Ion Geophysical Corporation (IO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you so much for standing by, and welcome to the ION Geophysical first quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions)

As a reminder, the conference is being recorded today, on Thursday, the 7th of May, 2009.

I'll now turn the conference over to Mr. Ben Burnham of DRG&E. Please go ahead.

Thank you, Michael, and good morning, everyone. Welcome to the ION Geophysical Corporation's first quarter earnings conference call. We appreciate your joining us today. With me are Bob Peebler, Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer.

Before I turn the call over to management, I have a few items to cover. If you would like to be on an email distribution list to receive future news releases, or experienced a technical problem and didn't receive your news release yesterday, please call DRG&E and provide us with that information. That number is 713-529-6600.

If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the Company's website at www.IONGEO.com, or via a recorded instant replay available until May 21st. That information was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, May 7, 2009, 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 risk factors disclosed by the Company from time to time in its filings with the SEC, including its annual report on Form 10-K for the year ended December 31, 2008, and in its quarterly reports 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 on our conference call this morning are covered by these statements.

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

Thanks Ben, and good morning. As expected, our first quarter was a difficult one. A key priority was our continued efforts to rapidly adjust our operating costs to the size of the business at hand.

Since late November, we have reduced our total head count by 23%. When combined with other cost initiatives, including significant salary reductions, we have reduced our run rate by approximately $43 million on an annualized basis. Although we continue to look for additional cost savings, I believe that the majority of the cuts are now behind us, and we will be once again focusing on building our business while continuing to emphasize cash management.

It's much too early to blow the 'all clear' signal, as we still have many challenges in our business, but I do sense that the worse may now be behind us. I believe that with oil prices occurring to settle into a $50 price range, and with many in our industry expecting more price involvement -- improvement in their price tags in 2010, the oil and gas companies are starting to unlock their budgets, which brings more certainty to everyone in planning their business.

It's important to note that much of our business comes from outside of North America and that many of our future prospects are in places like China, India, North Africa, and the Middle East, and that is where we are focusing much of our business development efforts.

One example of this is our recent announcement of our first Aries II system sale to a very large global Chinese headquartered contractor. It's notable that initially we expected this to occur in North America, but we managed to quickly redirect our efforts and close the deal with the Chinese contractor.

I also to want to point out that we are a technology company and are not in the fuel crew business. As a result, we do not have large amounts of capital tied up in vessels, crews, or other assets necessary to support contracted acquisition services. Our costs are mainly variable related to our personnel. This asset-light model gives us the flexibility to rapidly adjust our cost basis when the market enters a downward cycle.

In addition, our prices are mainly holding with the exception of some pricing movement in the commodity end of our business, such as geophones. This fact is reflected in our year-over-year gross margins, which remain generally consistent at 35%.

From a market perspective, even though we have seen some softness in the majority of our businesses other than proprietary data processing, which continues to grow, our main challenge continues to be the land systems market in North America and Russia. The precipitous drop in those markets has been dramatic, with land system sales essentially dropping to zero in North America and not faring much better in Russia. We do not expect either market to improve much until commodity prices increase sufficiently to restart drilling activity and related seismic acquisition work.

This unexpected decline has clearly tested the wisdom of our ARAM acquisition, since ARAM's main customer base is in North America. I still believe we will ultimately benefit by owning ARAM, as there is still a very large install base of equipment throughout the world that supports approximately 700 to 800 land crews.

The long-term trend is for more 3D systems and increased channel count, which will drive significant future sales. With ARAM, we are now much better positioned to serve this market from both a quality and price perspective, and expect to gain market share in the international markets.

Another area of weakness that will likely continue during 2009 is our VSO business with RXT, which is currently suffering a slowdown in their business and compelling them to reduce their fleet from five to three active vessels. Until RXT begins adding to their fleet, ION's 2009 seabed revenues will primarily be limited to spares and repairs on the three active crews.

The good news is they have made significant operational improvements and have managed to recently recapitalize their business, which has resulted in significant recent payments to us against [the amounts they owe us]. We plan to continue to work closely with RXT during this tough period, as we both share the same belief that the potential market for seabed full-wave will enjoy rapid growth in the years ahead as the challenges of characterizing high cost of hard-to-image reservoirs will only increase.

