Ion Geophysical Corporation (IO) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the ION Geophysical second 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 call is being recorded today Wednesday August 6, 2008. I would now like to turn the conference over to Ken Dennard of DRG&E. Please go ahead sir.

Thank you Mary and good morning everyone and welcome to ION Geophysical Corporation's second quarter earnings conference call. We appreciate you joining us today. Your hosts today are Bob Peebler, President and Chief Executive Officer; and Brian Hansen, Executive Vice President and Chief Financial Officer.

Before I turn the call over to management, I have a few housekeeping details to run through. If you would like to be on an e-mail distribution list to receive future news releases or if you experienced a technical problem and did not receive your release yesterday, please call our offices at DRG&E and provide us that information.

Our number is 713-529-6600. If you would like to listen to a replay of today's call, it will be available by webcast by going to the investor relations section of the Company's website at www.iongeo.com or there is a telephonic recorded instant replay until August 20. That information was provided in yesterday's press release.

Information reported on this call speaks only as of today August 6, 2008 and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay listening. 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 upon 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 risks factors disclosed by the Company from time to time in its filings with the SEC including in its annual report on Form 10-K for the year ended December 31, 2007.

Furthermore as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday and please note that the contents of our conference call this morning are covered by these statements. And now I will turn the call to Bob Peebler. Bob?

Good morning and thanks for joining us on our second-quarter conference call. I'm very pleased with the financial results this quarter with the particularly strong performance in our Solutions business line that includes data processing and our multi-client activities.

Our Systems business results were mixed with strong performance in the Marine group that was somewhat offset by a slow quarter for our Land Systems sales. In our Land business last year we shipped a large portion of the ONGC deal and also recognized revenue for the first FireFly system sale.

Excluding these two large sales, our Land cable systems business is about flat with last year. Our (inaudible) business in the first half is tracking below prior year however on a full year basis it looks like it will come in at or above prior year levels. I'm encouraged that our pipeline of opportunities for Land cable systems business is very strong for the second half of the year.

We also may be experiencing some sales timeout related to the announced ARAM acquisition as customers needed clarification of our intentions for our Scorpion land systems as related to the ARAM Aries product line. I will speak more to the ARAM acquisition in a moment but I would like to point out that one big advantage of consolidating the share of ARAM and ION in the cable systems space is to hopefully take out some of the short-term volatility of our Land Systems business.

Our main strength with our Scorpion system has been its ability to support digital full-wave high-density shooting. That is the primary reason we were awarded the ONGC deal and even more recently the 10,000 station (inaudible) order.

Where we have fallen short is the higher-volume cable-based analog business where we had only pockets of success. One of the main drivers of the ARAM purchase is to significantly strengthen our market presence in that high-volume segment of the Land business.

A significant Q2 highlight in our Marine group was the successful commercialization of DigiSTREAMER with our launch partner Fugro. We're pleased with the quality and reliability of the streamer and believe the market is ready for some competition in what has been a near monopoly for our largest competitor in this space.

Even though we are a late entrant in the solid streamer market, there is sufficient sales on the horizon both for new vessels and replacements that we should have a robust streamer business going forward. The addition of DigiSTREAMER is an important building block that when combined with Orca, DigiFIN and DigiBIRD brings us a step closer to what we call intelligent acquisition.

A good way to think about the intelligent acquisition is to think of Orca as the operating system for a streamer vessel that when integrated with DigiFIN, DigiBIRD and DigiSTREAMER will have capabilities for precision, real-time operations control of a survey that will permit even more complex surveys to be run more efficiently. We will be speaking more about intelligent acquisition in the future as it's a major thrust for our Marine R&D activities.

As stated, we had a very strong quarter in our Solutions division. Our state-of-the-art regional SPANs are growing in popularity as all companies are continuing to push into frontier areas. We now have a significant portfolio of SPANs and are continuing to add new programs and build out existing programs.

