Ion Geophysical Corporation (IO) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ION Geophysical second-quarter earnings conference call. During today's presentation all participants will be in a listen-only mode. Today's conference is being recorded August 3, 2011. I would like to turn the conference over to Jack Lascar. Please go ahead.

Thank you, Alicia. Good morning, and welcome to the Ion Geophysical Corporation's second-quarter earnings conference call. We appreciate you joining us today. Your hosts today are Bob Peebler, Chief Executive Officer; and Brian Hanson, Chief Financial Officer, and, most recently appointed President and Chief Operating Officer. Before I turn the call over to Management, I have a few items to cover. If you would like to be on a e-mail distribution list to receive future news releases or experienced a technical problem and didn't receive your new release yesterday, please call DRG&L 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 August 17. 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 our link on the homepage of ION's website at www.iongeo.com. Information reported on this call speaks only as of today, August 3, 2011 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 factor disclosed by the Company from time to time in its filings with the SEC, including in its annual reports on Form 10-K and its quarterly reports on Form10-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 over to Bob Peebler.

Thanks, Jack, and good morning. We expected the second quarter to land about where it did with the exception of our data processing business that clearly is still suffering from the overall slowdown caused by the BP Macondo accident. As we reported last year, we saw a significant drop in our Gulf of Mexico pipeline of business last fall, and anticipated that we would experience a drop in the Gulf processing business after we worked through our backlog. That happened, with a very slow first quarter and with only a slight improvement in the second quarter. Our original assumption was that the impact would last through most of the first half of the year, with the business returning to more normal levels starting in the third quarter.

The cancellation of the spring lease sale and the snail's pace in permitting has elongated the slowdown period that is driven and adjusted to our plan from our original assumption of a 3- to 4-month slow down to more or less 4- to 6-month period. However, we recently have seen a significant jump in our pipeline of sales opportunities to the Gulf that includes both breadth and depth of companies issuing bids and we expect that to continue. Based on our current pipeline of data processing business, we are estimating a return to a more normal business level of data processing activity in the fourth quarter. We are also encouraged by the bid activity for a newly established joint venture of Brazil and increasing activity in our joint venture in Russia.

We feel confident, by the end of 2011, we will not only have a much improved business in the Gulf of Mexico, but our data processing portfolio will have expanded internationally to better isolate us from swings in any 1 region in the future. The silver lining in the Gulf of Mexico slowdown has been an increase in global exploration budgets outside of the Gulf of Mexico, which have resulted in increased spending in the frontier areas and has had a very positive impact on our new ventures underwriting and data library sales. We started the first half of the year with much stronger activity than a year ago in data library sales and we will enjoy a significant increase in our new venture programs with the majority of our planned 110 million to 130 million capital program being spent during the second half of this year.

Finally, after 2 months of delays due to weather, we also started our Marcellus shale multi-client project that has been recorded by Firefly using state-of-art Vector Seis Full-Wave sensor technology. We are optimistic that we are building a strong technical understanding of the shale plays and we will be able to expand our land multi-client business which we now call Landscans. This is an important step in expanding our multi-client business with portfolio diversity to balance our already large Greenspan business line.

Our Marine Systems business is also moving along as planned with continued strong customer interest both walk-up and [instant] contractors in our leading DigiBIRD and DigiFIN products. And we also continue to see our command in control Orcas software further penetrating the market, both on expansion vessels and replacing our old SPECTRA product on the existing marine fleet. We also are on schedule to book the sales of the 12 streamers to BGP in the second half of the year, likely in the fourth quarter. Our geophone business has performed slower than expected, reflecting the sluggish land equipment business, much attributed to the current turmoil in the Middle East and North Africa, and also a product transition to a much more cost-competitive offering.

The combination of our lower-cost product line, which makes us more competitive, and the improving pipeline should result in solid improvement in the second half of the year. Even though INOVA continues to struggle due to the slower-than-expected land equipment business, we're excited about the new product set that they will soon be introducing at the industry's major trade show -- the SEG -- and will be commercializing in 2012. The new offerings includes -- INOVA's Firefly version 3.0 that will be much more field rugged, have substantially lower power requirements, lower cost, and many more new features; a new version cable system that has been designed in close cooperation with BDP to meet their needs in important markets, such as the Middle East; and, finally, INOVA's first land note product which will be well-positioned to compete in this new emerging market of economist notes.

