that are generated with our VSO technology, which again reinforces the importance of RXT's commercial success and further aligns our two companies.

Another very strategic event in the latter part of the fourth quarter was the sale of a 10,000 station full-wave Scorpion system to Sinopec. This sale was driven by Sinopec's recent drilling successes. Sinopec successfully drilled into deep pipe fractured gas sands based upon full-wave data acquired two years ago by BGP using ION System Four VectorSeis system. Our GXT division processed the data and our Reservoir Group have been working in collaboration with Sinopec over the last year to interpret the data and help them pick the best prospects. The recent successes on the two wells have resulted in Sinopec increasing their exploration program in the same basin.

As a result, they purchased their own full-wave acquisition system that will be filtered by one of their acquisition companies. We will continue processing and collaborating through 2008, with the services contract in our Reservoir Group. This is the best example we have to date that validates our solution strategy, where we help oil companies solve their most critical reservoir challenges by using all relevant products and services across our segments.

Another indication of the market strength for high-end solutions is the sale of the single largest positioning system order to PGS in the fourth quarter, which marks a continued interest and acceptance of DigiFIN. The industry's desperation to find additional large reserves is continuing to drive exploration spending in the global market, and this is especially being seen in the growing interest of high-end imaging such as wide azimuth for subsurface salt plays.

I would now like to highlight what I believe are some of our most significant accomplishments in the year 2007.

In the Marine Group, including concept systems, we had an exceptional year. Some of the growth was driven by the rapidly growing Marine market, but we also had growth directly related to the successful launch of our DigiFIN product line. We believe that DigiFIN, when combined with DigiBIRD and Orca, will have technical leadership in marine positioning technology.

Speaking of Orca, we are now deployed on 12 vessels, which is a great start for our new software product line.

Our land full-wave business using our latest VectorSeis sensor technology made significant gains this year, including the 22,000 stations sold to the India National Oil Company, ONGC, and the most recent 10,000 station sold to Sinopec for use in domestic China. This was the first system sale for ION at Sinopec, which has historically been the competitor's stronghold.

We have also seen increasing interest in full-wave in North America, Russia and the Middle East, which bodes well for the future of this technology.

We completed the BP and Apache field trials for FireFly last spring, and have since been incorporating changes that resulted from our field trial learning into version 2.0, which is still on track to be fully commercial by the end of Q2. The main short-term goal is to get the system into acceptance testing, mainly during the next two to three months, and educate and validate to our potential customers that version 2.0 will work as specified.

In the Solutions area, we had a strong processing to multi-client year. We believe we have clear leadership in the emerging reverse time migration business and also in full-wave processing and interpretation on land. The two exceptional 2007 achievements for our multi-client business were as follows. First, we pioneered the first multi-client ever in India, with IndiaSpan and achieved a tremendous commercial success. Second, for ArcticSPAN, we were also pioneers to the area and our work has been well received.

To demonstrate the interest in the Arctic, the recent lease sale on the Beaufort Sea, significantly exceeded initial expectations and ended at $2.6 billion. This shows continued strong interest in the Arctic and we are already early technology players in the area.

I would also like to mention that the rebanding of the company from IO to ION has been extremely successful. The change has been well received by both our customers and our employees. The new name clearly captures the fact that we are a much different company from when we started down a new strategic path back in 2003.

One final point before I turn the call over to Brian. As we mentioned in our earnings release, we are opening an international center in Dubai. We have learned over the last couple of years that the center of gravity for oil and gas business is shifting to Russia, Africa and the Middle and Far East. Dubai is geographically better positioned to ensure that we are close to our customers in the most active parts of the world.

We will continue to expand our local operations in all of those regions, and over time will establish Dubai as our international headquarters for that part of the world. As Brian will cover, associated with this change will be a more effective tax structure that better reflects our global operations and assures that we remain financially competitive with other international entities.

With that, I'll turn the call over to

Thank you, Bob. Good morning, everyone. As Bob mentioned, we generated another record quarter in the fourth quarter of 2007, with revenues of $209 million, a 26% increase over the same period in 2006. For the full year 2007, revenues totaled $713 million, a 42% increase from 2006 revenues of $504 million.