We expect our SPAN multi-client business to remain strong for the balance of the year and in 2009. After a bit of a slow start in Q1, our proprietary processing business had an excellent Q2 and our processing backlog is as strong as we have seen it for some time. Our leadership reverse time migration technology continues to gain traction in the market and is becoming a significant part of our total processing revenues.

The biggest event for us during the second quarter was the announcement of our agreement to acquire ARAM. We have received very positive feedback from both ARAM and ION customers as they see the benefits of creating a stronger competitor by combining the two companies in the cable system market.

As stated in our conference call announcing the acquisition, we plan on having ARAM's management lead our cable system business including the eventual integration of VectorSeis into the ARAM Aries II product line. We also plan to continue to support our Scorpion customers as needed and in the medium-term, Scorpion will continue to be ION's digital cable system that supports our VectorSeis sensor.

The addition of ARAM to our Land Systems product line will double our segment share and give ION access to additional customers to upsell our digital and other Land based offerings such as FireFly, Sensor geophones, (inaudible) controllers and [vibes]. Our current five-year model suggests approximately 30% of the total segment will switch to digital in that time frame and much of that will likely be driven by cable systems.

This leaves a very large cable analog segment that we want to be a major player in. The acquisition of ARAM helps us assure we can capture our fair share of that analog business in addition to the digital cable business which should be substantial.

We are on track to close the ARAM acquisition in late August or sometime in early September. The one risk in our Land Systems business over the next few months could be some confusion with our mutual customers slowing down our sales cycle.

As you can imagine, we're looking forward to getting the deal closed so we can start working closely with ARAM on maximizing sales for the balance of the year and to start merging our R&D efforts. We will update you on our progress on our next conference call. I will now turn the call over to Brian.

Thank you Bob. Good morning everyone. As Bob mentioned we had a strong second quarter. Starting with revenues, we generated $181 million compared to $165 million during the second quarter of 2007, an increase of almost 10%.

Year-to-date revenues decreased $9,000,00 to $321 million. As reminder, the first half of 2007 included $21 million in revenue associated with the sale of the first FireFly system and $36 million associated with the delivery of nine of the 14 land seismic acquisition systems ordered by ONGC. The large ONGC system sale in 2007 simply reinforces the lumpy nature of our business.

We continued to see improvement in our gross margin in the second quarter as compared to 2007 with the second quarter coming in at 32%. Our year-to-date gross margin rate of 33% is 7% better than the same period in the prior year. This increase is reflected across the majority of our segments but most notably in our ION Solutions and Land businesses.

In our ION Solutions division, strong multi-client data library sales including the recently completed programs in the African and Arctic regions combined with robust new venture multi-client surveys off the coast of South America and Asia led to significant margin increases compared to 2007. In our Land Imaging Systems segment, we continue to benefit from margin improvements related to cost reduction programs around our Scorpion cable systems and with our VibroSeis vehicle sales. Overall the significant increase in our consolidated gross margin percentage continues to demonstrate our focus on cost improvements, process optimization, and a more profitable product mix.

In the Land Imaging Systems segment, revenues decreased $46 million compared to $90 million in 2007. Year-to-date revenues of $96 million decreased to $68 million from the same period in 2007.

As I mentioned earlier, the first half of 2007 included both the FireFly systems sale and the ONGC systems sale in 2007. As we have stated many times, this is a lumpy business that is typically back-end loaded so the first half revenues are typically not indicative of full-year results.

Gross margins in our land business grew in 2008 to 23% compared to 16% in 2007. This increase was driven by our continued focus on cost reductions in our Scorpion systems sale and by VibroSeis vehicle sales.

Marine Imaging Systems finished an exceptional quarter with approximately $50 million in revenue as compared to $36 million in revenues for 2007. Year-to-date, revenues of $85 million increased $5 million over the first half of 2007. Both periods had an equivalent amount of VectorSeis Ocean revenues recognized in them.

Demand for our positioning systems remains strong which includes increased sales of our new DigiFIN product line. We also began delivery on a portion of our fifth VectorSeis Ocean system to RXT. Additionally, we sold our first commercialized DigiSTREAMER system this quarter and are pleased with the feedback and performance of this newest generation of seismic products.

