Ion Geophysical Corporation (IO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the ION Geophysical third quarter earnings conference call. During today's presentation all participants will be in a listen-only mode, and following the presentation the conference will be open for questions and instructions will be given at that time.

As a reminder, today's conference is being recorded, Thursday, the 4th of November, 2010. I would now like to hand the conference over to Jack Lascar. Please go ahead, sir.

Thank you, Josh, and good morning everyone. Welcome to the ION Geophysical Corporation's third-quarter earnings conference call. We appreciate your joining us this morning. Your hosts today 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 get on a e-mail distribution list to receive future news releases, please call us at 713-529-6600 and let us know. 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 18. The information was provided in yesterday's earnings release.

I should also point out that we will be using some PowerPoint slides to accompany today's call. They are accessible via a link on the homepage of ION's website at www.iongeo.com.

Information reported on this call speaks only as of today, November 4, 2010, 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 in the annual report on Form 10-K for the year ended December 31, 2009 and 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 of our conference call this morning are covered by these statements.

I will now turn the call to Bob.

Thanks, Jack, and good morning. The third quarter was the first quarter since the financial collapse that we have had good overall financial performance, driving positive earnings and highlighted by an exceptionally strong rebound in our multi-client business, resulting in a $59 million third quarter compared to $8 million for the second quarter.

It's also notable that our year-to-date earnings number is now in the black, which makes our goal of being profitable for the entire year, including covering any losses from INOVA Geophysical, a realistic target if we finish the year as we expect.

Additional highlights of the quarter include the completion of three new venture projects in the arctic, one ocean bottom cable project and two towed streamer projects where our contracted acquisition partners used our state-of-the-art DigiSTREAMER, DigiBIRD and DigiFIN technologies in addition to our proprietary technology that allows towing streamers below the ice.

We have also seen another strong data processing quarter with sufficient backlog to end with a record year. Our marine command and control software developed by the Concept Systems Group continues to see success in converting vessels to the Orca software platform while our marine equipment group completed a large shipment of source and position equipment, including DigiFIN, DigiBIRD to BGP for the 12-streamer vessel which will be recognized in the fourth quarter.

The streamers for this vessel are scheduled to be shipped in the fourth quarter with revenues recognized in 2011. The only real soft spot in the quarter has been the continued softness in our land equipment businesses which are represented by our INOVA Geophysical joint venture and our Sensor geophone business.

One highlight we are seeing is increased velocity of proposals in our Sensor geophone business which is usually a good proxy for the direction of the LAN business.

Our macro view of the market includes an overarching belief that we will see a stronger finish in year-end spending that we saw last year, which mainly accrues through our data library business, leading to accelerated growth in all our businesses in 2011.

We do have some concerns on the impact of the Gulf of Mexico oil spill in 2011, mainly related to our data processing business, but we also have opportunities developing in other parts of the world such as Mexico, and it's our belief that we can likely offset any potential slowdown in the Gulf of Mexico with other business that is in our current pipeline of opportunities.

We most recently attended the Society of Exploration in Geophysics, SEG, in Denver, and I came away with the impression that the industry was significantly more optimistic than a year ago, both from the tone of those who presented and also by the number of people in attendance.

There was also an emphasis on the importance of geophysics in the rapidly emerging shale plays which many of the technical presentations and supplier displays emphasizing new technology to help improve the productivity of these plays. With the low gas prices, significant improvements in productivity, whether from drilling fewer wells or from more accurately completing them, is needed to make many of the shale plays commercially viable.

At ION we believe that we are at the beginning of a major technology cycle related to the shale plays that includes geophysics, both surface and subsurface, that embodies the integration of both passive and active seismic measurements and reservoir completion engineering.

We plan to be a major player in this important and growing market around the world and have our energy focused on the needed technology. We already have leadership in some of the critical seismic processing technology areas led by our GXT member group, and we also have some experience via our multi-client group which we plan to rapidly expand over the next several months.

We also believe FireFly will be significantly involved in shooting new seismic surveys in areas such as the Marcellus in the Northeast where logistics are difficult and where full waves could play a significant role.

In summary, we are bullish on the relevance of geophysics to the shale plays and believe ION will play an important role in helping solve the shale imaging challenges for our customers.

I would also like to take this opportunity to discuss two new additions to our board of directors. We have determined that it's important to have a stronger mix of industry professionals on our board of directors, and we will be announcing the details of these new board members in a press release to be issued later today.