Our gross margin in the fourth quarter of 2007 increased 2 points to 32% compared to 30% in 2006. This increase is the result of product mix across all of our lines, including increased system sales in land imaging systems, increased VSO sales related to our fourth VSO system delivery in marine imaging systems, and increased multi-client sales and data processing revenues in our ION Solutions division.

In the land imaging systems segment, revenues increased 10% in the fourth quarter to $82 million, as compared to $75 million in the fourth quarter of last year. For 2007, revenues increased 58% to $325 million from $206 million in 2006. Excluding the sale of the first FireFly system in the first quarter of 2007, approximately half of our growth came from Scorpion VectorSeis system sales, demonstrating the continued market acceptance of our full-wave technology.

The other half came from our lower-margin vibroseis trucks. As I mentioned before, although the margins on these truck sales have a negative impact on consolidated gross margins, this product is strong from an operating margin perspective, because it requires little R&D and overall SG&A to support it.

Gross margins in our land business slightly deteriorated for 2007 to 18%, compared to 19% in 2006, primarily as a result of the first FireFly system sale in the first quarter, which had limited margin, as discussed in that quarter's earnings call. Operating income for the land imaging systems segment rose 113% in 2007, to $28.7 million.

Marine imaging systems revenues finished the year with its strongest quarter at approximately $61 million, which represented a 60% increase over the $38 million in revenues in the fourth quarter of 2006. For 2007, marine revenues increased 39% to $178 million from $128 million for 2006.

As seen throughout the year, the increased demand for our positioning systems, which includes the commercialization of DigiFIN, continues to drive the record revenue growth. Gross margin in the marine group was 31% in the fourth quarter of 2007, as compared to 34% in the fourth quarter of 2006. The change in margin rate is primarily due to product mix and some foreign currency exchange effects related to the fourth VSO system delivered to RXT at the end of the quarter.

For 2007, gross margin was 38% compared to 37% in 2006, a reflection of strong DigiCOURSE positioning sales and an improvement in margins on increased VSO sales. Operating income in the marine imaging systems segment rose 48% in 2007, to $44.7 million.

Our Concept Systems Data Management Solutions segment revenues increased 49% to $9.6 million in the fourth quarter of 2007, from $6.4 million in the fourth quarter of 2006. For the full year, Data Management Solutions revenues increased 62% to $38 million from $23 million in 2006. The increase reflects strong industry demand for marine seismic work and for our GATOR and newly launched Orca product line towed streamer navigation and data management applications. Operating income in the Data Management Solutions segment rose 132% in 2007, to $17.3 million.

In our ION Solutions division, net revenues increased 21% to $57 million in the fourth quarter of 2007, primarily driven by the typical year-end sales activity in multi-client data library sales. For 2007, ION Solutions revenues increased 18% to $173 million from $147 million in 2006. The growth was driven by strong results from both data processing and multi-client revenues. Operating income for the segment in 2007 totaled $21.6 million.

While the fourth quarter on a consolidated basis saw stronger margins, we still showed full-year margin deterioration due to one-time nonrecurring items. For 2007, full-year gross margin of 28% showed a 3 point decrease from 2006's 31%. Our 2007 results include three unique one-time low-margin transactions we spoke to on prior calls, 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 $37 million in revenue with an average gross margin of 8%, and account for approximately 1 of the 3-point decrease in rate year-over-year. The remaining difference is attributable to overall business mix, including the impact of lower than average margins related to the ONGC sale and a large one-time higher margin multi-client seismic library sale in the second quarter of 2006.

Overall, consolidated operating expenses for the fourth quarter of 2007, as a percentage of revenue, declined to 18% from 19% in the fourth quarter of 2006. For 2007, consolidated operating expenses were 20% of revenue, down from 23% for 2006. We continue to invest heavily in R&D, with 2007 running consistent with 2006 levels at 6.5% of revenues, but continue to see benefits as we leverage the SG&A part of our infrastructure while we grow the top-line.

We incurred an income tax expense of approximately $8.2 million in the fourth quarter of 2007 and $12.8 million for the full year. The income tax expense represents an effective tax rate of 23.1% for 2007, as compared to 15% in 2006. Our 2007 rate includes a one-time charge related to the consolidation of international operations in Dubai.

We are expanding our footprint in Dubai, which includes establishing an international headquarters for our international sales force and sales generation, and expanding warehouse and manufacturing space to better support our international customers. It is expected this change will result in significant operational and tax efficiencies in future years.

