Ion Geophysical Corporation (IO) 2008 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the ION Geophysical Third 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 Wednesday, November 5, 2008. I would now like to turn the conference over to Jack Lascar with DRG&E. Please go ahead sir.

Thank you Britney and good morning. 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 e-mail distribution list to receive future news releases or experience a technical problem and did not receive your news release today, please call DRG&E and provide us with that information. That number is 713-529-6600.

If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the Company's website, at www.iongeo.com or via a recorded instant replay until November 19th. The information was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, November 5, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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 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, and its quarterly report on Form 10-Q.

Furthermore, as we start this call, please 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 those statements. I will turn the call now to Bob Peebler.

Good morning and thanks for joining us on our third quarter conference call. We are very pleased with our record third quarter revenues and improved profitability. We had another excellent quarter in Marine Imagining Systems driven by strong sales of positioning systems and DigiFIN streamer technology and the delivery of most of the remaining portion of the fifth VectorSeis Ocean for RXT. We're also delighted by the continued record performance of our ION Solutions Group, including new venture sales related to our programs off the coast of Alaska, South America, and West Africa and our continued strength in data processing.

Our Land Imaging Systems gross margin continuous to improve, driven by reductions in cable system and VibroSeis vehicle costs and higher margins for our ARAM system sales. Even though we had a strong quarter and expect to finish the year within our original earnings guidance, we realize that along with the rest of the industry, we are likely to be affected by the current turbulence in the financial markets, resulting in the ensuing slowdown of the economy and the decline in commodity prices.

From a macroeconomic standpoint, we believe the size of the industry is likely to be affected by the economic slowdown, which we are assuming will likely last through 2009 and may well extend into 2010. Two main areas most likely to be affected for us will be our land business in North America and Russia.

We still believe, we're in a long growth phase for the oil and gas business, and what we're experiencing is a temporary down cycle within the context of this long growth phase. The underlying issues of decline in reserves and the likely continued increase in energy demand over the long term will still be in the fundamental drivers of the industry. It is clear to me that investor perceptions have shifted dramatically from concern about oil supply as recently as last summer to an overwhelming concern about demand due to the economic slowdown related to the financial crisis and a resulting impact in commodity prices.

I have most recently heard concerns that we may be entering the downturn in oil consumption similar to the 1980s where demand fell over 6 billion barrels a day, oil prices plunged and it took almost a decade to recover. During that period, oil prices plummeted from a high of $32 barrel in 1981 to $6 in 1986 and prices languished for the rest of the decade.

I'd like to point out two important differences on the consumption side in the 1980s compared to now. First, in the US and Europe there was a significant switch from oil to natural gas related to power generation that started in 1982 and resulted in a significant and almost instant plunge in oil usage. We do not have nearly the same extent of switching to natural gas going on today.

Second, in the 70s and early 80s, prices were driven mainly by OPEC controlling production, starting with the OPEC -- the embargo in 1973. Today, the rapid economic growth in Asia and other developing countries have significantly increased demand, resulting in very little excess capacity. I still think it's reasonable to assume that future economic development will continue, particularly in Asia, unless the natural crisis grows beyond a recession. I would rather not speculate on the depth of the recession compared to the early 80s as they are very different animals, but I would like to focus on what I think is the biggest difference related to supply of oil and the impact on price.

In the late 70s and early 80s, OPEC had significant excess capacity and new non-OPEC capacity including the North Sea and Alaska were hitting the market as a result of the drilling boom that started in the early 70s. The combination of the excess capacity and the decline in consumption created industry overhang of over 12 million barrels a day against 60 million barrels per day of production. In the 70s and 80s, it took more than a decade to work through that surplus production.

The biggest difference today, and one I believe is one of the most significant factors to, consider related to commodity prices and drilling activity is peak production by country. In 1980, there were only 6 countries that had reached peak production, including the Lower 48 and Indonesia. The other four peak production countries were minor players such as Germany and Romania. Starting in 1990, 18 more producing areas have reached peak production, including Alaska and the North Sea that were just coming production back in the 1970s. Peak production is caused by the aggregate natural production decline of older fields and that decline is accelerating around the world.

A recently released IEA report, which is the first in-depth study of oil field declines around the world, estimates that the 500 largest fields in the world have a natural decline rate of 9.1%. This decline rate is much larger than previously believed. The report estimates that it will take $360 billion of industry investment per year through 2030 to meet the world hydrocarbon demand, and even at this rate of investment, the oil field decline will still only reduce to 6.8%.