With the continued strength shown in the sales of DigiBIRD, DigiFIN and now DigiSTREAMER and with the introduction of new seismic vessels, we expect our Marine business to have a solid finish throughout the remainder of 2008. Gross margin in the Marine group declined to 32% compared to 48% in the second quarter 2007.

Year-to-date gross margin decreased five points to 38%. These decreases are primarily a result of low margins associated with the sale of our first newly commercialized DigiSTREAMER system. We do not expect that the margins on this first DigiSTREAMER system to be indicative of future sales of this product line.

Our Data Management Solutions segment revenues remained consistent at $10 million compared to $11 million in the second quarter of 2007. Year-to-date revenues of $19 million were up $2 million over the first half of 2007 with the mix shifting to more recurring revenue on the software side of the product line as Orca gains traction and fewer onetime hardware sales such as the sales we saw in 2007 as clients upgraded their systems in anticipation of upgrading to Orca.

In our ION Solutions division, net revenues more than doubled to $75 million in the second quarter of 2008. Year-to-date revenues grew to $121 million, a 75% increase from the $69 million generated in the same period of 2007. This growth is primarily driven by increased multi-client data library and new venture sales including new programs off the coast of South America and Asia.

Overall, consolidated operating expenses for the second quarter of 2008 as a percentage of revenue remains stable at 21%. As discussed in our last quarterly call, we expect operating expenses as a percentage of net revenues to remain consistent and improve over the 2007 levels on a full-year basis. We continue to invest heavily in research and development and are expanding our operations internationally including the opening of our international headquarters in Dubai.

We incurred an income tax expense of approximately $4 million in the second quarter of 2008. The income tax expense represents an effective tax rate of 18% for 2008 compared to 22% for the second quarter of 2007.

We more than doubled our second quarter net income of $15 million compared to the $7 million earned in the second quarter of 2007. With the significant margin improvements, and the $8 million increase in net income, we're beginning to realize the benefits of our strategic and product initiatives. For the second quarter of 2008 diluted EPS doubled to $0.16 compared to 2007's $0.08.

Turning to the balance sheet, inventories rose by $60 million as we invest in building out inventories for new product lines such as DigiFIN, DigiSTREAMER, and FireFly version 2; invest in building the remaining portion of the fifth DSO system for RXT; and build up Scorpion and VibroSeis vehicle inventory levels to meet our expected back half demand.

Accounts receivable decreased by $17 million from year-end 2007. Overall, our working capital increased 20% over prior year. At this point, we have invested quite heavily in working capital in the first half of the year and do not expect this trend to continue as we begin to turn inventory in the third and fourth quarters.

CapEx excluding the investment in our multi-client data library for 2008 was $8 million. Year-to-date investment in the multi-client library totaled $57 million which continues to be unusually high compared to last year.

However, we expect the capital demand of our multi-client business for the remaining half of 2008 to be significantly lower than the first half which was front-end loaded. Cash decreased by $18 million from year-end 2007 due to the increase in inventory discussed above.

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 expect 2008 earnings to be between $0.70 to $0.85 per diluted share. With that, I'll turn the call back over to Bob.

Thanks Brian. Looking forward, we see a continuing strong market for both Land and Marine products and services. This has been driven by the continuing pressure on oil companies to increase reserves via exploration and to get more out of their existing reservoirs.

There is clearly strong interest in emerging areas such as the Arctic and we plan to be technology leaders to solve the most complex problems wherever our customers take us. Our recently announced opening of our international office in Dubai is one such example where we are adjusting our business footprint to have a more global reach.

At the same time, we're expecting North America activity to continue to increase as major oil companies are reentering via acquisitions of companies and properties and are also looking for organic growth through more exploration activities on acreage they already own. It's hard to imagine how this trend will change at least in the short-term.

I suspect that many of you are also interested in FireFly. We started the FireFly job on the Durham Ranch in Western Colorado in the latter part of July. The Durham Ranch is a multi-client survey which is being underwritten by our current main project customer, Resources, and ION.