Another good news story in our marine business involves the payoff we are beginning to see on a significant investment in Intelligent Acquisition portfolio of streamer technologies, which include ORCA, DigiFIN, DigiBIRD, and DigiSTREAMER. The value of combining ORCA, DigiFIN and DigiBIRD as an integrated offering has the attention of both oil companies and contractors because the offering has a dual benefit of much more efficient operations and better imagining for both 3D and time-lapse 4D acquisition projects.

For example, our Intelligent Acquisition technologies are able to significantly reduce infill or the reshooting that most contractors must do when the streamer cables separate behind the vessel and have insufficient cross-line spacing to properly sample the subsurface. In many marine surveys, the cost of infill can account for 30% of the total acquisition cost. So far, we are seeing reductions of 20% to 50% in infill on vessels using our Intelligent Acquisition technologies, which could save the oil and gas companies 5% to 15% on their acquisition bill.

Even though our marine business started significantly slower than last year, our pipeline and backlog gives us confidence that we can still look forward to a solid year with sales mainly tied to the delivery of new vessels which -- where we already have purchase orders or good visibility of future sales.

Although our 2009 multi-client and related data library sales will likely not be as strong as last year, we are still expecting a solid year. Our advantage compared to others is the fact that we are a niche player that's focused on the exploration hotspots around the world, and that we are offering more comprehensive basin-scale geoscience offerings that oil and gas companies use to plan their regional exploration programs far in the future. As such, we are less affected by prevailing commodity prices compared to other data library providers whose products more closely tie to where do we drill this year? Areas such as the Arctic, the west coast of Africa, Brazil and India are examples where we have focused and most companies operating there are well capitalized and have a long view when it comes to their global exploration portfolio. One benefit of the slowdown that is already accruing to us -- and will likely increase -- is the decrease in day rates for the vessels we subcontract to do our surveys.

As always, the biggest challenge with our multi-client business is the timing of library sales, which continues to be lumpy. However, the unpredictability is somewhat offset by the fact that we now have a significant portfolio of individual programs that helps create more balance. Even in this environment, we are continuing to track new underwritings for key programs in regions ranging from the Arctic to Southeast Asia.

Our proprietary Data Processing business continues to be strong and growing. Although we have seen some weakness in some areas of our pipeline, our leadership in technology, including reverse time migration, is providing a significant competitive advantage against the commodity end of the processing business. We still expect our proprietary Data Processing business to grow compared to 2008, a true bright spot in our portfolio of products and services.

Before I turn the call over to Brian, I would like to update you on key areas of technology. First, at a high level, we have reduced R&D spending by approximately 15%, but expect we will spend approximately $42 million in 2009. This represents about 7% of our forecasted revenue, which we believe is appropriate for a technology-based business such as ION.

Related to this spend is a significant focus on the commercialization of FireFly. I am pleased to announce that for the first time we are supporting more than one commercial FireFly project. The first project is in China, where as of today the project is approximately 65% complete with a productivity rate greater than what was contracted and with excellent trace recovery that is approaching what is routinely possible with cable systems.

The second job is with BP in Northeast Texas in the area of Haynesville Shale Play. The project recently started and is currently being laid out. This job is notable in three ways. First, it's our first project of using vibrators as the sound source compared to dynamite. Second, the project is in a very high canopy area, meaning significant foliage, almost as dense as encountered in jungles. We are pleased that so far our radio system is working well in this environment, which is an important achievement.

Third, I consider it significant that we're working with BP again. As you remember, they were one of our early field trial partners and know FireFly about as well as anyone. They provide a great input into their expectations for what a cable system needs to deliver, and because of their input and commitment I think we've made some great improvements in the system that is accelerating the adoption of this technology.