At today's estimated production of 87 million barrels per day, the industry has to find nearly 6 million barrels per day just to keep even. With these facts, we believe that it's reasonable to assume that any activity decline due to the recession and lower commodity prices will quickly aggravate the long-term supply problem and the result will likely be the prospect of even greater shortages down the road. It's this problem, combined with the fact that easy oil has been found, that causes us to be bullish on both expiration and exploitation activities and the needed geophysical technology, both new measurements and process and interpretation to reduce risk and increase productivity.

We frankly disagree with the assertion by some that we are approaching the end of the geophysical cycle, and we would argue that we are closer to the beginning of a long, higher end technology cycle. We do expect some cutback in spending due to 2009 -- during 2009 -- due to debt crutch and other short-term adjustments being made due to short-term commodity prices, but we believe that the longer term up cycle is still intact, likely starting again sometime in 2010, assuming by then that the end is in sight for any global recession.

What will be different is the gross cycle has lasted long enough that significant new capacity is coming into the market in all areas of the business, and we expect price deflation for the companies whose earnings growth has mainly been dependent on high activity and price inflation. It's more of this commodity end of the business where we believe all companies will like to be working to reduce their cost through more competition, and contractors will have to compete more on efficiency and high-end technology to grow profitably.

We also believe that the stronger contractors will be upgrading their fleets and land crews to better compete and will be retiring equipment that was put into service to meet the demand and take advantage of the all boats rise high prices. We strongly believe that in an environment of lower commodity prices, technology becomes even more relevant to all companies, as they need to be even more efficient in finding and developing oil and gas reservoirs. The declining commodity price doesn't mean that the E&P challenge has gotten easier. Oil companies will continue to look for ways to reduce the number of dry holes and to get more out of existing reservoirs more cost effectively.

We believe that we are clearly moving from the pricing leverage due to capacity constraints to technology differentiation. That being said, we are mindful of the fact that in the short-term both domestic and international oil companies are becoming more cautious and cost-conscious as a result of the recent turmoil in the commodities and credit markets, and we will have to work harder to prove our technology and services are even more important to both contractors and oil companies.

ION is very well positioned for this new environment as we have invested over a $160 million in R&D over the last five years aimed at resolving tough imaging problems and significantly improving productivity and field operations for both marine and land. We also have chosen to be "asset light", meaning that we are not in the seismic contracting business and don't own crews and the associated equipment, but rather have invested in technology in both acquiring and processing for the most difficult imaging challenges.

Since we aren't in the contracting business, our multi-client business should also benefit if boats and land crews become more available at lower cost. As to our market presence, with the exception of our recently acquired ARAM business, majority of our businesses are in international markets in the deep water Gulf of Mexico. We believe ARAM sales are likely to be impacted in North America for the balance of the year and 2009 due to the weakness in gas markets, but we plan to mitigate that problem as much as possible by pushing more of their product through our international channels and consolidating the ARAM business with our Scorpion cable business -- system business, which we believe will resolve in significant cost reductions.

I am optimistic about our improved competitive position with the acquisition of ARAM and feel confident that the combination gives us an improved ability to navigate through this land down cycle. Although we are very aware of the challenges facing us and are preparing for some impact on our business, our visibility into future business is currently difficult due to the high level of uncertainty with both our oil company and contractor customers. As a result, in the short term, we are tightening our earnings guidance for 2008, which will be covered in more detail by Brian.

As far as 2009 is concerned, we are in the middle of our budgeting cycle and while we expect softness in some of our markets and are tightening up appropriately, we also believe our portfolio of high-technology aimed at complex challenges and a strong mix of international business should provide us with the opportunity to have a solid year. We will update you on our 2009 annual guidance call sometime in mid December.

I will now turn the call over to Brian.

Thank you, Bob. Good morning everyone. As Bob mentioned, we had a robust third quarter. We generated $219 million compared to $174 million during the third quarter of 2007, an increase of over 25%. Our year-to-date revenues increased 7 percentage points or $36 million to $539 million. Our 2007 sales included revenue associated with the sale of the FireFly version 1 system for $21 million and $58 million associated with the delivery of the 14 Land Seismic acquisition systems to ONGC.

Sales from the remaining non-Land division product and service offerings, including our marine imaging systems and ION Solutions segments, have continued to grow in revenues and income from operations compared to a year ago.