ION is project managing the operations including planning the survey and eventually doing the processing. We have subcontracted (inaudible) to provide the labor and basic equipment for the job while ION is providing the version 2.0 FireFly system. The reason for this approach is it gives us control over the job and allows us to pace the operations to accommodate our needs to thoroughly test the equipment.

The primary goals of this survey include the following. First, to shake out the system before we make a commercial sale. It's an attempt to get the system fully operational and rock solid before we sell the system to a contractor.

We realize this is a very complex system that includes hardware, software, firmware, radio technology, computing technology et cetera. These types of systems cannot be fully tested in the lab or even test facilities. The only way they can be fully shaken out is on large-scale jobs.

Second, to record excellent high-density full-wave data on a fractured shale play that has many analogs in North America and likely the world. Since we will be doing the processing and own the data, we will be positioned to make presentations to interested oil companies and contractors to help accelerate the take-up of both FireFly and full wave.

And last, to demonstrate the utility of FireFly in an environmentally challenged are that includes very difficult terrain. We were told by East Resources that they had contractors (inaudible) survey related to cable based proposals mainly due to the very difficult terrain and the limited timeframes available because they needed to complete the survey in early September before hunting season starts. We are already seeing the benefits of FireFly in the situation and will elaborate more on that when the job is completed.

We have been in operations for about two full weeks after a period of crew training and some preliminary acceptance testing with engineering. We are progressing with the layout and also have started shooting a portion of the spread. We expect to have the operation completed by the end of August.

Our current plans will be to move the system from Durham Ranch once the job is done to a (inaudible) shoot in early fall. The main purpose of (inaudible) shoot will be to test the VibroSeis functions of the FireFly system since Durham Ranch job is all dynamite. For the ones of you that might be interested, you can go to our website, www.IONGeo.com where we have posted a slide show on the initial activities at Durham Ranch as recorded last week.

As stated in the past, we have many customers interested in FireFly with a steady stream of presentations and now visits to the Durham Ranch site. Assuming a successful completion of the Durham Ranch survey, we will be on track to full commercialization during the second half of the year as planned. With that, I'll turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS) James West, Lehman Brothers.

Bob, when I look at your timeline now for this first commercial FireFly shoot, I know you are expecting to be completed by the end of August and I think the original expectations were into September, perhaps I'm wrong there. But I thought it was little bit longer, maybe a six to eight week shoot. Are you seeing enhanced operational efficiencies with this first commercial version I guess better than the efficiencies you had with the original technology that's used with BP?

To your first assumption, the shoot was always designed to be completed pretty much in the 1 of September time frame. We have a pretty hard stop just from the landowners requirements.

I would guess, James, that maybe where timeframes we have given you, that may have included some of the early acceptance testing which was -- we decided to take the equipment up to Colorado and do some of the engineering acceptance testing there. We just felt like that would be better to do on-site. So probably some of that time was built into that.

As far as productivity, we're seeing the benefits of version 1 and version 2 as compared to the Wamsutter and Apache shoot. But it is not beyond what we expected. It's pretty much what we did expect. Now the interesting thing and I will say for you and for the others, I would really encourage you to go into the website and look at the pictures because you really get a sense of the terrain and the difficulties that we're challenged by.

It's all the way from farmland that has all kind of irrigation equipment on it to very significant terrain that goes up as much as class five to class six climbing. So we've actually even had to hire climbers to climb up and put the VectorSeis sensors alongside of the mountain. You just couldn't do that with cables safely and effectively and certainly not in the timeframe we're talking.

Okay, and then a follow-up on the FireFly. The second survey that you're going to do that I guess will be with BP, will you still own the equipment at that point or is the intention to sell it to a contractor?

Not yet decided because we're wanting to shake out the (inaudible) piece of it, we may own, we may not. That is still all up in the air.

Joe Agular, Johnson Rice.

Brian, I think I heard you say that the Marine revenues year-over-year for VSO were basically at a similar level. Is that correct?

Yes, that's correct, yes.