INOVA will be entering 2012 in a much stronger competitive position and with the expectation that the international land equipment business will also be on the upswing. INOVA should finally start contributing positive to ION's 2012 financial results. In summary, we finished the first half with substantial improvements over 2010, even with a much lower than expected data processing business. We look forward to a much stronger second half of 2011. Assuming all prices continue to hold up in the $70- to $90-per-barrel range or higher, we remain optimistic for the remainder of the year and also believe that we will be entering 2012 in an even stronger position with what appears to be a continuing exploration upcycle. With that, I will turn it over to Brian for his comments.

Thank you Bob. Good morning, everyone. Let me begin by sharing a few of the financial highlights from the second quarter. We delivered $0.02 of diluted EPS for the second quarter as the strong performances by our multi-client and Marine businesses, and a steady performance by our software segment, offset weak performances by our data processing and sensor geophone businesses as well as our share of INOVA Geophysical' s losses. While these overall results are sequential improvement over our break-even performance in the first quarter, we continue to expect our full-year results to be significantly back-end loaded.

Excluding the revenues of our Legacy Land business, revenues increased 21%, to $179 million, for the first half of 2011, compared to $148 million for the prior period. Our solutions multi-client business delivered year-to-date revenues of $66 million, up 107% over the same period of the prior year, driven by our customers' interest in data from our multi-client programs in Northeast Greenland, East Africa, Brazil, and the Gulf of Mexico. Solutions backlog grew for the third consecutive quarter to $117 million.

Our full-year expected investment in our multi-client data libraries remains at a range of $110 million to $130 million. This investment, combined with the probable recognition of revenue for the 12-streamer system sold to BGP, and the increasing momentum in our data processing business, significantly back end loads the year. EBITDA at $57 million improved 77% over the first half of 2010. Cash from operations of $61 million increased 200% over the same period of the prior year. With that overview, let's take a look at trailing 12-month revenues followed by an in-depth look at each of our segments. Excluding the impact of our Legacy Land business, revenues for the trailing 12 months of 2011 were $459 million, or 38% higher than the same period of 2010.

Solutions segment revenues increased 67%, with higher sales from data libraries and new venture projects, while data processing revenues remained essentially flat. Software segment revenues increased 6%, as system segment revenues increased 4% over the prior period. Our solutions multi-client business delivered a solid first half of revenues of $66 million, more than double the prior period, as customers showed interest in both accessing our data libraries and participating in our new venture programs. And we maintain our CapEx guidance extended last quarter of $110 million to $130 million for multi-client projects.

On the last call, we mentioned that we were accessing the viability of increasing the amount of risk we were prepared to take on strategic projects that are in areas where we have a proven track record of success. Historically, we operated at a level of 100% of the portfolio of new venture projects being underwritten before commencing work, which has put us at a competitive disadvantage and forced pricing concessions. Most companies in the industry perform multi-client work-commenced projects at levels less than 50% of underwriting and anticipate further underwriting coming in as the project advances.

Given these dynamics and our healthy cash position, we intend to increase ION's financial participation to approximately 25% of the total project costs on approximately one-third of our multi-client projects in any given year. In other words, we are planning to decrease the underwriting requirements to 75% underwriting levels on the part of our customers for approximately one-third of our projects each year. The remaining two-thirds of our projects will remain underwritten at the portfolio level of 100%. Our Solutions backlog grew for the third consecutive quarter with 11% growth over prior quarter.

Current backlog of $117 million exceeds the typical range of $70 million to $90 million, which is a positive indication of the strength of our sales pipeline and should result in a positive impact to our Solution revenues during the second half of the year.