We continue to see improvement in our gross margin in the third quarter, as compared to 2007, with third quarter gross margins of 33%. Our year-to-date gross margin rate of 33% is 6 percentage points 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 recently completed programs combined with robust new venture multi-client surveys off the coast of South America, Africa and the Arctic 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. We also had additional system sales of ARAM land systems after our acquisition date.

In the Land Imaging Systems segment, revenues increased to $82 million compared to $79 million in 2007. Year-to-date revenues of $177 million decreased to $66 million from the same period of 2007. As I mentioned earlier, 2007 included $21 million in revenue associated with the sale of the first FireFly system and $58 million associated with the delivery of the systems to ONGC.

In the Land business, we are starting to see indications of slowing demand for land seismic acquisition systems across the North American and Russian markets. We believe the slowdown is a direct result of current economic conditions and that demand for our Land products will increase again with the recovery of the economy in late 2009 or early 2010. However, as Bob mentioned, this economic recession also provides opportunity. With the addition of ARAM, we are in a strong strategic position to further penetrate international markets with lower cost yet highly reliable systems. In addition, it provides further opportunities to strengthen our position in the North American market through ARAM's current rental business in these capital-challenged times. ARAM's proven Aries land system, eventually combined with our digital VectorSeis technology, will provide an even better product offering to meet the needs of our customers.

Currently, we are working on the consolidation of our Land business and expect to achieve significant cost reductions for 2009. We would expect to book a restructuring charge associated with this integration in the fourth quarter of this year, but don't have it finalized as we are still working through the specific details. As we move into 2009, we believe that we are positioning our Land Imaging Systems business to meet and exceed our customers' needs both now and in the future.

Gross margins in our Land business grew during the third quarter to 26% compared to 17% in 2007. This increase was driven by continued focus on cost reductions in our Scorpion system and in our VibroSeis vehicle sales, as well as higher margin Aries system sales in the mix.

Marine Imaging Systems finished another strong quarter with approximately $49 million in revenue, as compared to $37 million in revenues from 2007. Year-to-date, revenues of $134 million increased $17 million in the comparable period of 2007.

The third quarter of 2008 included the delivery of the majority of our fifth VectorSeis Ocean System to RXT. Additionally, demand for our streamer positioning and control systems remained strong which includes increased sales of our new DigiFIN system. With the continued strength shown in the sales of DigiBIRD, DigiFIN, and now DigiSTREAMER, our Marine business is experiencing another solid year in 2008. Third quarter gross margin in the Marine group declined to 41%, compared to 44% in the third quarter of 2007. Year-to-date gross margin in the Marine group decreased 4 percentage points to 39%. These decreases are primarily a result of product mix.

Our third quarter Data Management Solutions segment revenues remain consistent at $10 million compared to $11 million in the third quarter of 2007. Year-to-date revenues of $29 million were up $1 million over the comparable period in the prior year with the mix shifting to more recurring revenue on the software side of the product line as Orca gains traction and less one-time hardware sales that we saw in 2007 as clients upgraded their systems in anticipation of upgrading to Orca.

In our ION Solutions division, net revenues grew 67% to $78 million in the third quarter of 2008. Year-to-date revenues grew to $199 million, a 72% increase from the $116 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 Alaska.

Third quarter gross margin in the Solutions division slightly decreased, 2 points to 31%, due to product mix. Year-to-date gross margin showed a significant improvement by 6 percentage points to 32% due to strong data library and new venture multi-client surveys.

Overall, consolidated operating expenses for the third quarter of 2008 as a percentage of revenue decreased 2 percentage points to 19% compared to 21% for the third quarter of 2007. As discussed previously, we expect operating expenses as a percentage of net revenues to remain consistent or even improve over the 2007 levels on a full year basis.

We incurred an income tax expense of approximately $4 million in the third quarter of 2008. Year-to-date income tax expense increased $4 million to $9 million compared to $5 million for the same period in 2007. The income tax expense represents an effective tax rate of 13% for the third quarter of 2008 as compared to 9% in the third quarter of 2007, driven primarily by the tax jurisdictions where sales occurred around the world. For year-to-date 2008 and 2007, our effective tax rate remains stable at approximately 16%.

We nearly doubled our third quarter net income of $25 million compared to the $13 million earned in the third quarter of 2007. For the third quarter of 2008, diluted EPS increased 79% to $0.25, compared to $0.14 in the third quarter of 2007.