As a result of this reorganization, the rights to sell our products internationally were transferred to our international legal entity, resulting in approximately $9 million of taxable gain being reported in our consolidated US financial statements and a corresponding book tax of $3.6 million or approximately $0.04 on a diluted basis.

On a cash tax basis, we will be offsetting the expense with an NOL. As this is rather complex, rather than derail this earnings call, I would encourage you to call me directly, after the call, if you have any further questions.

Moving to net income, we finished with record fourth quarter 2007 earnings of $17.5 million of net income applicable to common shares, which is a 34% increase over the $13 million earned in the fourth quarter of 2006. Additionally, for full-year 2007, our net income increased 50% to $40 million over the $27 million earned in 2006.

For the fourth quarter of 2007, our diluted EPS was $0.18 compared to $0.15, an increase of 20%. Our diluted EPS for 2007 was $0.45, which was within our discussed 2007 range and represents a 36% increase over last year's $0.33. Our 2007 EPS was negatively impacted by several one-time charges discussed previously, including the income tax adjustment on the conversion of our convertible debt. Excluding these two events, our diluted EPS was $0.52.

Turning to the balance sheet, inventories rose by $13 million and Accounts Receivable by $20 million from year-end 2006. In general, we are very pleased with the modest usage of working capital in these two areas, as compared to the 42% revenue growth we experienced. This reflects more effective inventory management and credit and collections processes implemented in 2007.

CapEx, excluding the investment in our multi-client library for 2007, was $11 million. Full-year investment in the multi-client library totaled $64 million, which was fully underwritten by the program participants. Cash increased to $36 million at the end of the fourth quarter, from $17 million at year-end 2006.

Additionally, like last year, we will again have no material weaknesses related to our internal control over financial reportings. After the full remediation of all material weaknesses in 2006, no other material issues or concerns have arisen this year, giving rise to continued improvement and success with our SOx implementation and control processes.

For 2008, we are reiterating the earnings guidance we provided last December. We continue to expect 2008 consolidated revenues to be between $780 and $830 million. Accordingly, we anticipate 2008 earnings to be between $0.70 and $0.85 per diluted share.

Similar to the past two years, we anticipate 2008 to be backend loaded. This is mainly due to the natural budget planning cycle of our larger contractor customers who formulate capital spending plans during the first quarter each year, as well as the anticipated timing of the commercialization of FireFly and DigiSTREAMER product lines. As a result, we anticipated that the revenue and earnings cycle of 2008 will be very similar to that of 2007, with the first quarter being the softest.

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

Thanks, Brian. I would now like to make a few comments on the prospects for our business in 2008 and beyond, and how I believe we are well positioned for continuing strong growth and increasing profitability over the next several years. During our December guidance call, I spoke to my belief that we're in a long activity up-cycle for oilfield services that could extend well into the next decade and is made up of two phases.

The first phase is a commodity phase where all boats rise. This is followed by the technology phase. In this phase, companies that offer differentiated capabilities through their technology and services to better find and manage oil and gas fields, continue to show revenue and earnings growth. Meanwhile, the more commodity focused businesses will start having margin and earnings issues related to competition from increased capacity. I believe we are in the latter stage of the first phase and entering the second phase, and ION is well positioned for phase two.

To support my position, I would like to first speak to why I believe we're in a long activity cycle. In Saturday's Wall Street Journal, there was an article on Exxon. The article starts out by stating that Exxon's success in finding new oil and gas is slipping. In fact, Exxon was less successful in 2007 than prior years in finding new fossil fuel. Exxon said its 101% reserve replacement was the company's lowest in 14 years. An Exxon Senior Vice President was quoted as saying that much of the remaining hydrocarbons is found in remote, complex geological formations and under harsh conditions.

This is not only a common theme for the large IOCs like Exxon and BP, but also the national oil companies have similar technical challenges. For example, Sinopec is aggressively pursuing gas for the domestic China market by drilling into deep and very complex tight gas sands, demonstrating that the larger oil and gas reserves are locked in more complex areas.

Second example is in the Middle East, where I just returned from an ION sponsored technical workshop with participants from many of the Middle East NOCs. One interesting data point was the rapid acceleration of channel count over the last few years from an average of 40-fold, fold being a measure of resolution, to an average fold of 1,000 or an increase of 25X.