The third job is in Mexico, where the Mexican contractor Comesa will operate a FireFly system for PEMEX on three full scope end-to-end projects that range from swamps to remote farming areas that also present difficult imaging challenges. The PEMEX projects are a poster child for our solution strategy as ION not only will be providing the FireFly technology, but also work indirectly with PEMEX on all aspects of the seismic workflow, including survey planning, project management of acquisition operations, and follow-on processing of the full-wave data with the goal of identifying individual locations in partnership with PEMEX geoscientists. We recently signed a contract with PEMEX and Comesa and are in the process of shipping the equipment. The job will likely start in June.

Considering the very tough market conditions, I'm pleased that with these three projects we are making steady progress with the introduction of FireFly and the related full-wave acquisition.

I will now turn the call over to Brian.

Thank you, Bob. Good morning, everyone.

I'd first like to go through our latest quarter's results and then move into a broader discussion relating to our updated guidance and our current liquidity and cost reduction initiatives.

Moving into the financials for the quarter. As we expected, our first quarter continued to show market weakness, especially in the North American and Russian land markets. Overall, we generated revenues of $107 million compared to $140 million during the first quarter of 2008, a decrease of approximately 24%, primarily on the system sales side of our business.

Our ION Solutions revenues were up slightly as compared to prior year at approximately $47 million. We experienced both sales growth and an increase in our backlog in our Data Processing business. Revenues from our Data Management Solutions division decreased $2 million entirely as a result of changes in currency exchange rates. Excluding the impact of currency, that business grew year-over-year 9%.

Our Land and Marine Imaging Systems each showed a decrease of approximately $16 million in revenues compared to prior year. For the Land Imaging Systems business, the decrease was attributed to the softness in the North American and Russian markets. For the Marine Imaging Systems business, it was more a question of the timing of new vessels this year, as it was more actively projected for the second through fourth quarters than it was planned in the first quarter.

We saw a decrease in our gross margin rate in the first quarter to 32% compared to 35% in 2008. The quarterly decrease in margins was due to the amortization of ARAM's acquired intangibles. Removing the impact of the amortization charges, consolidated gross margins for the first quarter of 2009 and 2008 were both 35%.

In our Marine Imaging Systems division, we experienced a 2 percentage point decrease in gross margin, mainly related to the product sales mix for the quarter. Our Data Management Solutions segment gross margins showed a 4 percentage point improvement over last year as a result of more software versus hardware sales. Margins in our ION Solutions segment remained stable when compared to the first quarter of 2008.

The first quarter of 2009 contained two special charges that directly impacted our results. The first special charge relates to an additional impairment of the acquired intangible assets of ARAM. At March 31, 2009, our acquired intangibles were evaluated again for possible impairment. Based upon this evaluation and the continuing prevailing market conditions, it was determined that $38 million of ARAM's proprietary technology intangible assets were impaired. We recorded that charge as a separate line item on our income statement. As of March 31, 2009, ARAM's intangible assets have remaining net book value of $33 million and a remaining weighted average life of 6.9 years.

The second special charge for the quarter relates to the additional employee reductions in force that occurred throughout the first quarter. At March 31, 2009, we had expensed approximately $1.6 million in severance related to these reductions. In total, the first quarter contains approximately $40 million of special charges before taxes.

In the Land Imaging Systems segment, first quarter revenues decreased to $34 million compared to $50 million in 2008. As expected, the North American and Russian markets continued to be soft following the slow fourth quarter of last year. However, we did see continued activity in the North African, Indian and Chinese markets. We also saw success bringing ARAM's ARIES product line to international markets, selling systems in both China and Russia in the first quarter.

Gross margins in our land business decreased during the first quarter of 2009 to 17% compared to 24% in 2008. Lower land revenues for the quarter contributed to this decrease in margins. Margins were diluted due to the inclusion of the amortization charges associated with the ARAM acquisition, which totaled approximately $3 million for the quarter.

Marine Imaging Systems revenues decreased to $18 million in the first quarter of 2009, primarily due to the timing of new vessel deliveries into the market. While the new vessel builds are forecasted to be large this year, the related sales activity is projected to occur during the reminder of 2009. During the first quarter, however, we did continue to retrofit existing vessels with our newest steering technology, DigiFIN, as we enjoyed continued sales to two of our largest customers. We expect the sales in our marine division to continue to increase as new vessels enter the market this year.