The third quarter results included several special items. The first item relates to the fair value adjustment of our preferred stock redemption features. Every quarter these features must be valued at fair market value, which caused a non-cash loss of approximately $1.1 million for the third quarter or an impact of $0.01 to our diluted earnings per share. Additionally, we had charges related to our ARAM acquisition of approximately $900,000, which had another $0.01 impact to our diluted earnings per share. The final special item relates to Hurricane Ike, which directly hit the Houston area in September and caused extensive power outages and other infrastructural damage across the region. The impact of this national disaster was approximately $500,000 or approximately $0.005 impact to diluted earnings per share. As a result of this hurricane, we were forced to shutdown operations in our Texas locations for several days and shipping through the Gulf of Mexico for New Orleans location was also interrupted.

The total impact of these special items is approximately $2.6 million or $0.025 per diluted share. Excluding these special items diluted earnings per share nearly doubled to more than $0.27 in the third quarter of 2008 compared to $0.14 for 2007.

Turning to the balance sheet, inventories rose by $126 million. The increase was primarily due to the acquisition of ARAM and the investment in new product line, such as DigiFIN, DigiSTREAMER, and the commercial version of FireFly. The building of the remaining portion of the fifth VSO system for RXT, and building up of Scorpion and VibroSeis vehicle inventory levels in anticipation of fourth quarter demand.

Accounts receivable decreased by $8 million from year-end 2007. Overall, our working capital decreased 14% over prior year.

CapEx, excluding the investment in our multi-client data library, for the first three quarters of 2008 was $11 million. Year-to-date investment in the multi-client library totaled $88 million, which continues to be exceptionally strong as compared to last year. However, we expect the capital demand of the multi-client business for the last quarter of 2008 to be lower than the average spent in the first three quarters of the year as much of the expensive activity shooting seismic was in the spring and through early fall.

As we mentioned earlier, we have entered into several new financing arrangements in order to purchase ARAM. While these agreements and the respective criteria are listed in detail in our 8-K filed in September after the ARAM closing and will also be described in detail on our third quarter 10-Q, I wanted to give you a brief overview at this time.

As of September 30, 2008, we had total indebtedness of $315 million of which $191 million is current. In late September, we entered into an amendment and restated our credit facility. Part of this amendment included adding a 5 year, $125 million term loan of which $19 million is due within a year. This term loan matures in September 2013 and carries an interest rate of 6.3% at September 30th, 2008. We also have $ million outstanding on a revolving line of credit as of September 30th, 2008. Since $72 million of the revolver we used to purchase ARAM, we are required under the amended credit facility to repay it prior to year-end and have re-classed the full $72 million to current maturities of long-term debt.

Additionally, we entered into a short-term bridge loan with Jefferies Finance CP Funding LLC, with a principal amount of $40.8 million and a discount of 2%. This note matures on December 31st, 2008. The fees associated with this note and the expense of the 2% discount of approximately $800,000 are being amortized through year-end. Again, this note is classified as short-term.

We issued one of the sellers of ARAM a Senior Seller Note in the principal amount of $35 million due upon the earlier September 18th, 2009 or the day we replace the bridge facility with either a permanent instrument or draw down on the commitment I'll describe in a minute. This debt is an increasing rate debt with the interest rate increasing at marked intervals from 9% to 15% by maturity. This note is short-term.

Finally, we issued to one of the sellers of ARAM a subordinated seller note in the principal amount of $10 million, due one day after a senior seller note. Like the Senior Seller Note, this debt has an increasing interest rate in marked intervals from 10% to 16% by maturity. This note is also short-term. Therefore, in total, we have entered into four new debt agreements for a total of $288 million and new debt financing of $176 million classified as short-term.

The original purpose of issuing these short-term debt instruments and bridge financing facility was to close the transaction as quickly as possible as we were concerned that any delay of closing after the announcement of the deal in July would [time out] both companies with purchases by land contractors until they understood how the surviving entity would go to market. It is our intent to pay down the $72 million on the revolver, both seller's notes and the bridge facility with a high yield bond. Ideally, we would have liked to raise the bond funds prior to year end, but given the current credit markets that goal maybe unlikely.

In anticipation of difficulties in the credit markets and prior to closing, we entered into a bridge loan commitment with Jefferies Finance LLC for a one year $150 million bridge loan which can be drawn on between December 15th and December 31st, 2008 if we are not able to raise the desired funds through the high yield bond. We are currently working with our advisors at Jefferies to evaluate the feasibility of marketing the high yield bond in 2008 or deferring it into 2009 and drawing on the commitment to ION.