Investment in much higher resolution is driven by the shift in focus from finding the simple large structures in the earlier days, to better defining the reservoir at a more detailed level for exploitation activities in order to extract more fossil fuel out of existing structures.

Assuming that developing countries such as China and India, continue driving demand and needed oil and gas remains more difficult to find and to extract than in the past, it's logical to conclude that we're in a long cycle that requires new technologies to meet the industry's production goals.

Related to the long cycle, Andrew Gould, CEO of Schlumberger, spoke about strong, long-term fundamentals and mentioned three phases. In his case, phase one took place between 2003 and 2005, absorbing idle capacity and increasing price in line with higher activity. Phase two occurred between 2005 and 2007, and generated even higher prices fueled by investment in people, equipment and facilities. And he says we're now entering phase three, which is 2008 and beyond, which is characterized by high activity without the pricing power.

In SLB's latest earnings release, he stated that technology that assists our customers in mitigating risk in exploration and improving operational efficiency, will remain at a premium. I concur with Andrew's analysis and I believe that those of us who are focused on higher end technology that reduces risk and makes operations more efficient can successfully continue to have both strong revenue and earnings growth.

In our case, I believe our strategy of focusing on the tough oil company problems and brining our toolkit of high technology services and systems to solve these problems efficiently is a winning strategy. We are in the early stages of the commercialization of full-wave on land via Scorpion, VectorSeis and FireFly, and on the seabed via VectorSeis Ocean. We also have DigiFIN, DigiSTREAMER and Orca serving the high-end towed streamer market. All are in the early adopter stages with plenty of growth ahead.

Our processing and reservoir services are also bringing new generation processing interpretation using new technologies such as reverse time migration and high density full-wave processing.

To demonstrate my point about moving from the commodity phase to the technology phase and ION's related market position, I would like to compare our revenue and EBITDA growth to the oilfield services company averages as presented by Lehman in a recent report.

The average for service companies revenue growth in 2006 was 35% and EBITDA of 60%. Those numbers declined to 20% for both revenue and EBITDA growth in 2007. In contrast, ION's revenue growth held steady at approximately 40-plus percent and EBITDA grew from 43 to 47% during the same period. I would attribute the difference mainly to being focused on the high-end geophysical market, being the technology leader in the complete value chain, and being focused on solving tough oil company imaging problems versus chasing the commodity end of the business.

Our five-year model suggests that we can continue to grow revenues in the double digits over the next several years and significantly increase profitability due to our technology advantages. I believe we are extremely well positioned with our strategy and our success is mainly a function of continued demand for finding and producing oil and gas and our own execution against our plans.

Finally, I'd like to thank all of our employees who have made possible the exciting accomplishments of 2007. To all of them that are listening in, thank you. With that, I'll turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS) James West.

Bob, on full-wave, I saw you sold an additional Scorpion, a full-wave Scorpion system during the quarter. What do you think the market share is now for the full-wave systems operating versus kind of 3D/2D systems out there?

I think it's still in probably the 5 to 6% range, something like that. We track that mainly tracking where there are full-wave surveys, so we look at the total activity. Now what's happened is that the rate of increase of full-wave has been fairly significant, but the whole market has been expanding rapidly also. And so, if you just look at the all-in dollars being spent in land imaging, there's still a lot of room -- it's still a very small part of the total.

Okay. And is your market share still in the 80% range of equipment sold?

Yes.

Okay. And if we look at the -- the way I've been looking at the full-wave market, you sell a system or two into a certain region, we shoot some surveys and then drill wells based on that and then it seems like the uptake really accelerates after that. So I know Canada was a very successful market. It's now some 40% full-wave. It sounds like China is really accelerating right now. Outside of those two regions, what should we be focused on as the next market or the next regional play for full-wave where you think the acceleration will occur?

Well, if you think of it as planting seeds, with the large number of digital systems that were sold into India, they are only now pretty much completing the commissioning of those systems, but they're not in operation yet. So, we're working very closely with ONGC in making sure that they get the value out of that. So, I think that it is just starting. I mean, they've purchased equipment, but they haven't really started collecting the data yet. So that's one that we're excited about. We think that that market, once they start getting experience with it, will grow.

Also, we've had several systems sold into Russia. And so, that one is interesting. And I think you're going to also see some interesting activity in the Middle East. So it's all the places where you've got complex land reservoirs.