Now, let's take a closer look at a few trends we are observing related to our Data Processing business and the Gulf of Mexico. Our Data Processing business continues to be impacted by the slowdown in the Gulf of Mexico as Data Processing revenues decreased 21%, to $41 million, for the first half of 2011. This slide illustrates a relative comparison of revenues, backlog, sales pipeline, and number of active customers in the Gulf of Mexico, as compared to the baseline of the second quarter of 2010.

The Data Processing business sales cycle begins with our pipeline of data processing opportunities. As contracts are signed, these opportunities move into our backlog, which is then converted into revenues as data processing services are completed. As you can see, the sales pipeline dropped off quickly after the events of the second quarter, but has returned to levels experienced before Macondo. In addition, we are observing more than a 50% increase in the number of customers requesting quotes for Gulf of Mexico processing work. As the Gulf of Mexico sales pipeline continues to grow, we expect it to work its way into our backlog and begin to be converted into revenue during the fourth quarter of this year.

Software segment revenues decreased 3%, to GBP12 million in sales compared to the first half of 2010, as higher sales of Orca and GATOR software were offset by decreased revenue associated with a one-off large sale of GATOR-related hardware in the prior period that was not repeated this quarter. On the US dollar basis, revenues increased 4% due to the favorable impact of foreign exchange rates. The Software segment continues to grow steadily, and we added 4 more vessels to the Orca platform in the second quarter. The majority of these additions involve HighM 3D vessels towing 10 plus streamers.

In addition, we completed the first sale of GATOR2, our latest ocean-bottom software platform, during the second quarter. Systems segment revenues were up 16%, to $53 million, for the first half of 2011, compared to [$46] million for the same period of the prior year. This increase was primarily due to sales of our Marine products as our sensor geophone business continues to be negatively impacted by the events in North Africa and the Middle East. As we mentioned in our first-quarter call, we expect continue to expect to recognize the revenue for the 12-streamer system sold to BGP during the second half of this year, most likely in the fourth quarter.

The asset side of our balance sheet continues to demonstrate our asset light strategy, with our most significant investments in working capital and oil company funded multi-client projects, resulting in data library with a net book value of $120 million. As we mentioned on last quarter's call, we have invested over $325 million in the last 4 years building a strong portfolio, and our current year invested is on track to exceed investment levels in all prior years, demonstrating our belief in how the value of this investment drives sales activity. Total cash on hand was approximately $99 million, which was $6 million less than our total outstanding debt balance of $105 million.

As of the end of the second quarter, we had $199 million of liquidity, comprised of $99 million of cash and $100 of undrawn credit on our revolving credit facility. Operating cash flows, including cash flows from working capital, tripled to $61 million in the first half of 2011, compared to the same period of the prior year. During the first half of the year, we invested $46 million in our pre-funded multi-client data libraries and $7 million in PP&E. Free cash flow increased $8 million, compared to an outflow of $3 million of free cash flow for the same prior-year period. We continue to expect to start using some of this cash as we move into periods of heavy investment in multi-client work and bridge the timing of project execution expenses and the collection of underwriting.

INOVA estimates second quarter revenues to be in the range of approximately $32 million to $36 million with an operating loss of approximately $7 million to $9 million and a net loss of approximately $9 million to $11 million. Similar to last quarter, we would expect to book 49% of this estimated net loss in our third-quarter results. These numbers are estimates, which we believe offer some visibility into the impact we expect the joint venture to have on our financial results. However, they are not final audited numbers. In addition, we would expect similar results for the third quarter with the business turning in early 2012.

INOVA revenues for the second quarter of 2011 increased more than 80% on another strong quarter of vibrator vehicle sales, compared to the same period last year. In addition, BGP purchased an additional $14 million of equipment from INOVA. The recent political unrest in North Africa and the Middle East is negatively impacting the land seismic market, directly impacting INOVA. However the long-term impact of these events could become positive if replacement equipment is needed in this region. In summary, we are pleased with the results of the second quarter and continue to view the year as skewed to the second half, similar to 2010. With that, I'll turn the call back over to Bob to comment on our press release this morning. And then we'll open it up for questions.