For 2008, we are reducing the top end of our earnings guidance from $0.85 per diluted share to $0.80 per diluted share. The tightening of our earnings guidance mainly assumes that we will not likely see the normal high level of year-end spending due to both oil and gas companies and our contractor customers taking the more conservative approach in the current economic climate. We therefore expect 2008 consolidated revenues to be between $780 and $830 million and earnings to be between $0.70 and $0.80 per diluted share.

As we've done in prior years, we will hold a 2009 guidance call in December upon the completion of our 2009 plan to discuss our views on how we see next year's expected performance unfold.

And with that, I will turn the call back over to Bob.

Thanks, Brian. I'd like to wrap up with a few specific comments on our new technology and our acquisition of ARAM. As you know, we are in the process of commercializing FireFly but have made a mid-course correction in strategy due to the current credit crunch and the impact on our North American customers. We expect some rough sledding for our North American contractor customers and expect a significant pull back in their capital spend. For the first time in a long while we are seeing some contractors tacking crews and we expect this may get worse before it gets better.

Our short-term dilemma is that oil company interest in FireFly has grown significantly since our success at Durham Ranch, and we expect that interest level to continue to grow as they gain further exposure to our marketing efforts. We believe that in the short term the most important thing we can do is get FireFly in the field, and we'll be looking for some creative business models that assure we can cover short-term oil company demand while being realistic that our North American contractors likely can't make large capital commitments due to the combination of the debt markets and the current slowdown.

In addition to continuing to focus on North America, we have also accelerated our international efforts with FireFly. It is more difficult to support early stage technology further from our home base, but we believe that the economic climate is better with some of our international customers and the interest is high, so by necessity we have broadened our marketing scope.

We also believe that even though ARAM is seeing softening for the Aries product in North America due to the turndown, we are well positioned to aggressively push ARAM into the international markets. We are very close to releasing Aries II, which has significant new capabilities including much higher density shooting. This combined with much lower cost in our Scorpion analog system gives us more flexibility to gain share internationally.

Also a big technical push with ARAM will be the integration of VectorSeis into Aries II offering, so we can sell full-wave back into Aries or ARAM's install base. The ARAM is a bit of a hedge against the diffusion rate of FireFly, since we have room to grow from a market share perspective and it's a lower cost offering for the mainstream market, which is still growing internationally.

In Marine, we are making great progress with Orca sales and growing interest and demand for DigiFIN. The combination of DigiFIN, DigiBIRD, and DigiSTREAMER are all aimed at not only an approved image but much more productive operations. The cost of DigiFIN can easily be justified by the productivity gains related to more efficient operations, so the value proposition is a perfect fit if contractors are looking for ways to save money while still offering their customer better data.

In summary, I would also like to make a comment on our asset-light strategy. We chose not to get into the contracting business as we prefer investing our capital mainly in R&D and to maintain a low fixed cost overhead. Our short-term goal is to leverage our built-in strengths and navigate through these choppy waters so we can take full advantage of our portfolio of technology when more certainty returns to the market.

Operator, we will now take questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question is from the line of James West with Barclay's Capital. Please go ahead.

Hi, good morning guys.

Good morning, James.

Bob, clearly 2009 is going to be more challenging than we thought a couple of months back. North America is going to be certainly difficult and definitely under pressure and so I would say your customer base likely to be able to spend less next year. But on the international side, I think the only country or customer base you mentioned where you see a downturn is Russia at this point, so I wondered if you could talk a little bit more about the international business in this environment. Do you think that your international operations are going to continue to grow next year?

To speak to the environment, Russia is the only place today that we've seen issues, and frankly, Russia is a bit of puzzle for us. We don't know exactly how it will even turn out as we go into 2009. What we are seeing, as you would expect, is that the lower commodity prices certainly have put pressure on the government and how we -- what we don't know is -- how that's going to find its way into the NOCs which are a dominant part of the Russian market.

The Russian dilemma is that about the time this happened, their production has peaked. In fact, it's speculated now if the production is now in decline and there is pretty good evidence of that. So, I think to have a real dilemma and it's just -- it's going to be curious to see how that plays out. We're assuming --and we certainly have see it in the short term -- we're assuming that Russia is not going to be as good a robust market as it was in the last couple of years, and we'll just have to sort of play that one as it unfolds in 2009.

In the remainder of the markets, international markets, we really have not seen much effect at all. In fact, as much as we can tell, most of the companies we're talking to whether it is ENOCs or the large IOCs that are major players, are all pretty much seem to be holding to their capital spend. There is a little bit of wait and see attitude, but as you know, many of those projects are already locked-in and fairly significant. And then you have countries like China and India that very much have an energy policy that's driving a lot of their activity and we just haven't seen any signs of reduction in those markets.