Okay, that makes sense. And then on the cableless market, obviously as you commercialize your FireFly system, it's going to be probably the most robust system in the marketplace, but you do have kind of a lot of low technology competitors that are coming out with competing products. When you think about that market, as we look out the next couple of years, how do you think this market's going to fragment, the cableless market?

I mean there will be high quality large data set surveys then there will also be guys shooting in surveys just to get the operational efficiencies, but what do you think the percentage will be on the high end versus the low end?

That's a hard one. Probably in total earnings dollars, it'll be the highest at the higher end, just almost by definition. I think the main thing for people to think about is the trend to higher density shooting. We're seeing -- whether it's on cable systems or cableless systems, we're seeing a very strong trend, almost everywhere of increasing channel count. And we've been expecting that and it's starting to happen.

So, that's just telling you that people are -- they're not doing that because they're just doing it for fun. I'll just say it's taking that higher resolution to do the work. And if you start expanding channel count, then the cableless systems become more attractive, particularly in areas at first where you have difficult terrains and those kinds of things.

Over time, I've said over and over again, and when I look out several years from now, it's hard to imagine that you'll have a whole lot of cable activity, but it's going to be an evolution over time. But in the short time, I think we're going to get footholds in both the high end, high density shooting, full-wave shooting and we'll see footholds in the sort of moderate type shooting that's just mainly aimed at productivity or even in places where you just have real tough terrain. So, you can have all kinds of interesting segments and we'll report on those as the market unfolds.

Okay, great. And then just one last question from me. With the VSO systems you sold another system to -- delivered your system to RXT in the fourth quarter. I know they are committed to buying a certain amount of equipment in the next four years. Have you scheduled the delivery or have they made the order for the next system?

We're in the process right now of finalizing that, but there will be certainly a system in our plan and likely will be executed, probably delivered sometime in the second half.

Terese Fabian with Sidoti & Company.

I have a question on your decision to set up international headquarters or a center in Dubai. Can you explain what that means in terms of your operations, are you going to be staffing it at a cost and then also the other part of that equation is, what kind of sales effect do you think it will be having?

First to start, let me give you just an anecdotal story, I guess, to help you understand why this is important. When we travel out of Houston and go to, whether it's India or the Middle East or the Far East, all those places, you're looking at almost a round trip of 20-some hours in flight. In fact, it's typically 30 hours doorstep-to-doorstep.

When you're sitting in Dubai, you're in the Middle East, so you're two, three, four hours from all the places, you're six, eight hours from Russia, you're four hours from India. So, the center of gravity, and if you look at where the activity is, the center of gravity clearly is in those parts of the world.

Now, we still plan to have a very aggressive region by region infrastructure, so we're not going to consolidate everything in Dubai. We're still going to have strong presence in Moscow, China, all the local areas, but the handwriting on the wall for us is that we're going to have to have more and more people that are serving that part of the world, located closer to the market.

So, it will start out with ultimately you have to have some operating control. We already have some manufacturing facilities already in Dubai. We will likely expand on those. As you start personalizing, some of your R&D will likely do some technical things there. So I think it's a beachhead that we'll grow from and the market will help us understand over time what we have to have. We'll also have, I'm sure, some administrative things there related to those markets.

Okay. And is there a tax implication on that in terms of tax guidance for '08?

We have already contemplated that into our guidance for '08, Terese, and we'll continue to do that in future years as well.

(OPERATOR INSTRUCTIONS) Cindy Du with Jefferies & Company.

My question is on the marine seismic business. When I look at the number of existing and new 3D vessels that are coming out with 8-plus streamers, it looks like DigiFIN and DigiSTREAMER is marketable to probably half of those vessels, only because two of the larger marine contractors use their own proprietary equipment. First, do you agree with my estimate, and second, what kind of penetration rates are you expecting from those vessels that are currently baked into your '08 and five-year guidance?

I don't think we've given at the product level, specific guidance. The only thing I will say is that the marine business for us is made up of the positioning technology plus which we just now added DigiFIN. DigiFIN will be paced somewhat by how rapidly the higher density shooting and more complex shooting evolves, which is evolving quickly. So, we're pretty bullish on DigiFIN.