So the gains that you showed mainly came from the Digi products in the quarter which was very impressive. I was just wondering if you could maybe give us an update on what the pipeline looks for DigiSTREAMER and some of the DigiFIN products considering the outlook for the seismic vessel expansion.

I will take the question on the pipeline. On the DigiFIN part of the business, my sense is we are increasing momentum. We're having really good success with DigiFIN. I think the contractors are now using -- Fugro, who in particular who are really aggressive in implementing DigiFIN, are seeing really great advantages from the productivity of their vessel on these large-scale surveys. And that word is getting around.

I think that there is as much interest on the oil company side as there is on the contractors side. So in some ways I think some of the momentum is going to be driven by the oil companies. We're pretty bullish on DigiFIN and would expect to see it continue to grow throughout the year and into 2009.

I think on DigiSTREAMER obviously that one is a little more difficult in the sense of the commitment. The oil companies or the contractor certainly has a choice. And so what has been very, very important for us is to prove that we have a highly reliable effective system and we're doing that on the Fugro vessel.

But there's a lot of interest in it and we do have a pipeline for it. How much of that will fall into this year versus '09, I think the majority of opportunities will likely be more in '09. But we should see some activity in the balance of the year hopefully.

Your comment on the streamer margin, I think just to ask the obvious, did you mean that you could have improvement in margins once you start to ramp up sales of that?

Yes, part of it is I think it would be natural that the first streamer we put out when we don't have really a history of our streamers, we obviously had to do a bit of a deal to share some of that risk. I think now that we have proven that the streamer's really solid -- it's a solid streamer but it's also solid from a reliability point of view. So I think with that we should get more normal margins that we would expect.

Terese Fabian, Sidoti & Co.

I have a question on the multi-client data library sales. It looks like you had pretty dramatic growth in sales in the second quarter. Can you talk a little bit about that and sort of expectations for the rest of the year?

I will talk a little bit about this quarter and then I'll talk about the nature and then if Brian wants to chip in on this also. The advantage we have now than what we had a year or two ago is that we have been building the portfolio.

And so as that portfolio grows, obviously that gives us more places to sell and also it reflects just the volume of the business. So I think to a certain extent we're benefiting from that larger portfolio from the library point of view and also we have quite a few new ventures that's been launched.

We would expect a strong year for that business. We don't have any indication that it's not going to be the case. But we did have a heck of a quarter this quarter and it tends to be lumpy business. So I don't think we would say take this quarter and assume all quarters will be like that. But we do expect a very strong business. I don't know, Brian, if you have anything else you want to comment on that?

Probably the only thing I would add to that, Terese, is if you look at the capital that we have invested in the business in the first half of the year, we continue to invest with the same level of discipline where we're looking at that as a portfolio and we're getting that capital provided by the people underwriting the surveys.

But it really was a little bit front-end loaded when you look at the number of projects and the timing of those projects. So that's why I sort of put in my script the fact that we don't expect to see that much capital going [out] in the back half of the year.

Right, well that's helpful. I have a question on how many SPANs do have going on now and what is the competitive positioning of your SPAN versus somebody else's multi-client data library sale?

I will talk to the competitive advantage. I don't have the total SPANs off the top of my head. On the competitive advantage, one is that we (inaudible) originators of this idea of understanding that the industry was going to go back to the basics of regional geologic studies and it was going to be sort of in all the key basins but typically a lot of these basins are more complex or they're deeper.

And so, we have really demonstrated our ability to go in and work with the oil companies, work with expertise in each of those basins and build sort of a fit-for-purpose design SPAN that's also using our state-of-the-art processing GXT that creates a very robust technical product. And frankly we have just demonstrated over and over again our capabilities to do that to the point now we have a leadership position in that very large and growing niche.

And we have very large companies that participate in this with us that really keep going back to us to go to the next area. So that has taken us into places like the Antarctic and West Coast of Africa and South America and on and on. There's so much strong growing interest in global exploration that it's just a great sweet spot for us and I think we have managed to demonstrate that highly effective and technical capability that has brought that recognition to us.