So, less Russia, we're still looking at our 2009 plan. We'll speak more of that in December, but at the movement I would still expect that we'll see some growth in international markets.

Okay. And then just on FireFly quickly with respect to the international, the shift towards the more international markets. Were your customers internationally fairly well aware of FireFly before this or is this going to be a significant marketing effort over the next couple of years?

No, no, they're very much aware. We've kept them educated and obviously we've been so visible that it would be hard for them not to be aware. And, so there is an awareness and we have been in discussions with more than one for some time, but it's been on a different timeframe and so we're just looking at possibilities of going faster than we had originally planned. That has even altered to a certain extent our own testing programs and thinking about training up some of our international folks who can handle it. So, we're having to -- we're having to sort of adjust to that. But I think there is good chance we'll end up with some kind of program internationally next year so that's sort of our timeframe that we're working on.

Bob, do you have to reengineer the product for it to work internationally?

No. The only thing -- the only thing we have to do is, there are some firmware changes. For example, it depends on the radio frequencies, but that's a firmware change. I mean basically the -- it's quite a robust system so we have to make software tweaks, but basically that's the beauty of FireFly that it's -- the box is a box and the sensor is a sensor and mainly if you make changes, probably the bigger changes are just adapting to their operational practices and the value proposition changes a bit. For example, just to give you some data, in China a crew that you'd have a 150 people on in the US, you might have 1500, and so the value preposition of saving people is not exactly the main value prop. But they have great interest in some of their -- their areas where you have difficult terrains, same thing in India. I mean there is a lot of places where the value prop is different but there isn't -- there are some very significant value propositions.

The other fact in international markets is actually in favor of FireFly, is with the exception of the Middle East. Much of that -- much of those markets are dynamite which really plays to the current version's strengths.

[I know] BP and Apache have time on the original FireFly version 1 system, are they back out in the field or do they plan to go back out in the field with that product?

It will be -- it will be actually with Version 2. We've worked out a way of getting them -- or the service can be provided on with Version 2 and we're talking to both of them, they each have their own individual plans. I am still guessing and if I had to guess between the two, we'll probably see something going on with BP before Apache. They are quite -- BP is quite, quite still excited about FireFly and one of the main customers out there that we think is going to create some opportunities for the market.

Okay. Thanks Bob.

Thank you. (Operator Instructions.) And our next question is from the line of Terese Fabian with Sidoti & Company. Please go ahead.

Thank you. Good morning. I have a question on the RXT contract. You have in place three more system sales for the Ocean bottom cabling system. Are those firm or are those negotiable?

Well Terese, the RXT contract is a -- it was a contract, as you know, it goes out multiple years and it has a minimum purchase requirement per year. So that's not negotiable. That is -- that was in consideration to the exclusivity we extended to them.

Okay. So that's that. And then I have a question on your land system sales numbers, it seems pretty high in the third quarter, what went into that?

You're talking about the total system?

Right. The land imaging systems, the $82 million.

Actually, I'm not sure how to answer that. Can you be more specific with the question?

Sure. Well, there are $45 million in the second quarter and you had that $30 million ONGC sale in both quarters, so I am wondering why the pop?

Part of the pop is we had a small part of the -- we picked up some ARAM business, and because we closed it before the end of quarter, so there is a little bit of boost because of ARAM. And then we normally have, I mean as you know it's a lumpy business, so I think I actually I'd have to go back and look at the detail. I suspect that I don't know if that was Vibes or if that was Land Systems, I am not sure, but I think part of that outlook was probably the ARAM addition.

Yeah, I mean I know the quarters are lumpy and you may have taken some from the fourth quarter in the...?

Yeah, we look at quarter-to-quarter...

But I am just wondering in terms of modeling, how to look at that?

Yeah, it's just -- really Terese it was just a function of just the lumpiness of the business. It was really hard to say what happened, how do you convert Q3 to Q2.

Yeah.

Okay. Can I ask you another question? On the ARAM rental business, is that a very large portion of last year's revenue stream, is that something that you might be building on, is that a market you see?

No, it's not a very large number historically, but the nice thing about it is that they've built out a really great infrastructure, a way to manage the assets, a way to maintain the integrity of the assets, so they have got a great platform and they have demonstrated that that platform works very well in Canada. So, we look upon it as an opportunity to be able to take that platform and take it out to other places around the world, so we look at it as a growth opportunity.

