Ion Geophysical Corporation (IO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to ION Geophysical's 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 open for questions. This conference is being recorded today, Thursday, May 3, 2012.

I would now like to turn the conference over to Ms. Karen Abercrombie, Director of Corporate Communications for ION. Please go ahead, ma'am.

Thank you, Camille. Good morning and welcome to ION Geophysical Corporation's first-quarter earnings conference call. We appreciate your joining us today.

As indicated on slide two, our hosts today are Brian Hanson, President and Chief Executive Officer, and Greg Heinlein, Senior 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 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 May 12, 2012. 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 Investor Relations page of ION's website.

Moving on to slide three, information reported on this call speaks only as of today, May 3, 2012, 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 its annual report on Form 10-K 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 of our conference call this morning are covered by those statements.

I will now turn the call over to Brian Hanson, who will begin on slide four.

Thanks, Karen, and good morning, everyone. I am pleased to report we are off to a very solid start to the year. Yesterday we reported first-quarter revenues of $112 million, up 23% from the first quarter of 2011, and diluted EPS of $0.05 on net income of $8 million. This represents one of our strongest first quarters in ION's history in terms of revenue, operating income, and net income.

From our viewpoint, oil companies are increasing exploration spending as expected and we are seeing the results of this being reflected with significant increases in marine activity and widespread interest in our new venture projects around the world. We saw growth in all of our businesses, especially in the marine equipment, data processing, and multi-client.

On our two most recent investor calls we shared our business expectations for 2012. Among them we said we expected year-over-year growth across all of our businesses and, as we broadened our multi-client portfolio to include land programs, we expected to more evenly disturbing our financial results throughout the year with approximately 25% of our earnings for the year in the first half. Our first-quarter results demonstrate solid progress against these goals.

In the marine seismic market we are seeing continued growth in both the towed streamer and seabed segments. On the towed streamer side there is a tightening of capacity with contractor tender activity, vessel utilization, and backlog picking up, especially in the high-end 3D and 4D segments. Marine contractors have been operating on tight CapEx budgets, but as day rates continue to improve, we would expect to see an increase in repair and replacement business toward the latter part of 2012.

Given no new vessel introductions in Q2 this year and the expected pickup in purchase activity in the back half, we would expect the second quarter to be the softest quarter of the year for our marine business with the fourth quarter being the strongest.

We are also seeing a rebound in the seabed market. Tender activity is strong with over $300 million of work awarded in the first quarter, driving up backlog to the highest level seen in several years. Fleet utilization is high with most operators booked through the 2012 season.

Additional capacity in the form of expanded crews is being brought on to meet increased demand. This bodes well for our OBC business as we enjoyed spare and replacement business in the first quarter as one customer began shooting a large project in Brazil. In addition, we entered into a large multiyear transaction with another customer to re-equip their crew for work in the North Sea and Middle East for which we expect to start recognizing revenue later in the year.

All indicators are pointing up for the OBC market and we continue to be optimistic that we will [enjoy] an additional one or large ticket sales toward the end of the year as we launch our next-generation OBC system this year.

Internationally, data processing tender activity is extremely robust, particularly in Europe, the Middle East, and Africa. Tender activity is also healthy for multicomponent, full-wave processing, an area which we have a leadership position.

In addition, we are seeing Gulf of Mexico activity continue to increase. In the first quarter we delivered another sequential improvement in data processing revenues, restoring the business to pre-Macondo levels with a much more diversified international mix of customers and worldwide geographical footprint as compared to being Gulf of Mexico-centric. We are running back at full capacity with all seats in the plane filled, driving significantly improved operating income levels as compared to the same quarter last year.

In short, our strategy last year to hold on to our processing capacity and to diversify more internationally paid off. The business (technical difficulty) demand. Based on our current backlog, we expect continued solid growth in this business throughout the year.

On the multi-client front we are seeing a rise in global exploration (technical difficulty) activities heating up off-shore of the East and West Coast of Africa, the Arctic, and South America. We are well positioned with our portfolio of marine (technical difficulty) with upcoming 2012 and 2013 lease (technical difficulty) anticipated for Australia, Brazil, Greenland, and parts of Africa.

With regards to Greenland in particular, we are seeing strong demand for our current offerings and are launching new 3D gravity gradiometry projects to complement the nearly 18,000 kilometers of Greenland data [we have acquired] over the last three years, which should be ready for customers in advance of the upcoming lease round.