Thanks, Brian. I'd like to take a moment to discuss the Executive Management changes that were released to the public this morning. Effective today, Brian Hanson has become President and Chief Operating Officer of ION, and starting January 1, 2012, Brian will become President and CEO. At that time, I will become the Executive Chairman of ION, a full-time position with both the responsibility of the Board Chairman role, but also I will be assisting Brian with overseeing some key technology programs and continuing my role on the Board of Directors with our joint venture, INOVA, along with other defined key strategic external relationships.

Due to the fact that I will not be an independent director, Jay Lapeyre, our current Chairman, will become the Lead Independent Director. Brian will maintain the CFO responsibilities until we find his replacement, with the search already underway. I joined ION as the CEO in April of 2003 and have enjoyed the journey with my ION colleagues to reshape the Company from a seismic equipment manufacturer to a geophysical solutions company focused on solving oil companies' most difficult exploration and reservoir characterization problems. It was our belief that by focusing on these EMP challenges, while also listening to our contractor customers' logistic issues and delivering services to acquire the needed data, we would end up with a highly differentiated technology company.

What makes us very unique in our industry is our strategic choice to not get in the business of owning field crews and the associated capital equipment, but rather design and manufacture the technology to collect the data used in those field operations -- VR equipment business -- while expanding into the data processing, multi-client, and reservoir description businesses. In the projects where we need acquisition services, we accommodate those needs via subcontracting to service contractors offering our customers our equipment business. This business strategy has expanded the breadth and depth of our business and has resulted in significant growth in both revenues and market cap since we launched the strategy back in 2003.

As you know, we hit a major speed bump in late 2008 and 2009 as we went through the financial crisis, but are now confident that the worst is behind us. And we are regaining the momentum in the market as the exploration cycle once again begins to accelerate. During the last few years, Brian Hanson continued to be our CFO, but he also became the de facto COO after we eliminated that role back in 2009. Together we have built an outstanding Executive Management team, and I believe we are stronger than ever. Many of you may not know, but in addition to Brian's financial background, his first degree was in engineering and over the years he has alternated between both operations and financial roles, the latest being the CFO of ION.

As I approach 65 next year, I decided it was time to turn the reigns of the Company over to someone that would provide the continuity with our people and our strategy, and bring new energy to the role, and the Board agreed that Brian is an excellent choice. Although my role will change in January, I look forward to having an active role in the Company helping Brian where I can to continue to execute our growth strategy. I believe that considering ION serves the market of approximately 5 billion to 6 billion, we have plenty of room to grow. And I have confidence that Brian, working with our Management team, can provide the leadership needed to continue to take the Company to the next level. I wish Brian well in his new President and COO role over the next few months, and then the CEO role next year. With that, we will open the lines for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

James West, Barclay's Capital. Please go ahead.

Congratulations to you both on your promotions announced this morning.

Thank you.

First question that I have is really about the second half of the year. And admittedly, you guys have talked about a very strong second half. Your business has always been second-half loaded. If I look at the first half of this year versus the first half of last year, revenue was up about 30% year over year and earnings were up more than that. Is that the similar type of revenue increase we should expect on a year-over-year basis -- second half this year versus second half last year?

You know, James, it is difficult to answer that question, because it would almost imply guidance. But, I think that the back half of this year will be similar in behavior to the back half of 2010 in that it's seriously back-end loaded. I think that the 2 areas that we're, probably, a little more concerned with this quarter than we were last quarter -- one is that we would expect a little more softness in the data processing area of our business for the third quarter, where last quarter we expected that to have rebounded by now. And the other area, I think, is that we continue to expect to see INOVA losses. We expect to book comparable INOVA losses in the back half of the year that we have in the second quarter. We don't see that business turning to profitability and actually recognizing that financial performance through our statements until early 2012.

Okay, but the flipside of that would be on the positive side -- the multi-client investment that you have underway. You had some projects in 2Q that got pushed into the third quarter and it looks like you have another $100 million or so to invest. Am I right in thinking that additional investment will also show up as revenue in the second half of this year?