And do you think that that's a business that will withstand the market trend down, I mean would people rent rather than buy or is the business just...?

It's an obvious one solution that people have some business they need and they don't have the right equipment set or whatever and they don't want to make the capital investments. So, it's really a nice -- if you think about why they put it together, it was really at the beginning had to do with Canada where you had this very cyclic business, and it was a good way for people to manage the highs and the lows and also allows people to get introduced some technology and then ultimately they can purchase the technology. So, it's just really a nice add-on to your business offering.

One comment, Terese, that is that our current information on the ARAM rental business is pretty much the entire rental fleet has been committed to for the winter shooting season in Canada and we are also hearing a little bit about contractors sort of phoning around and seeing if they can rent equipment from each other versus buying it.

Okay. Okay, I have some other questions. Let me queue up as there are others in front of me, thank you.

Thank you ladies and gentlemen. (OPERATOR INSTRUCTIONS). And there are no further questions in the queue at this time. Actually, we do have a follow-up question from the line of Terese Fabian. Would you like to take that?

Yes. I am ready to go ahead.

Please go ahead.

I am sorry. One really similar question on shares outstanding, What was the count at the end of the quarter?

Terese, I don't have the exact count sitting in front of me at the end of the quarter, but we will have our Q out here tomorrow.

Right. Okay. Then a more complicated question that probably you do have an answer for. When you are looking at creative business models for FireFly rollout, what would they entail, I mean possibly could you be acting as a contractor in this type of an environment just to get the system out?

We are looking at different -- obviously we have some inventories, so we are looking at different proposals. I really won't get into that detail, it's just really competitive, that would be information I just don't want to share. When we have it out there, we will be able to talk about it, but I am just not going to talk about that right now.

Okay. Do you still expect something to develop from this within the next quarter's periods or are we looking end of '09 now?

It's very difficult for us to comment on current deals that we are negotiating.

Right, we just can't to do that on timing, I mean we have competitors on the line, so we are just not going to talk about that.

Okay, okay. Thank you.

Thank you. And our next question is from the line of Morten Nystrom with [Finley Fones]. Please go ahead.

Yes, just a follow-up on the RXT contract. Could you say anything regarding (inaudible) RXT needs to buy from your guys per year?

I am sorry, I didn't quite -- was the question, what is the required....

How much this RXT needs to buy from your equipment every year in order to keep exclusivity?

I believe the requirement as a minimum, there is a couple of different ways the formula works, but it's approximately $40 million a year I believe.

How much was it in the third quarter?

We have, we don't break out the DSO number as a specific number, but I can't necessarily answer that. We don't segment our business like that.

Okay.

But suffice to say, I can tell you that RXT has met the contractual obligations for 2008.

Thanks.

Thank you. And our next question is from the line of Joe Agular with Johnson Rice. Please go ahead.

Thank you. We were dropped off the call for a short while there, I am not sure if this has been asked yet or not. But, on the Q4 comments regarding the softness that you are seeing from your customers, I think you mentioned primarily it was on the Land side, correct?

Correct, yes. Land US and Land Russia.

Okay. And I guess what I am trying to find out more on is whether or not this would be both system sales and parts and supplies or is it mainly kind of the parts and the supply side of the business?

No, it is system sales.

Just system sales you did with customers, I mean is it basically a situation where customers have deferred?

Well, I think Joe to be frank, I think there if you think about the value chain, they are also being cautious. Now, if you look at -- Russia and North America is two different stories. If you look at North America, you had companies like Chesapeake and some major players that were very big consumers of -- and major customers of some of the contractors -- who really slowed way down or even stopped or sold a lot piece of their business, so there is a lot of uncertainty currently in the market. So, I think part of it is people aren't sure what next year is going to look like. There is going to be some asset changing hands, what the gas price is going to be, so I think part of it is just right now our own customers until they get more clarity from their customers, they are not going to know and as we would all be there -- therefore they are being a bit conservative and you do have because of fairly significant slowdowns in the resource plays, you do have some contractors that have some cruise that are not working right now. And so, obviously if you have a crew that just got stacked, your appetite for buying more -- I would say that it's mainly been the sales that we've seen probably just slip out, our appetite for high density shooting, upgrades to things like ARAM 2, which we know is going to happen -- it's just like they are going to have to just wait to see their own -- how their own market sort of firm up.