On the total, I think maybe in our website it sort of shows we're -- we don't talk about the ones that we have on the drawing board for obvious reasons. So the only ones we talk about are the ones that are sort of -- that are already out there and we're either well into the acquisition or we're selling data.

(OPERATOR INSTRUCTIONS) James West, Lehman Brothers.

Thanks, just a quick follow-up. Brian, your guidance that you reiterated for the full year, I just wanted to make sure that did not include the ARAM acquisition.

That's correct, James. It does not include the ARAM acquisition. We do expect though when we look at the ARAM acquisition that it is -- from an earnings perspective it's probably just going to be neutral.

Neutral for 2008?

2008, that's correct.

George Casper, Robert W. Baird.

Just a follow-up on VSO and DigiFIN. The deployment, you have deployment now but is it four or five systems and were those deployments with RXT, is it?

Yes, it's currently four systems. We have a system -- they have a system in the Gulf of Mexico. They have a system in the Caspian Sea. They have a system I believe in the North Sea and they have a system off the West Coast of Africa on a very large project.

Okay and then the (inaudible) system deliver -- what is your delivery schedule going forward again?

We should be delivering system five I believe by -- through the end of the year.

Is that destined for the contract for Brazil?

I would assume that. You would have to ask RXT on that. (inaudible) systems that are moving around, we are involved with them but that's their business.

What's the forward look to additional orders and is the price tag in the $30 million range or is it going to go higher?

Well that's sort of the number we use and what often happens is once they have a system in the water, if they want to expand the arrays or whatever, then you can have additional follow-on. But again as far as the projections forward, I think it's more appropriate to listen to RXT about their forecast of their business.

Okay and on the DigiFIN side of the opportunity, does this expand when seismic vessels are deploying a larger number of streamers? One deployment I believe has as many as 17 streamers by (inaudible) sovereign which is a petroleum geoservices vessel. Can you describe the opportunity as more streamers are towed? Does that creates opportunity for this particular product?

Normally when they're talking about putting more streamers in the water, they're doing that for two reasons. One, they can cover more area faster. But also typically it comes with putting the streamers closer together and then obviously the more streamers you have in the water, the more danger of tangling at the tail and different things. So this gives them more stability and more control and so I think it's a very -- I think your thinking is correct that the more streamers in the water, (inaudible) likely the interest in being able to steer those streamers from a lateral point of view.

In addition, it gives them turning efficiencies. It gives them the ability to even get closer together, the things like (inaudible) surveys. So I think there's many -- all the forces that are driving that business I think line up with a good business for DigiFIN.

David Phillips, HSBC.

A couple of questions. Firstly, with the Marine streamers, could you talk a little bit about the addressable market that you're chasing in the area for the (inaudible) streamers particularly differentiating between whether you're chasing opportunities in the up-and-coming replacement market to maybe replace someone else's kit with yours in due course or are you really at the moment targeting the obvious new entrants who are appearing on the horizon?

And secondly in Land equipment, what started of tendering activity are you guys seeing for the really high channel count (inaudible) let's say 10,000 channel counts and above? Clearly, there's a lot of activity in China (inaudible) but I'm wondering if you're seeing that anywhere else for instance perhaps Russia. Thank you.

I will start with the Marine and then go to the Land. On the Marine side, I don't -- we're not going to give out obviously the details on our view of the specifics that we're chasing for competitive reasons. But it is a combination of both. It is some new vessels coming out and in addition to that it would be some replacement type vessels and replacement work.

We would be clear that we understand that we're late entrants in the market. The market has been dominated by one supplier almost to a monopoly point of view. Because of that, I think there is a growing need, an expressed need by several of the customers we talk to that they would like to have an alternate supplier.

In this particular case, our main thrust is to have a good reliable system and it has some feature function we think benefits but mainly I think just having a good system in the marketplace and just for the pent-up need for another supplier will bring some business. Now our strategy going forward is that as we then start integrating our DigiFIN, DigiSTREAMER, all of our Digi products with Orca, then that will start becoming at the system level a more competitive and compelling offering that include it all.