First quarter gross margin in the Marine group decreased 2 percentage points to 44% compared to 46% in the first quarter of 2008 primarily as a result of product sales mix. Our first quarter Data Management Solution segment revenues decreased to $7 million compared to $9 million in the first quarter of 2008 entirely as a result of changes in foreign currency exchange rates. This division conducts business primarily in pounds sterling and during the first quarter the US dollar strengthened significantly against the pound sterling.

In our ION Solutions division, net revenues remained at $47 million for the first quarters of 2009 and 2008. The results were driven by strong data processing activity and sales of our data library including Artic span. First quarter gross margin in the Solutions division remained stable at 32% for both 2009 and 2008.

As a result of lower revenues this year, first quarter consolidated operating expenses including the impairment charges -- excluding the impairment charges of $38 million and the $2 million of severance charges as a percentage of revenue increased 37% compared to 27% for the first quarter of 2008. Removing the impact of the special charges, operating expenses increased by $1 million year over year.

We incurred an income tax benefit of approximately $14 million in the first quarter of 2009. Excluding the special charges, we generated a net loss of $10 million compared to net income of $8 million for the first quarter of 2008. Including the special charges, diluted EPS was a loss of $0.39 compared to income of $0.08 in the first quarter of 2008. The total impact of the special charges was approximately $28 million or $0.29 per diluted share. Excluding these special items, our loss was $0.10 per diluted share.

Turning to the balance sheet, inventories during the first quarter rose by $9 million to $272 million as a result of trailing advance purchase commitments for certain materials. As has been discussed in prior earnings calls, our main focus at this point is to monetize our inventory and based on our current pipeline of business, we project this to begin occurring in the second quarter.

Accounts receivable decreased by $49 million in the first quarter of 2009 from year-end 2008 as we continue to focus on collections. Excluding the investment in our multi-client data library, CapEx for the first quarter of 2009 was $2 million.

Additionally we had $7 million related to transfers of inventory into our rental pool. Given the current weakness in the North American market, we have successfully shifted our focus to providing more rental opportunities to our customers.

Cash decreased $13 million compared to year-end, primarily as a result of reducing trade payables related to our build of inventory in the fourth quarter of 2008. The first quarter is historically our weakest quarter of the year and therefore is typically our lightest cash generating quarter. We have already seen our cash balance increase and as of the end of April, our unrestricted cash balance was approximately $30 million.

Beginning in the fourth quarter of 2008 and continuing through the first quarter of 2009, we implemented several cost reduction initiatives including significant general expense reductions, reductions in headcount, a salary reduction program, suspension of the matching contributions to employees' 401(k) plans and additional policy changes including a focus on decreased travel and the renegotiation of aging contracts.

The largest of these programs is the reduction in headcount. Including contractors, we have reduced our total headcount by 424 positions or 23% of our workforce. These reductions were made to right size the organization in order to align with the level of industry activity and protect our EBITDA-generation capabilities in spite of lower projected revenues this year.

The salary reduction program reduced employees' base salaries by 12% for Bob Peebler, Jim Hollis, and myself, 10% for our other executives and senior management, and 5% for most other employees. Additionally, the Board reduced Board compensation by 15%.

Through our cost reduction initiatives in the fourth quarter of 2008 and the first quarter of 2009, we have removed an estimated annual expense of approximately $43 million. After one-time charges and accounting for the partial year impact for some of these expenses, we estimate that we will save approximately $36 million during the remaining three quarters of 2009.

As a result of the continuing uncertainty surrounding the duration and severity of this economic downturn, we are updating our guidance for 2009 to better reflect current activity levels. We are continuing to run our business conservatively with the primary objective to generate cash flows and have taken a very deliberate approach analyzing product and service demand in our business on a worldwide basis.

Based on our first quarter results and current expectations, we are updating our overall guidance for 2009, and we now anticipate 2009 consolidated revenues to range between $570 and $630 million. Even with lowered revenue guidance, we anticipate generating approximately $120 million to $160 million of adjusted EBITDA in 2009, which as a result of the significant cost reduction measures taken in the first quarter, is only slightly lower than our original guidance. The remaining detail regarding our updated guidance is contained in the earning release issued yesterday.