As we have previously mentioned, this first quarter we have commenced the large 2D land survey in Poland and are currently shooting the first phase (technical difficulty) multiphase program. We are once again working on putting together another Arctic program for 2012 shooting season utilizing ION's unique talents and patented approach for shooting seismic under the ice.

On the domestic land front, last year we introduced our ResSCAN programs to meet the demand of major oil companies who have entered the shale plays and are using seismic, including reservoir characterization, to optimize their drilling programs. This year we have changed our ResSCAN focus from purely gas shale plays to liquid and mix plays. We currently have for ResSCAN programs in process in North America with the ResSCAN portfolio diversified in gas, liquid, and mixed shale plays in the Marcellus and Niobrara regions.

With our broad global multi-client portfolio and our strong backlog of underwritten projects, we [have] little near-term exposure to any of softness in North American gas shale markets.

As Greg will explain further, INOVA started strong in 2012 with another profitable quarter and will now deliver two sequential profitable quarters. This financial performance, in addition to the market perception of the new product lines, including G3i and Hawk, positions them very well for a breakeven year or better for 2012. During the first quarter INOVA sold (technical difficulty) to BGP for deployment in the Middle East and we are excited about the prospects of using G3i in that market as well.

We are encouraged about the progress that INOVA is making in the marketplace. The G3i cable system offers a new analog-to-digital chipset capable of delivering exceptional geophysical performance. It has a high channel count of 100,000 channels per baseline with the lowest measured power per channel in the industry, which reduces the number of batteries on the crew and it's packaged in the toughest housing in the industry. It's built to last and we expect this project to sell very well, as demonstrated in Q1.

Needless to say, we are very pleased with INOVA's momentum.

In short, the industry is strong, our data processing business is back, INOVA is having another great quarter, making it two in a row, and with the expansion of our multi-client projects to land as well as marine we have the potential for a record year in our solutions business. With all that we are excited about 2012.

I will now turn the call over to Greg who will cover our Q1 financials in more detail.

Thank you, Brian. Good morning, everyone. Overall our first-quarter revenues were up 23% year over year. Our systems segment revenues of $37 million improved 53% over the prior-year period. Our solutions segment delivered first-quarter revenues of $66 million, up 14% from the same period a year ago. And our software segment sales increased to $9 million, up 4% in local currency from first quarter 2011.

With that overview, let's take a closer look at our Q1 performance on slide 10. Our systems segment revenues increase was due to improved (technical difficulty) ocean bottom products and continued healthy demand for our other marine products, as well as improved sales of our land sensor equipment. In the OBC market we are working with key customers to win tender activity and to expand their OBC footprints.

As Brian mentioned, we facilitated a sales arrangement with a company to begin work for several major acquisitions over the next several years. We will recognize revenue on this arrangement over the next three years. Our systems segment is ramping up R&D spend as we invest in the next generation seabed and towed streamer technologies.

Turning to sliding 11, our solutions segment revenue increase was attributable to improved data processing revenues, driven by our international expansion as well as strengthening in the Gulf of Mexico. After several quarters of sequential improvements our data processing business is back and strong.

Additionally, multi-client revenues increased 4% and several new venture projects in the North American shale, the Arctic, offshore Africa, and Brazil continued to progress. Our data library revenues were down year over year, primarily as a result of one large sale of northeast Greenland data to a consortium in Japan in the same period last year.

Typically the first quarter is a very soft quarter for data library sales, as customers have heightened levels of purchase activity at the end of the fourth quarter as they spend excess budgets. Our new venture revenue was quite robust, up 29% from last year, as we smooth out the complexion of this business shooting land projects through the winter months.

Our solutions backlog ended the quarter at $129 million, up 22% from the same quarter last year. Backlog levels for our solutions business provide an indication of the strength of our sales pipeline and will positively impact our solutions revenues for the remainder of 2012. We know there is a lag of one to two quarters from the time our backlog gets booked to when we start to recognize revenues. We are clearly seeing that again in 2012.

Moving to the next slide, software segment first-quarter revenues increased 4% in local currency and 2% in US dollars compared to the first quarter of 2011 as steady subscription sales of Orca and Gator software continue to demonstrate consistent demand for concept systems, demand, and control software platforms.

The number of Orca installations declined slightly due to one vessel being retired and one vessel converted from our 3D Orca system to our 2D Spectra system. Orca retains a strong competitive advantage in the market and we expect more conversions to Orca as the marine market continues to improve as new 3D vessels are added and as additional vessels convert from Spectra over time.