In addition to our desire to add more senior industry experience, we are also planning to reduce the ION board size to decrease our corporate costs and better match our needs after formation of INOVA Geophysical which has a separate board for the significant part of our future business. The reductions will come through previously planned retirements and resignations later in the year and into 2011.

With that, I will turn the call over to Brian.

Thank you, Bob. Good morning, everyone. I would like to first start by sharing a few of the financial highlights from the third quarter. Third quarter revenues were $122 million with year-to-date revenues of $286 million compared with $299 million for the prior period. As expected, multi-client revenues improved from $8 million in the second quarter to $59 million in the third quarter, primarily due to the new venture activity related to our arctic projects.

In addition, I'm pleased to report our data processing group had another record quarter with revenues of $28 million. For the third quarter we delivered $0.08 per diluted share, turned profitable on a year-to-date basis, delivering $0.01 per diluted share after excluding our first quarter special charges, and generated $52 million of EBITDA for the quarter, improving year-to-date EBITDA to $84 million.

Finally, we invested $38 million in pre-funded multi-client projects during the third quarter while remaining in a positive cash position and with no outstanding balance in our line of credit.

With that overview, I will now discuss our trailing 12-month revenues followed by an in-depth discussion of each of our segments.

Excluding the impact of our legacy land business, revenues for the trailing 12 months of 2010 decreased $20 million compared with the same period of 2009. System segment revenues were down 31% compared to the prior period, primarily due to the continued softness in geophone string and towed streamer product sales.

This decrease was partially offset by a 15% increase in software segment revenues driven by converting vessels to the Orca software platform and a 12% increase in solution revenues primarily due to continued demand for our data processing services as well as significant interest in our new venture programs and data libraries.

Our solution segment showed significant improvement on a year-to-date basis with increases in both data processing and data library revenues. Our data processing division delivered a record performance in the third quarter which contributed to its 37% increase in revenues for the first three quarters of 2010 as compared to the same period the prior year.

Data library revenues increased 85% year-to-date with sales of data libraries coming from a variety of geographic regions including East Africa, Durham Branch, North America and Northeast Greenland.

While new venture revenues increased by only 3% on a year-to-date basis, there was significant new venture activity in the third quarter of 2010 with revenues increasing $27 million or 115% over the third quarter of 2009. This increase was primarily due to the expansion of our ArcticSPAN program with several key surveys being shot during the third quarter.

As we expected, our solutions backlog decreased by 35% down to a more normalized level of $77 million for the third quarter of 2010 compared to a backlog of $118 million for the second quarter. As we mentioned on our last call, the prior quarter's backlog was unusually high due to the pending new venture work completed in the third quarter.

Specific to the Gulf of Mexico, current backlog for the data processing business is down approximately 20% as compared to year-end 2009, and bid activity in the third quarter dropped in half. Fortunately, we have significant global pipeline to potentially offset any sustained reduction of activity in the Gulf.

We are currently expecting full-year CapEx related to our multi-client business to decrease by approximately $15 million from the estimate we gave in the second quarter to a range of $75 million to $85 million due to one of our new venture projects in the arctic which was not completed during the 2010 shooting season as originally anticipated.

The software segment continues to show consistent growth as year-to-date revenues on a pound sterling basis increased 14% compared to the prior period while revenues on a US dollar basis increased 13% for the same comparative period.

The software segment growth continues to be driven by the conversion of vessels to the Orca software platform. To date we have converted 44 of the estimated 125 vessels in the seismic fleet which represents approximately 35% of total vessels, with two of these vessels being converted during this last quarter.

As noted in our previous quarter's call, initial acceptance of the Orca software platform was primarily seen in the high-end 3D vessel market, although we are beginning to experience success in penetrating down into the mid to low 3D and 2D vessel segments.

While the impact of foreign exchange rates was minimal on a year-to-date basis, we experienced some non-cash foreign exchange loss of approximately $3.5 million associated with intercompany balances held by our United Kingdom operations. However, these losses were offset by a third-quarter benefit of $3.9 million related to a US tax refund.

Now let's look at our systems segment with a comparison of revenues for year-to-date 2010 versus year-to-date 2009. As you can see, system segment revenues are down 24% from $95 million for the nine months ended September 30, 2009, compared to $72 million for the same period of 2010. This decrease was primarily due to continued softness in our geophone string and towed streamer product sales. In addition, our OBC business continues to be very soft.