Moving to liquidity, our revolving line of credit remains drawn 100% and we have approximately $30 million of cash on hand as of the end of April. In addition, our cash balance is building coming out of the first quarter and should show improvement each of the next three quarters of 2009. After the significant cost reduction activities mentioned earlier, it is our belief that the cash generated from our anticipated adjusted EBITDA range in 2009 is adequate to provide us with sufficient liquidity for operations.

Under our credit facility we're required to satisfy certain quarterly financial covenants and ratios. We are currently in compliance with all loan covenants and ratios. However, based up on the softness for the past two quarters and our current forecast for the remainder of the year, our estimated projections indicate that we might bump up against one or more financial covenants at the end of the third quarter and then continue in compliance in the fourth quarter.

We are working proactively with our bank group on an amendment to relax the covenants and expect to have it completed in the second quarter.

With that, we will open up the call for questions.

Alright, thank you. Ladies and gentlemen at this time we will begin our question and answer session. [Operator instructions) And our first question is from James West with Barclays Capital. Please go ahead.

Good morning James.

Bob, on FireFly, I think first congratulations on all the FireFly-related announcements we've seen this year. I think it's particularly impressive given the industry environment we're in. But now as you have three projects in various stages, should we expect you to take on additional projects at this point or are you guys tapped out from a manpower and technology standpoint?

No, we're tapped out. We got pretty much equipment we have deployed and as you can imagine, we have basically three jobs going on at once in three parts of the world so that's pretty much what we can get done. As the year unfolds and some of these, and we are off these projects, we're constantly looking for additional projects but right now we're pretty much tapped out.

Okay. And then on the processing side of the business, you gave great backlog there, it's been extremely strong, what's driving that? Is it just pull through from last year's exploration work, is it reprocessing activity, I mean is this something, you have a technology niche you have, I've been surprised as how well that business has performed?

It's sort of all the above. One of the things we see -- I'll just give a couple of examples. For example, there was a lot of wide azimuth work. As you know acquisition work down over the last year or two and now companies are stepping back and actually want to reprocess a lot of that data. And so -- and once that happens, the opportunity moves from the original contractors that acquire the data to reprocessing shops like ourselves that have really good high-end reputations.

So, we're doing -- we're now reprocessing a lot of the data that had been collected over the last couple of years which is sort of why we like that business, it's a great addition to our portfolio, some time when acquisitions slows down, high-end processing increases. The other fact is that we've been working very hard to expand our global footprint and because of that, we just have a much broader portfolio of activity which gives us more activity.

And then I think, third, we have just really strong reputation in leading technology and that's really benefiting us now. Our leadership for example in Reverse Time Migration has really opened up a lot of opportunities for us and that's a real hot area, we're seeing companies. So, it's a great business, we've got a great technical leadership and it's going to be a really good year for the guys.

Okay, that's very helpful. Thanks Bob.

Thank you. And Joe Agular with Johnson Rice. Please go ahead with your question.

Thank you. Bob, I want to ask you a question on the remark you made in your opening statement which was that you're starting to see some signs that oil companies are unlocking their budgets. I was just wondering if you could may be give some more color to that, maybe where, given that seismic it seem it's always thought it was so discretionary.

Right.

It's a very interesting comment.

Yeah, one thing, Joe, is it what I've seen is just a change in things settling down a little bit. If you go back to as early as January or even February, I think there was a lot of concern in the industry we might see oil prices go to 20, right? There was all kinds of scenarios out there and I think just a combination of the sense that the economy is starting to slowly but surely get little bit better, the sense that the oil prices are likely going to hold in that upper $40, lower $50 range at least and it's sort of held there, I think it's given oil companies more confidence to basically start releasing their plans for the year.

So we sort of saw the first part of the Q1 people really in turmoil and everybody sort of internally focused. So now it's -- I don't say it's business as usual, but people are now just starting to -- you get a feeling that people really now have plans that they're going to operate against this year.