Okay. Bob, could you give us also some comment maybe on data sales, what the outlook is for that side of the business? It seems like that would be an area that has a little bit more discretionary aspect to it as well, but it sounds like it's holding up for you?

Yeah, well one thing that we have is that we are right in the sweet spot with our multi-client data sales. We are not -- if you look at where our stands are, the majority of them are in exploration areas that have high levels of interest. So for example, Arctic span, West Africa, Brazil all those different places are places where people aren't backing down, and so if anything, what's intriguing to me is that I think there will also be trying to get on the head of the drill bed a bit and so I think if people slowdown and drilling some activities that then necessarily mean they are going to cut back on the geoscience work.

What we have done, as Brian said, we tightened up our range because historically we have see some just we call bluebirds, but it's that yearend that data sale or whatever, so we have some budget and we are just sort of assuming that's just not going to happen as much as we have seen in the past. We don't know. I mean to be frank. At this point in the quarter we normally don't know until we end the quarter anyway, but we are sort of assuming that that's just not going to be there at the same. But I think for a normal business model with that multi-client business even looking out next year, we are just in the right place. I think the libraries we have and the projects we are working on are still very very important areas for exploration and I just don't see those being cut back too much if at all.

And also in your comments, your introductory comments you mentioned that given some of the overcapacity that may be developing here on a short run basis on the sort of the crew side, the acquisition side, it sounds like you may take advantage of that, are you not changing any plans in your investments in new data?

Well, we might. I mean, obviously for us one of the challenges you have if you are collecting data is crew availability and so whether -- and so we have several ideas for different kinds of spans on land and marine and so if the cost of a crew goes down, that's good for us.

Okay. Thank you.

Maybe one other comment I would make is we've talked a lot about sort of what's going on in the land business, North America and Russia little bit of the multi-client type, but we haven't really talked a lot about is the fact that the marine business is strong.

Yeah.

We are not seeing softness there at all quite a bit of visibility in the next year, and the data processing business is actually fighting the other battle, they are -- they have got great backlog and are actually still struggling with the capacity issues.

Yeah, we are saying -- that's why I am saying we haven't really seen any indication of major slowdown on what you think of the geoscience process. I do think that even on land all companies had problems that they have actually have not been able to get ahead of the drill bed, things have slowed down and so I think the -- we just think the strength of our processing business is good. And also -- and we will talk about this a lot more in December, but we are entering the year with a hell of a portfolio partner -- a big portfolio technology that's very relevant to the market even in the --- particularly in the marine.

Thank you. (OPERATOR INSTRUCTIONS). And we do have a follow-up question from the line of Terese Fabian with Sidoti & Company. Go ahead.

Again, first let me say I do appreciate your review of the energy cycle back then from the 80s and as it relates to now, I think that's very helpful to have packaged, and I do have a question following up on the marine side of the business. You announced last year that you had a joint venture agreement set up to do some permanent -- a pilot system for permanent seabed monitoring, reservoir monitoring. Is there any advance on that, I mean are you still doing work on that and where is it going?

Yeah, it's pretty much a program -- we are in a venture, I think the big, the big step in that venture will be actually a pilot project which Statoil is still committed to do. And so, we are just really still going down the path of being participants in that venture. There is really no news one way or the other on that venture.

Well, the venture has been set up, the organization has been set up. We've contributed to the venture and we have a seat on the board of it and...

Yeah, continues on.

Yeah.

Do you think that the permanent seabed monitoring or permanent reservoir monitoring of some kind is the direction that seismic is going to be going more into?

Well, it's why we are in the venture is that we want to keep our toe in that water. Yeah, I think there is going to be permanent installations, we've already seen that. And, which form it takes is still I think in people's minds, also be it built with retrievables, be it built with nodes, be it built with towed streamer, be it built with permanent and the market is a little bit all over the place on that. If you look at the majority of 4D monitoring, it's still being done with towed streamer. And so, how much is ultimately going to be permanent; I think the jury is still out. It's a market that's been really big in hope and slow in defusion and that's why we haven't really, we just can't --- we've tried to be there with our technology to do a venture versus kind of tackle it by ourselves.

Okay, great. Thank you.

Thank you. And, there are no further questions at this time. I would like to turn it back to management for any closing remarks.

Well, thank you for taking the time to attend the conference call and we look forward to talking to you in December when we give you our guidance for 2009.

Thank you. Ladies and gentlemen, this concludes the ION Geophysical third quarter earnings conference call. Thank you for your participation. You may now disconnect.