On a positive note, we have successfully completed the shipment of a large order of marine source and positioning equipment for BGP's new 12-streamer vessel. Given the strong book of marine business for the fourth quarter, we would expect to close the gap on this $23 million third-quarter shortfall in the systems segment versus prior year by the end of the year by as much as 50%.

Although we will recognize the revenue for the source and positioning equipment in the fourth quarter, the revenue associated with the 12 streamers sold to BGP will not be recognized until 2011.

This next slide is market data that is commonly requested of us as investors try to quantify the size of the marine marketplace. It essentially is vessel count segmented by size and the total kilometers of streamers operating in the market today. We find this data, especially streamer length, to be a valuable tool to use as we forecast our business.

As you can see, vessel count increased from 83 vessels in 2005 to 128 vessels in 2010, with the strongest growth occurring in the high-resolution 3D vessel segment which tows ten-plus streamers. Streamer length, which is defined as aggregate kilometers of streamers measured from the vessel connection to the end of the streamer, almost doubled over the same period and increased approximately 30% in the last year alone.

As new vessels enter the market and existing vessels require replacements and spare parts, we expect to see increased capital spending by our customers to outfit and operate their vessel fleets with our latest towed streamer products, including DigiFIN and DigiSTREAMER.

And as the demand for complex 3D and wide [ASMA] surveys increases, we believe our investment in new marine technologies will help position us to serve the growing high-end treaty vessel segment.

Now let's move from the results of operations to a review of our balance sheet, liquidity and cash flow. The asset side of our balance sheet illustrates our asset laden strategy with the thrust of our investment and working capital and oil company funded multi-client projects which have resulted in a data library with a net book value of $139 million.

At the end of the third quarter, our balance sheet was much improved from year-end 2009 with greatly reduced leverage and a debt-to-capitalization ratio of 0.2.

We have $160 million of liquidity comprised of $16 million of cash and $100 million of undrawn credit on a revolving credit facility. The primary component of our long-term debt is $100 million of outstanding term loan indebtedness. Both our revolver and term loan have long-term maturities of March 2015.

Taking a look at cash flow for the nine months ended September 30th, 2010, operating cash flows including cash flows from working capital increased 9% compared to the prior period. While we continue to make significant investments in our pre-funded multi-client data libraries, we are able to maintain a positive cash position and we have no outstanding balance on our revolving credit facility.

Now let me give you an update on the progress of our joint venture, INOVA Geophysical. The land business continues to struggle, but we believe this business is slowly improving and will continue to improve during 2011. For the three months ended September 30, 2010, we have reported a loss of approximately $8 million, representing our 49% share of INOVA Geophysical's losses for their second quarter period.

We estimate third quarter revenues to be in the range of approximately $27 million to $29 million with an operating loss of approximately $9 million to $11 million and a net loss of approximately $10 million to $12 million. As in our third quarter filings, we would expect to book 49% of this estimated net loss in our fourth quarter filings.

Similar to last quarter's estimates, these are not final, audited numbers. However, we feel that providing these estimates help improve transparency into what impact our joint venture could have on ION's results of operations in the fourth quarter.

Finally, I'd like to invite you to visit our investor education center which can be found on ION's website at www.iongeo.com. The investor education center, or IEC, is another step in our efforts to provide increased visibility into our business. At the IEC you will find presentations developed to provide our investors and analysts with an overview of ION, including our key technologies and services.

Each presentation runs approximately 10 to 15 minutes and contains a video message as well as links to additional information. We hope you will find the IEC a valuable resource as you seek to gain a deeper understanding of our business.

And with that we'll open up the call for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of James West with Barclays Capital. Please go ahead.

Hey, good morning, Bob. Morning Brian.

Good morning.

Good morning, James.

Bob, when you talked with your major oil company customers, so in your solutions business when you're actually touching the EMPs and the oil companies and they talk about CapEx plans for 2011, what's your sense of the magnitude of the increase in exploration type spending, and do you think that exploration will outperform underlying growth and CapEx?

James, I think the question almost has to be answered in two parts. One is sort of your international part and then the second is in North America. On the North American side, then you have to say what are you going to categorize as exploration? Do you -- for example, do you categorize shale play in some of the new areas as exploration or is that more of a development?