And as far as where, we certainly have not seen a strong increase in North America because of the natural gas problem, but even there some of our contractors are saying that they are now starting to see a little better deal flow, some activity, some bidding, and so I think even there people are starting to, they're sort of adjusting to the reality of the market and they're now starting to make some plans.

And in the international markets -- in our international markets, place like China, which we just got back from there is still a lot going on in the domestic side there. Most of our international markets, less Russia, still seem to be relatively strong. But I think mainly -- I think mainly, I think a growing confidence that we probably got the worst behind us from the oil prices diving and then there is some stability. And I think most people are also thinking that next year the prices will go up some. So I think it's that combination.

Okay. That was it from me. I'll queue in later, thanks.

Okay.

All right, thank you. Terese Fabian with Sidoti. Please go ahead with your question.

Thank you. I have a question on the FireFly survey in China. Can you talk a little bit about the scope of the work and when it would be completed and relating to all of the projects that you are going on, how long will it take to actually see the results of the work for the customers to be able assess the results?

Yeah, there are two ways the customers are looking at this. One is just the operational aspects of FireFly, and of course they see that immediately. And then secondly, to get a sense of the quality of the data itself. And there is two ways they look at that, part of that's what's called trace recovery meaning so what percent of the data is actually being collected with the system. And then also they sample the data as we pull that data off of FireFly, it's put into a form that then the businesses are already looking at the data and they get a good sense of whether or not the data is good data or not.

And I would say in all three of those areas we're passing the test. Obviously when you're out there in outer Mongolia or wherever out in China, the logistics are different than we've experienced. We got a great customer that is working closely with us. We're learning more about what they expect from an operational procedural point of view. So there is a lot of things you sort of learn together as you go forward, but we are seeing the system, though compared to where we're at even last summer we made just significant progress on things like trace recovery to the point as getting nearly to where I think we could expect with a wireless system and then the cable system.

And the data -- the data looks really good. I don't think anyone has any concerns at all about the data quality, and a job -- even though it's a new system with a new customer, right now the job is moving along faster than they had planned for in sort of like total shots per day, and we should have that one finished up sometime in late May in the China world.

In the BP, we've been laying out. I think as of today we should be getting our first vibe point. So they were moving the vibes in position this morning, and we're expecting to get some word sometime today that they've started the actual data collection side. We've been quite pleasantly pleased how well the radio from the point of view of connecting to the FireFly boxes has been working in the layout process and I will see how we do in the -- with the vibes. That's the first time we've used vibes so that's pretty exciting for us.

And the Mexico job, we're just shipping the equipment. So the whole adventure is ahead of us pretty much on that one. We're quite excited about that because it's a -- it's three projects. We'll be pretty much out there for the rest of the year and maybe into next year, but at least through the rest of the year working with CAMESA and Pemex.

Can you talk anything about, like what kind of revenue realization you have on these jobs? Is it profitable for you, are you doing the data processing on the seismic?

Yes, each one is a bit different. The Chinese job will be ultimately a sale. We shipped equipment. We have a contract. This is one where because it's a brand new system, we need to go through the check list of this works and that works and at some point then we get the -- get paid against the contract and it will be profitable. And then it will be what our expected margins will be on the system.

And then the Mexico job is a rental with a purchase option. And so that's a three -- whatever it is in the time, several months of rental, which is profitable for us. In fact the rental purchase model is a good model for us for new technology, and that's sort of those two and then the BP job is a little more complicated because it goes back to our original agreement with them. And so that one is structured to sort of accommodate some of those requirements, but it's also going to be fine.

Okay, good. Thank you. And then I have a question, you had a release out on the completion of the Brazil sand, what's the significance of that in terms of your sales and what's going on with other sands because you had mentioned in your press release that a multi-client data library investments are going to be reduced this year but that comes from the clients if I understood it?

I will let Brian cover that one.

Hi, Terese. It's fairly significant that that was a very well underwritten project from the get go. So the significance of completing that one is just that we get another really great library that's on our library shelf.