Also Orca, which is on all the vessels -- the majority of the vessels, with the exception of some that have their own system like Schlumberger, but we're on the majority of vessels with what's called Spectra and over time we expect that Orca will replace those, plus it brings a lot more capability for higher end shooting.

We really haven't given specific guidance product line by product line in that overall guidance.

Okay, fair enough. And then the margins on the marine side this quarter were, it looks like, 300 basis points lower than the fourth quarter last year, which also included a shipment to RXT. So, was the erosion in margin due primarily to the FX loss or was there something else in the mix driving it?

No; a big part of that was the FX loss, that's right. By product line, there's been no margin erosion.

Michael Marino with Johnson Rice.

My question is on the land margins. I'm sorry, I missed the operating income number you gave for the full year, so I wasn't able to fully back into it, but it looks like the land margins in the fourth quarter were better than maybe they've run in recent quarters. Do you have the operating income margin for the fourth quarter in the land business and could you give that out, Brian?

Yes, I did. Let me just go to that part of the script. You're correct in that the fourth quarter margins were better in the land business and it was really associated with, you know, the prior quarters had - there were mix issues with the vibroseis vehicles and in addition, we had a lot of ONGC activity in prior quarters that had lower margin rates. So, we just saw normal margin rates in the fourth quarter.

I guess my question is, is this a level that's achievable? Was the mix kind of maybe representative of what it should be going forward, ex FireFly?

Yes. Excluding the impact of mix, as you look at systems and vibroseis vehicles, I think the fourth quarter represented a more normal margin rate for our business .

What was that margin rate?

In the fourth quarter?

Yes.

The operating income for the year was 28.7 so you can back into that.

Okay. So it was over 12%, though.

Our gross margin?

No, operating.

Operating, yes.

Okay, because that's a marked improvement from recent levels.

Oh absolutely.

And FireFly should be additive to that or kind of neutral?

That's correct, additive.

Thank you. One last question on the RXT system delivered in the fourth quarter, was the entire system delivered in Q4, or is there some carryover into Q1?

The entire system was delivered.

Follow-up from Terese Fabian.

In terms of your data library sales and multi-client library sales in the fourth quarter, did you give a number on that? It appears that they were quite high.

We gave the number on the Solutions division, which was the number that we give, right? And that Solutions division really represents the processing of multi-client and data library sales combined. But you're correct, it was a very strong quarter for us.

And on the new span that you completed in the North Sea someplace, is that going to be going on sale soon or what is the processing on that?

Keep in mind, the way that the span programs work, we start selling them at conception, right, as we go out and get underwriting for them; and then when that span is complete we are always open for business to sell the data library.

Okay. And then just one more marine question. On the VectorSeis Ocean bottom cable system, I know the difference between s-waves and p-waves and stuff, but what does it provide in terms of resolution that streamers don't provide and how does it compare in terms of cost?

From the image itself, assuming you can get good coupling to the seabed, then it eliminates a lot of the issues you deal with when you're [measuring] to water. If you think about it, you've got what are called multiples. There are a lot of things you have to deal with because of the source is going through the water, through the earth, then the signal has to come back through the water and up to the streamer. So you're on a seabed so you couple direct to the earth. So the challenge historically has been to get good coupling.

What's unique about VectorSeis is because it's a digital sensor, we don't have to worry about orientation, so it can be in any orientation and then we have some proprietary technology that's related to how we make the coupling even better and sort of disconnect it from the cable, and noise affects the cable. So all that combined, we are just getting outstanding images, regardless of whether it's the c-wave or the p-wave, just the actual digital receiver.

You also have better low frequency and high frequency response with VectorSeis compared to the normal geophone, so that's also an advantage. Then the converted wave has growing applications all the way in marine. There's been a lot of interest around see-through gas clouds, but also as they move into these exploitation areas there's a lot of interest for lithology and all the different things they're using both on land. So there are a lot of reasons it's really good on seabed.

Cost, what's happened is the towed streamer cost has gone up so much that the delta cost has gone down. And then if you combine that with [BSO], which is a more productive system, they're starting to close the gap between cost of co-streamer and cost of OBC. It's still more expensive, although when you look at complex surveys with towed-streamer like wide azimuth and such, those are very, very expensive and so in those you can almost get close to them and [eventually] maybe even less if it's in water depths that it works.