In my mind, in many of the areas they're going into in shale play, it's still almost in the exploration category in that there's still a lot of risk involved in the capital deployed. But you could argue that if it's exploration, it's late exploration because the structures are reasonably defined.

In that area our sense is obviously as you know the natural gas prices are down significantly but yet people still have significant investments, whether they're going whole for production or they're going into new acquired areas. So I think in that area we'll continue. Our feeling is that spend will continue to increase in some targeted areas, whether it's the liquid areas or places that are more productive like the Marcellus. We see a lot of interest and activity and willingness to underwrite in many of those areas.

Internationally what we're seeing just pretty much across the board is increases in exploration both in places like Russia, which as you know was really down and out a year or two ago. Middle East we're seeing a lot of very large projects that will fall into next year in bid out, particularly on land. That's where we're seeing a lot of the velocity of increases of bidding and talk of large projects.

Places like China which had slowed way down, we're seeing some increase. So I think that -- so what appears to be sustainable higher oil prices are going to drive exploration up, so it's sort of that overarching feeling that makes us feel that '11 compared to '10 is going to continue to strengthen.

Okay. And then on your new venture programs which have been highly successful offshore, I believe you mentioned doing some more work on land and using FireFly to do that. Can you maybe comment on how you think about the mix between that business going forward between land and offshore?

Yeah. We've been -- as you know, we've been quite successful offshore because we've carefully picked areas that we feel like we have a technical advantage, and our model which is mainly 100% underwritten really lends itself to those kinds of projects, where we work very closely with the oil companies.

We've been cautious to move on land. We have not wanted to get into the more commodity end of just putting together shoots on land, so we've been looking for sort of the sweet spot for us to enter and we do believe we now have enough understanding of the shale play, and we think that there is enough opportunity for our technology, both processing and converted waves, things we've been working on for a while that it's a good time for us to move in, and it's a great model for our multi-client business.

And then FireFly, if you look at areas like the Marcellus shale, many of these areas are quite challenging logistics. So if you put all that together, there are some real sweet spots for us now to get involved. And so we like to have a reasonable portfolio on land because this helps balance our portfolio, and so I can't tell you what percent because we're only going to do the projects that fit our model. But I think there's a lot of runway for us now to put together some significant programs on land. Personally, I would be quite happy if we were someday sort of 50/50.

And you had the same discipline on land as you do offshore where I think offshore you're 100% pre-funded. Same type of idea on land?

Yeah, I think it's pretty much the same. The one difference in land compared to offshore is that you typically have a lot more players and a lot more opportunities to underwrite. And you often have many in different stages, so at the exact moment you kick off maybe a little bit different offshore, but our goal was still pretty much at a portfolio level to have it 100% covered.

Okay. Thanks, Bob.

Thank you. (Operator Instructions) And our next question comes from the line of Paulo Loureiro with Morgan Stanley. Please go ahead.

Yeah, Bob, Brian, good morning.

Good morning.

Good morning, Paulo.

It was a very impressive. This $59 million in multi-client sales in the quarter is very impressive. And I'm trying to -- I know it's very choppy. It's very hard to quantify and to give any guidance, but first who are you clients in those arctic ventures? Are we talking about Big Oil, and do you see this level of interest sustained going forward?

Yeah. The clients, first the clients as you imagine are typically the big players. So when you're up in the arctic, you have to look at the guys that have got the balance sheets and the long-term staying power to play there. Time to production is quite long, so you have the usual cast of characters, the ExxonMobils, the BPs, the Totals, the large exploration companies.

I think it's driven -- if you just step back and look at the arctic today, the current estimate is at 20% to 25% of the remaining reserves could very well be in the arctic. And obviously if you look at the shoreline, it goes all the way across Canada, Greenland, all the way up through Russia and of course the US. So there's -- and if you look at the data that's available there, it's pretty limited in datasets.

A lot of that is because of the difficulty of the shooting. It's difficult. It's a very short shooting season, and so what we've done again to really support our strategy of looking at the portfolio of ION technology and where we can differentiate ourselves. And in this case it really took the whole of ION to build an offering that actually gives us an advantage, and that includes our marine group, our processing group, our software group. We all came together on how do we actually extend the shooting season substantially, and also how do we improve the quality of the data where you're not having to move around and have to deal with the ice as much as you normally do if you're just towing the streamer on the surface.

This is our second year into it. The first year was more of our experimental year. A year ago we had quite a successful shoot, and then we just built off that success so I think we've really managed to identify ourselves through our practice and through our success of being the leader in the arctic. And there is a lot of data to be shot up there.