Yes, absolutely. In fact, what you'll see is the majority of our capital expenditures for multi-client will occur in the third quarter, and what you'll see is significant revenues come through in the fourth quarter for multi-client.

Okay, and is there a risk? I understand the Marcellus chute is underway now. I guess, the Arctic is also another key area for you. Is there risk that those surveys don't get performed or have they started now?

Pretty much all of our projects are active and on the go. There is always a certain amount of operational risk associated with multi-client projects;, but, no, they're in full swing.

Okay, and then another key piece of revenue in earnings in the back half is going to be the sale of the streamers to BGP. I understand the streamers have been delivered. At what point can you recognize or will you recognize that revenue -- what is the risk that slips into 2012?

We are highly confident that the revenue will be recognized in the fourth quarter, at this point in time. The vessel is -- it's going to undergo marine trials in August and seismic trials in September, so we should see that revenue recognized in the fourth quarter.

Okay, that's all for me. Thank you

Thank you.

(Operator Instructions)

Daniel Burke, Johnson Rice. Please go ahead.

Thank you, and would echo the congrats to you, Brian. And Bob -- hope we'll get to hear from you on at least 1 more quarterly report. [ laughter ] Just a follow-up -- more specifically -- you all had referenced the bankruptcy of one of your contractors on the Arctic chute. Brian, you indicated, just a moment ago, that all of those projects are now moving forward. Could you, more specifically, quantify what financial impact that delay might have had on either your Q2 or your prospect of results in the second half this year?

The multi-client program is, obviously, a group of projects and every incremental project is more opportunity to drive further revenue growth for the Company. So, the way I think about that bankruptcy, Daniel, is -- to the extent that we had executed those Arctic projects, it probably would have resulted in us raising our CapEx guidance for the back half of the year. But, as a result of that and having to punt on a couple of those Arctic programs, we're maintaining it.

Okay, great. So, in other words, the $110 million to $130 million would have had an upward bias and now that number is going to be a realistic figure for this year. So, no change to the way we were expecting the year to trend is the way to sum it up?

Correct.

Okay, that's helpful. And again -- looking at the Solutions business in the second half of this year, data libraries sales are always difficult to forecast, then, but more specific to the new venture side of the business is that going to be most weighted to Q3, given the Marcellus chute ongoing and the Arctic activity with the expectation that data library sales then kick in as an overlay into Q4? Is that similar to last year?

Yes, Daniel. I think it will be more -- it will be a heavy Q4 because a lot of the capital spend will occur in the third quarter. But then there's a little bit of a timeline for it to turn into revenue. So, I think, the majority of the revenue will occur both from new ventures and data library in Q4 this year.

Okay, that's helpful. It almost sounds like the profile at Solutions is quite heavily weighted to Q4 relative to Q3. Is that fair?

Yes, that's extremely fair this year.

Would it be fair to say that the Solutions business in Q3 will look, therefore, a lot like Q2? I mean, Data Processing sounds like -- the run rate there is what it is -- likely to ramp in Q4 -- new venture -- uptick it a bit -- library sales always a question mark. But is it fair to expect relatively modest improvement in margins -- in solutions from Q2 to Q3 with a pretty substantial uptick into Q4?

Obviously, data library is extremely difficult to predict. But I think it's extremely fair to anticipate an increase in new venture revenues for Q3.

Also, what you saw on the data process is correct -- that we're seeing this -- the time of the pipeline -- we're seeing that recovery. But it's going to take into Q4 -- which we said -- to really see it come back to what we think is the normal level.

Okay. And then just one last one, maybe. There is always the potential out there for some OBT activity. Any of that coming into visibility for the second half this year or is any potential there more likely to be 2012 opportunity?

There is, obviously, some bidding activity, out there, going on. But I don't think we have a good enough visibility to determine whether it is late 2011 or if it's 2012-type activity yet.

Okay, thanks for the clarity on the Solutions side. I appreciate it.

(Operator Instructions)

And I show no further questions at this time. I'd like to turn the conference back to Management for closing remarks.

Thank you for taking the time to attend this conference call, and we look forward to talking to you during our third-quarter call.

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