On the Land side of the business, I think it's fair to say that every major basin in the world, the trend is to increase -- the land trend is increasing channel count. We're seeing it in the US, we're seeing it in Russia, we're seeing it in China, we're seeing it every place in the world and that is really -- why is that?

That's because as they move from sort of either 2-D activities where they're trying to just get a sense of -- exploration sense of where the opportunities are, once they start moving into the more detail, they're finding that they need a higher resolution -- whether it's for things like the tight gas sand, fractured sands, deep more complex reservoirs which is more and more where the opportunities are. I'll give you one great example would be in Libya where you see two to three years ago most of the activity and even now most of the activity has been large-scale blow and go 2-D surveys. But now they're coming back and they're wanting to do more reservoir characterization in either in older fields or some of the identified opportunities.

So that brings them into the world of 3-D and we think even ultimately to the world of full wave. So I think the trends are pretty much the same everywhere. And we are seeing sort of the book of interest and the book of business growing.

Gregory Eisen, ICM Asset Management.

In your equipment sales, are you seeing any sign of customers wanting to opt for leasing as opposed to buying your equipment? Is there any kind of movement in that direction? Are they looking to (inaudible) the least cable equipment rather than buying with the idea that they do not want to have a long-term investment in analog equipment?

No, we haven't really seen that. I think if you look at the payback on a system in today's market where they're keeping their crews loaded, the payback is relatively short. And so, I don't think people are hesitating. If they have a job and they have a book of business, they're pretty much just buying whatever the oil companies are demanding at that point in time. So I don't think we have seen that.

Now the one (inaudible) we have with the ARAM model, they have -- it's a relatively small but an interesting rental business that they do some rentals for purchase. So there are customers that want to drive it and try it and they will get into rental. Once you get a portfolio rental, that in itself would be a pretty lucrative business and then obviously sometimes that converts to a sale. So that just gives the buyer a choice. So I think mainly when you see people leasing or renting, it's really more to try to manage your capital than actually trying to anticipate a change in the technology.

Sure, and regarding ARAM and the whole analog business, as you look at where it's going over the next few years, obviously your industry's growing but digital is taking its share from the analog side. Is it reasonable to believe that kind of just as you look at the way the growth of the industry pans out, that analog although it's a very large piece of the industry will not be growing going forward in dollar amount but rather all the growth will be on the digital side? Or do you see the analog side growing still?

Actually, interestingly enough I think that I could argue and our models would suggest this is that you could actually have as a percent of the total digital growing but both markets growing. You see what I mean?

In other words, we could see if you add the total up and look at the percent of digital five years now, the percent of digital for total could be larger but then when you look at in total dollars of each segment, you could actually still see the analog side growing and that is just because of the rapid growth around the world. I mean there's just so much potential for land in many parts of the world that you can see that happen.

I think our main deal is that it almost could even be flat and we are okay because our -- we've had a relatively small share in that space. So if we could take a little bit of share by combining, we could probably continue to grow just on the basis of share. But I actually -- if I had my own judgment at this moment, I think that both markets are going to grow at least over the next three, four, five years.

David Phillips, HSBC.

Actually, thanks. All of my questions have been answered already. Thank you.

Joe Agular, Johnson Rice.

Bob, could you update us on your manufacturing capacity for the Digi products?

I think we can handle the business we have on our -- looking forward. We have both Digi capability in New Orleans and we've also added capability in Houston and we did that for two reasons.

One is that our experience with the hurricanes scared us a bit so we felt like we needed that alternate facility. That's assuming that both New Orleans and Houston would get hit at the same time I guess. And then secondly we also did that not knowing for certain what the ramp up would be. But we have a lot of headroom in our capacity and I think we have enough leadtime view of that market that we can cover.

So I don't envision that we might on a quarter basis have a little bit of an issue. But I don't see in like a six-month rolling six-month that that should be an issue for us.

Okay, but I was just trying to get a sense for you do have the capacity to handle the amount of business that you have or potentially could have in coming quarters?