Do you have any significant competitors there? Because, I mean, you have been more vocal of any of the other companies out there. Do you see a lot of competitors trying also to do the same?

They tend to turn back. We've had a few. We've had a few attempts, but the problem they have is they don't have our capability and so we've gone further north than anyone's gone. We've had straighter lines than anyone has been able to do. And so, yeah, there's people up there, and they've been in some of the lower parts but there's no one that's been able to compete with us at the scale that we're doing now.

Okay. So I guess you have this first mover advantage there.

Yeah, we sure do.

And sustained into next year. And another question totally unrelated to this one. It's about INOVA, and so you had $8 million in negative contribution this quarter, but this one quarter is the lag effect. How shall we think about the contribution from (inaudible) to your income statement into 2011? I mean, I would expect INOVA to be a accretive. Is it -- am I wrong here?

No. INOVA, as we pointed out when we did the venture, one is that we saw this as a -- back last March when we closed the thing, that 2010 was going to be the year of just getting the venture up and running, to get clear on the R&D programs with a lot of feedback from BGP. Much of the activity that we have not been able to participate in historically over the last few years has been where some of the hottest activity has been, and that's in a place like the Middle East. And that's because we've just not been in that market enough so we didn't get the feedback nor the presence, nor did we have a large player to take us into that market.

So one thing that's quite important to us is we're working on technology that will likely be field tested the second half of next year with BGP crews that we think will make us quite a viable player in that part of the world. And obviously we have a partner that can take us in there, which has really been our handicap.

So I think in our own minds the real strength in the market will sort of come in phases. We're going to see I think next year just the base business for our ARIES product lines, Scorpion product line, where we've already had some presence should start coming back some next year if the activity increases like we thought. And then followed by that will be I think penetration into markets we have not had just because we have a new offering that's been -- basically help (inaudible) with our partner.

So I don't -- we haven't given people any real detail on next year. I think initially though we would expect it to be better than this year, and then rolling into the next year it should really be where we've got all the cylinders running with the new technology and the other things we're working on. But we still feel very good about the venture. We've got a partner that we've never had in the past, which means we have a very large buyer.

And by the way, their business has not been that strong, like everyone in land acquisition, so I suspect their capital spend in 2010 has probably been the lowest they've had since they started out. And I'm talking about on the land side. And they've been focusing somewhat on the marine side, so I think just our partners' normal spend should also increase.

We are seeing strength in some areas. For example, we're starting to see some velocity in the buy business, which was completely dead last year and at the first part of this year. So the market is starting to move. It's a little hard for us to predict exactly what rate or exactly what is going to happen, but I think the trend is clear to us.

Okay. But it sounds like a 2012 story the way you describe it.

Well, I would say there is a step between us -- between now and '12 where I think we'll see improvement. So whatever it's doing today should be better next year, and I think '12 is where we'll see the full benefit of the venture.

Okay. Thank you very much.

Thank you. (Operator Instructions) Our next question comes from the line of Stephen Gengaro with Jefferies. Please go ahead.

Thanks. Good morning, gentlemen.

Hi, Stephen.

When we think about the INOVA side and what's -- I know you talked a little bit about this but what -- can you share with us a little bit more on sort of what percentage of the business is BGP buying? And I know they also had that nice marine order recently, and just sort of maybe talk a little bit about your relationship there and how you think that plays out.

Stephen, this is Brian. When you look at the results of INOVA that we gave some sort of range guidance on for their third quarter that's going to be in our fourth quarter, there was very little BGP volume in that number. So as Bob said earlier, BGP's CapEx has been pretty low this year, so the first couple of quarters of INOVA's existence didn't really reflect a lot of BGP transactions. And quite frankly, they've been spending more time, as Bob said, scooping out R&D plans and getting their teams up and running and sort of establishing infrastructure. So from a historical perspective I can answer the question and it's not (inaudible).

I think on the total, the thing I can tell you is that the likelihood of us getting all of the BGP marine business before the joint venture would have been nearly zero. And so it really allowed us to end up with a much bigger total, having the total offering, and that clearly was helped by the relationship.

Now, at the same time they have a business to run and they're not going to buy product that's not -- that they don't believe is viable in the market. But that being said, they clearly have a preference for our product line if the product line meets their operational needs.