So that's a little bit of a different question than what the new venture program looks like moving forward. We had a fairly robust year last year with multiple projects going on on multiple fronts. And this year we've just taken a more cautious approach to that business and have just -- and lined up fewer projects. So we don't anticipate spending as much CapEx as we work those projects, but we have some very interesting projects in the pipeline.

Okay. And again, that CapEx is basically from the project participants?

That's correct.

Okay. Thank you.

We're still running under the same model where we look at the portfolio of new venture programs, and that portfolio should fund our new venture activity.

Okay. Thank you very much.

All right, thank you. And Mark Thomas with Simmons & Company, please go ahead with your question.

Good morning, guys.

Hi, Mark.

Good morning.

Just a couple questions here. Touching on the marine segment first, I know you mentioned you expect solid marine sales going forward with the new-build vessels coming out. Does -- would the marine segment revenues this quarter be reflective of a good baseline for maintenance related sales on a quarterly basis?

It's probably reflective of maintenance-related sales, and then in addition you have to layer in the retrofitting vessels with the DigiFIN technology.

Okay. And then...

Go ahead.

And then turning to your customers, are you seeing any improvement on some of your customers' financial situations where you may feel more comfortable making sales without cash upfront?

Well, we -- on the marine side of the business, we do make sales without cash upfront to certain customers, like customers like PGS where we have a longstanding relationship. They've got a tight balance sheet and we extend normal trade terms with them. So that's the normal course of business. Same thing with the customers like True Grow.

I guess more specifically on the land side.

Well, on the land side, I think we're still typically pretty conservative with your average contractor.

Okay. And then...

It depends -- it very much depends on the contractor. If you look at land, we do have some contractors that are quite substantial and you would be comfortable with them. But obviously right now our preference is also to get as much cash upfront as we can get.

Okay. And then final question from me, just on a percentage basis, could you estimate how much of your marketing efforts have shifted to the more robust markets like China, India and North Africa, say relative to six months ago?

Yeah, I would say the majority, like probably 80% is in -- outside of North America with the exception of the Gulf of Mexico processing obviously and data library sales and that kind of thing. So our processing business, we still have a substantial piece of that business that would be related to North America based customers. But from a systems point of view, we are almost totally focused external. The business we get are with our known customers and it's more [in the area of small] repairs and that kind of business.

Okay. Thank you very much for taking my questions.

All right, thank you. (Operator instructions) George Gaspar with Robert Baird, please go ahead.

Yes, good morning. I'm sorry, I got on late and I didn't know if you had commented on the proposed request to shareholders for a reverse stock split?

We have not commented on that.

You have, you have not?

We have not.

Okay, all right. I mean is -- what's the strategy here, can you talk about that?

Yeah, the strategy, obviously we would like to have that option to do that. If you look at the number of shares, even in our -- when times were a lot better for us, we felt like we had a bit of a share overhang. And so if you look at how market works, there's a lot of companies out there they get about $5 or so, they don't really take a look at you. And so we just want to have that in our arsenal of things if we decide we can do the reverse split.

Okay. And in terms of financing, I don't know if you've made a comment on that, on the high interest rate financing that's in place, you've got any strategy on trying to drive that down or is that just going to have to work its way through the business process over the next year and hopefully you get some room to move or to replace this?

Actually, George, we're working very aggressively to take that out as soon as we can. And we're looking at different scenarios to put a lower cost instrument in place and extend the maturity, and have a lot of support and cooperation with our general bank group to do that.

Okay, all right. And then one question on your work, if you are working with Africa, Nigeria offshore area -- do you work that area?

Yes. Well, in effect, it shows up in different ways. One is we do have SPANS in that part of the world, which is a multi-client. And then we also have a lot of our contractors that use our equipment in that part of the world.

Okay. Are you going to -- there is pretty significant exploration project that's going to begin in September in the joint development zone of Nigeria. Are you going to be involved in that or have you been involved in doing or supporting seismic activity there?

Yes, again because we don't ourselves provide crews, and so we show up in two ways. One way is for the contractors to be using our equipment like the Intelligent Acquisition equipment, and I would be surprised if that doesn't show up there in one form or another. And second is our SPANS, our multi-client. And then actually the other is VSO in -- off the west coast of Africa which RXT has quite an extensive project with Exxon, ExxonMobil.