So our whole idea is that number one, you have a lot better improved image. Number two, the market's opening up. It becomes a bigger market. The system is becoming more and more efficient. We still have a lot of ideas of how to make it more efficient. And so over time, that market should just -- we see that as a growth market for a long, long time.

That's all very, very interesting. Thank you. Just one more question. What depth can it go to, the VSO cable?

Today we're routinely running I think around 500 to 600-800 meters. It's designed to go deeper than that. You get into more of not the VSO system, but the backend of the boat and buoys in deep water and how you have to have a way of floating the buoy in deeper water. So, there are issues that can be managed over time and we will be running some deeper tests this year.

[Andrew Morey] with Talon Asset Management.

When you mentioned the long activity cycle on the Exxon article, has it changed your sales cycles or your visibility and backlog, has that changed at all or stretched out?

I guess in some parts of our business. For example, in data processing, because of the nature of that business, it is a backlog business. You're processing what you have in house and the oil companies know that, so they have to get in the queue sooner and the industry is tight. So, in that sense, we have pretty good backlog visibility and obviously in tight markets you get more because the client needs to get in the queue.

The marine business is more of a backlog business in the sense that if they're bringing new vessels on, those are long-term. So, we're aware of them way early. And then it's the competition who's going to get on it, but they have to decide to get them installed. So those are pretty good. And again, if people are building and the vessels pacing, you have pretty good visibility into that market.

On the other hand, geophone business, we might have a month or two or three or a quarter to visibility but it's a volume business. You've got a lot of activity.

(OPERATOR INSTRUCTIONS) Cindy Du with Jeffries & Company.

I just have a couple of follow-ups. The first one, the award that you mentioned in the beginning of the call with RXT and you guys getting the processing work, was that bid together or did RXT pull you into that project award?

It's separate in the sense of each of those are separate tenders and they have the processing. So we had to compete on our own merits. Now obviously, there is a natural connection the oil company would make. They know that we're the authors of the sensor technology and they know we have tremendous experience now in processing it. And so we have a natural advantage and we have relationships back into the oil company. They look to us sometimes to help explain the sensor technology. But we competed with all the top guys and we're proud to win it.

Okay, that's great. And then in terms of OBC and relative to the current marine market, what's the market share that OBC has right now and how fast do you think it can grow over the next few years?

The market share today, it's a little bit like the question on the market share of full-wave. The market is growing, but the total market is also growing rapidly. And so, our estimate is it's only about 5 to 10% of the total marine spend. But it's a growing segment in total dollar volume. And so, that's why I like that market.

It's not engaged in a lot of the more commodity activities. It's very focused, it's very high end. We've got some great new technology. It addresses both the image and the productivity issues historically that market's had and our partner now has a critical mass of business. So now they will start getting the efficiencies you get when you're in the service business and having a portfolio. So, there are a lot of good things about it and they have a very high market share in depth in that market.

Okay. And then one last thing. Could you tell us the timing of any upcoming lease sales, if any, that your multi-client library would benefit from specifically?

Well, as I mentioned, there was just a recent lease sale up in Anchorage, and there's just a tremendous interest in that part of the world. Now once you have a lease sale, it makes it then attractive for other people, either the people that bought into the lease sale that may have not had our data. So the fact that the lease sale was very large means that there's going to be a lot of activity up there, so there'll be follow-on business I feel and it also just speaks to that whole area.

I can't speak to the timing of other lease sales right now. I just don't have that top of my head.

Tamara [Manukian] with Greenwood Investments.

I have just a housekeeping question. How many shares outstanding, basic and diluted, did you have at the end of the quarter?

We have that on our press release, at the bottom of our press release. We've got it for both the quarter and the full year, if you want to pull it off of that.

Is that weighted number or at the end of the quarter?

Yes. All that detail is in the press release.

Okay. And one other question. It seems like restricted cash has gone up significantly and I was wondering what is that related to?

[The only time] we have restricted cash is usually when we're tying up cash associated with certain LCs around the world. Right now we're tying up probably the most significant is the ONGC deal. We've tied up some cash on that.

We have no further questions. I'd like to turn the conference back over to Management for any closing statements.

Thank you for joining us and taking time and we look forward to talking to you during our first quarter earnings call.

Ladies and gentlemen, this concludes the ION Geophysical's fourth quarter earnings conference call. You may now disconnect. Thank you for using ACT Teleconferencing.