Okay. No, that's helpful. And then when you think about -- I just had a question on the Orca side. You give a slide, but the software, when you say software, that's the sale and then the service is sort of the ongoing sort of annuity from that sale? Is that the best way to think about it?

No, actually it's not. No. The services revenue is associated with people that we have on those vessels that we're billing out on a day rate basis. They're actually supporting the surveys. The software when you went into the concept business, what you'd find is the legacy software like the Spectra products and the Gator products, but that we sold up to Orca were sold on a one-time sale basis and then there was a maintenance charge annually to support those softwares.

We flipped that revenue model when we launched Orca, and Orca now is straight -- it's a straight subscription model meaning you are -- our customers are paying us on a monthly or quarterly basis on an ongoing, recurring revenue stream for that product. So as we convert from the Orca platform to the -- or from the Spectra platform to the Orca platform, in that software revenue segment we are moving from a one-time sale to more of a recurring revenue base.

Okay. That's helpful. Thank you.

Thank you. And our next question comes from the line of Mark Gaskill with MKG Financial Group. Please go ahead.

Thank you. Congratulations on the quarter, and I just have a couple of quick questions on the FireFly. We understand, I mean, there has been a lot of delays and a lot of slowness on the land drilling side, but as we got forward doesn't the fact that the cableless system obviously saves a lot of money, wouldn't there be -- do you anticipate a progression moving towards replacement of equipment just for that reason alone to help bring down the cost of land drilling?

And the other -- on exploration, but the other question is that it used to be when FireFly was being developed I think there was a competition out there that was running a couple years behind IO or ION on developing a cableless system also. Are you seeing the potential of other competition coming on on the cableless system, as well, and is that pretty much something we should expect going forward? Thank you.

Yeah, let me answer the competition first and then go back to your original question. On the competition side, what's happened is the market is segmenting out into different applications. So, for example, there is one market where people are using their cable systems but they combine it with what's called nodes which are just basically recording devices without any intelligence. If you want to think of it, you put them out, they typically have some kind of a GPS in them for timing, and they sit there and they just sit there and record the data. You have no way of monitoring it. You don't know anything about it until you pick it up and download it.

There is an application for that, though. It's awfully cheap and you can just put these things out, and so if what we're seeing is that people might have mainly a cable job but there's a little patch, for example, that they can't access very easily they may put those out, or sometimes if you go to higher density shooting they'll put those out within the cables themselves just to increase the -- so they'll have the cable system for quality control and sort of back up and then the recording.

We think there is a market for that, particularly in some of your broad exploration areas, and it's one that's not that hard to do so I think that we can -- if INOVA wants to they can get into that pretty quickly just to see how that market goes. But at the same time, we don't think that really replaces your full high-density shooting that we see going on in many places, or if you're in logistically difficult areas, then being able to know where the sensors are and being able to record them and accurately know what's going on with those sensors is important. So in that world we still think we have quite an advantage, just the experience with INOVA with the FireFly has given us that advantage.

What's been hard is that we come to this really down about the time we were bringing the technology in the market, the whole market went into the tank. And so to try to get people to even think about buying capital has not worked, and so as you probably know we went into the rental model. What we're coming up against, actually the interest and I think the activity in the rental model is increasing to the point that some of the people renting I think are quickly going to conclude they want to purchase.

What's happened is that the current system, or even our rental systems, our guys have been obviously getting a lot of feedback, and they are working on sort of round two of FireFly which will drive costs out, will have lower power consumption. And so one of the challenges we have is to transition into that for our future sales. If we're going to have to crank up and start manufacturing again, we've got to pick what we're going to manufacture. So there is a little bit of that going on. Do we build more of the current system for the rental and what are we going to sell? So I think we're going through a little bit of a product transition with that, but all positives. I mean, it's all being driven by feedback from our own experience.

There is no question in our minds as cost of capital, the systems come down, reliability continues to increase, battery power, energy to drive those continues to come down. There is a tipping point out there because it doesn't make sense in many places to use cables if you have a competitive cable system. And I think that we still have that lead. I don't really see anyone encroaching on the full-bones system. Like I say, you have the nodes which is a different market and then you have the full cable system which FireFly is still the leader.

Thank you.

Thank you. And management, I have no further questions in the queue. I'll hand it back for any further remarks.

Well, sure. We'd like to thank you for taking the time to attend the conference call, and we look forward to talking to you during our fourth quarter call in the new year. Back to you.

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