Great. And if I could ask one additional, the -- in your annual report you gave a pretty good review of some of the technologies that are coming about and you're trying to help your customers on. The -- this business of steering the streamers and trying to get rid of the bright spots or dark spots or whatever, can you comment on how that DigiFIN system or whatever you are doing, that can eliminate some other re-tracking that's been required in the past by oil operators in doing seismic?

Yeah, George, I think you actually missed that part on the call, but I will keep you equipped, I covered that on infill. But we're seeing -- infill can represent up to 30% of their total cost. And we're seeing with using our streamer technology, the DigiFIN edition in particular in concert with ORCA, which is sort of our operating system, we're seeing from 30% to 50% improvement in infills. So that really equates to much more productive operations and obviously lower cost to the oil companies.

That's very encouraging. Thank you.

All right, thank you. (Operator instructions) We have a follow-up from Terese Fabian. Please go ahead.

Hi, I have two questions actually, and first is on the market recovery when it does come for seismic equipment sales. Do you think that -- I mean there have been very heavy sales over the past couple of years, some seismic equipment is abundant, it's all over the market. What kind of land seismic sales do you expect to see when improvement comes?

I think, Terese, the one thing I'd really like to point out to people that there is 700 to 800 crews around the world, of which only 118 are in North America. And so I think people here tends to think about the market being North America, but if you think about it, only 100 out of say 700, 800 is North America.

Another thing to look at is that North America 80% of the crews are 3D, 20% are 2D. The rest of the world, that's more like in aggregate it's more -- it's less than 50% of the crews are 3D and the rest are 2D. Also, in aggregate the channel count here is also higher.

And so the trend -- and I think the most fruitful trend for us, is that all those crews internationally, you're going to have them going more towards what's going on in North America as their markets mature. So you're going to see a big shift over time from 2D to 3D, probably up to those same kinds of ratios, and people who are driving to higher and higher channel count.

So the majority of market I think now and forever will be primarily international, and there really isn't that equipment overhang internationally because of that drive. There is a bit of an equipment overhang in Russia, but I think that will get corrected pretty naturally because their reserves are in decline. So that's -- I see that more of an aberration.

I think North America is more problematic. And in North America, I don't think the play is going to be increasing capacity. I think there's plenty of capacity and there's probably a bit of a gray market right now with equipment. I think the play in North America is going to be the higher end technology -- that people are going to be going towards full-wave, towards higher channel count and even towards things like FireFly. And so we'll be focused on FireFly and higher channel count with ARIES when the market starts recovering here. And in the rest of the world, it's really more of equipping them with more and more 3D and higher channel count.

Okay, thank you. We will look forward to that one. On the G&A question I have, it's for Brian. The first quarter number was fairly high. Does that include severance costs and do you have a run rate going forward?

Yeah. I'm not sure if you picked that up in the script as went through it, but the first quarter included about $1.6 million of severance charges. And as you run forward, we -- if you take a look at our run rate from Q4 and Q1, our total cost reductions totaled $43 million on an annualized basis. In the last three quarters of this year, we would expect that we will -- we've cut out about $36 million worth of expense, because some of that is not -- it's not all just in G&A. You're going to have some of it above the line too in customer service expenses and freight costs and stuff like that.

Right. So you don't have a breakdown in particular for G&A going forward?

No, I didn't take it to that level of granularity on the call, but I can always look at it.

Okay. Thank you very much. That's it.

All right, thank you. And management, there are no further questions at this time. Please continue with any closing comments.

Ben?

Okay. Well, thank you for taking the time to attend the conference call and we look forward to talking to you during our second quarter call. Thanks.

All right, thank you. And ladies and gentlemen, this does conclude the ION Geophysical first quarter earnings conference call. If you'd like to listen to a replay of today's conference, you can do so by dialing 303-590-3030, input the access code 4062393. That number again, 303-590-3030, input the access code 4062393.

AT&T would like to thank you very much for your participation, and you may now disconnect. Have a very pleasant rest of your day.