I think we're fine on that (inaudible) capacity.

Okay. Is there any update you could give us on the monitoring system, the seabed monitoring system?

Yes, you're talking about the joint venture we're in?

Yes.

I think the latest -- we actually, the team has actually bid on a couple of projects that I am aware of. Also within that mix, Statoil is to bring a project forward and I don't actually know what the timing of that is. But I think that is over the next few months we should be seeing some kind of project.

So we have enough interest that we're getting just regular commercial bid. I know we're in one for sure. And then we also have the project for Statoil that I don't have a most current update on but I know they are sort of committed to do that within the definition of the project itself. From a technical point of view, I think things are moving along fine.

Just one last question if I could. Just to remind us again, the overlap in the customer base on the analog side right now between ION and ARAM is pretty minimal isn't it?

Yes, it is. It wasn't going to be minimal in the future but it's certainly minimal now. If you look at where their main strength -- they really started in Canada and then grew down into the US and their main business up to most recently has been from that North American market. That's where we have actually -- we've been reasonably strong in Canada because of VectorSeis but it hadn't been a real large market for us. But we have not had really the installed base of the regular bread and butter business.

Where we have had more strength is international, places like Russia and China although those guys were projecting themselves into those markets and starting to get a little bit of traction. So the timing is great for us that in the short-term we really pick up coverage where we were weak and also they pick up quite a developed channel in the places they're just starting to enter.

Terese Fabian, Sidoti & Co.

(technical difficulty) data processing side of your business? Are you building those out? Are you going to be doing much reprocessing work of existing data? And let me just do the second part right away which is the alliance with LARGEO in Russia. What are the implications of that?

On the alliance, the implications of that, it's a reflection of our belief that when you go into these international markets whether it's Russia or even parts of the Middle East and likely Asia, if you can find a partnership where you have the right partner on the ground who has already some capability particularly in people and also have the local relationships, then if we can bring that up under our technology franchise which we really have a global franchise now with GXT, we can create the best of both worlds.

Often, when you look at that business you need that local knowledge, local geologic knowledge and you also need those local relationships yet those little regional companies often don't have the technical horsepower to have the capability they need. So we're really sort of creating if you want to think (inaudible) little bit of a franchise model to project ourselves rapidly around the world. We're looking at doing that.

We now have the one in West Africa which has that local content which is really helping us and the one in Russia we think will be the same. Russia is a very large future processing business and we are looking at doing the same in some other parts of the world. So we think it's a good model and we are sort of proving how we can make that model work.

So that is -- now on the reprocessing -- the GXT business is mainly reprocessing. People come to us typically after they have collected the data but they want high-end processing whether it's depth imaging or whatever. Now the exception to that has been one on land where we have really developed leadership capability in full wave and so now we're getting a lot of the -- if there is a full wave particularly used in our technology then we get it right off of the shoot which is part of our objective.

Another interesting area for us in our processing business has been we were sort of timed out in Gulf of Mexico because of all the money that was being spent in [wide azimuth]. The contracts that the contractors had with the oil companies related to [wide azimuth]almost locked them in to also getting the processing. But what we're finding is that there's really now a very strong interest in follow-on where we can reprocess the [wide azimuth] data. They frankly have had some real disappointments in some of the quality of the original processing of [wide azimuth] and so they're coming to us.

And so we're now starting to actually pick up some [wide azimuth] processing. We plan to bring our leadership, technical capabilities to that world also. And that might ultimately lead to getting even some original [wide azimuth] processing down the road but there's going to be a lot of reprocessing in that area also.

Mr. Peebler, I'll turn it back over to you for closing comments.

Okay, well thanks -- thank you for taking the time to attend the conference call and we look forward to talking to you during our third-quarter earnings call in a couple months. Thanks.

Thank you. Ladies and gentlemen that will concludes today's teleconference. Again if you would like to listen to a replay of today's conference please dial 303-590-3000 and enter the access code of 11117436 followed by the pound sign. We thank you again for your participation and at this time you may disconnect. Have a nice day.