Our software segment is a great business for us (technical difficulty) good free cash flow.

Turning to slide 13, INOVA's first-quarter revenues (technical difficulty) approximately 70% over the prior-year period [with] excellent sales of the new G3i (technical difficulty) vibrator sales and the first (technical difficulty) units. INOVA estimates first-quarter revenues to be in the range of approximately $53 million to $57 million with operating income approximately (technical difficulty).

With the positive momentum in the fourth quarter and the recent launches of these new products, including lower cost (technical difficulty) system, we are confident in INOVA's ability to breakeven or better in 2012. Similar to last quarter, we (technical difficulty) first-quarter net income in our second-quarter results. INOVA's first-quarter numbers are [estimates], which we believe offers some visibility into the impact we expect the joint venture to have on our financial results. However, these are not final audited numbers.

Slide 14, we generated strong cash flow again this quarter [further building] our cash balance. Ultimately this is a sign of a healthy business, especially with investments in key client libraries (technical difficulty) this same period last year.

Moving on to the balance sheet on slide 15, the asset side of our (technical difficulty) demonstrate (technical difficulty) with our most significant investments in working capital and [oil company-funded] multi-client projects resulting in a (technical difficulty) of $[177] million. Total cash on hand was approximately $87 million, which was $18 million less than our total debt outstanding balance of $105 million. End of the first quarter we had $157 million of available liquidity comprised of $87 million of cash and $100 million of undrawn credit on our revolving credit facility.

Now turning to our last slide, to wrap up we enjoyed a strong start to 2012 with growth in all businesses. (technical difficulty) continue to expect solid year-over-year growth (technical difficulty) a recovery in our (technical difficulty) data processing business, expanding land and marine offerings in GeoVentures, a very robust OBC market, and clear improvements in the land equipment market supported by INOVA's exciting new product offerings.

We expect our 2012 investment in multi-client [libraries] to be in the upper end of the range of $130 million to $150 million. Acquisition activities spread more evenly throughout the year. The seabed and towed streamer markets are steadily improving with a number of large projects awarded in the first quarter. We continue to anticipate selling the (technical difficulty) this year, either OBC or towed streamer, mostly likely one of our next-generation (technical difficulty).

Based on our market outlook and robust pipeline of [work] activity, we are confidently investing in each of our businesses (technical difficulty) being positioned to to achieve year-over-year quarterly improvements for the remainder of 2012. Finally, we would like to thank our customers for their continued faith in us and our employees who give us a competitive advantage every day.

With that I will turn it back to the operator for questions and answers.

(Operator Instructions) James West, Barclays.

Good morning, Brian. Good morning, Greg. With your processing business now kind of back and running almost at full capacity or at full capacity at this point, what are your thoughts on adding additional capacity to that business? And how much do you think you could add over the course of 2012?

James, we are back where we were a couple years ago. As you know, from the period of 2006 through 2010 the challenge in growing that business has really been about recruiting the data processing talent. And so we have really been dated by that over the years.

We are back aggressively recruiting again this year, so I would expect that you would see that we would grow at levels that were comparable to that time frame from 2006 through 2010.

Okay, that is very helpful. On the ocean bottom cable side of the business, last quarter you were optimistic about it. This quarter it sounds like you guys are even more optimistic, and given the level of demand for ocean bottom crews out there in the marketplace, it all makes sense.

Is the gating item on you just teeing up a sale here just the launch of your next-generation system?

Yes, that is right. Where we are at right now is we are right in between what is our current VectorSeis ocean technology and launching our next generation of it. With the product sales that we have done in the first quarter and with this multiyear transaction that we just referenced in the script here, we are pretty much depleted on our VectorSeis ocean inventory.

There won't be (technical difficulty) we are building the next generation system now, so we would expect that that will be launched and available for purchase toward the back end of the year.

Okay, good to hear. Thanks, guys.

(Operator Instructions) Georg Venturatos, Johnson Rice & Co.

Good morning, guys. Just curious on the multi-client side, sounds like -- looks like there is a good opportunity set out there. Obviously looking to spend towards that upper range of the $130 million to $150 million.

Was hoping maybe you could talk about where some of that incremental spend is likely headed and how you see the opportunity set evolving over the next six, 12 months?

Sure, George. I would characterize our multi-client business today as truly a broad global portfolio. So if you look at the regions in the world that we are working, we are consistently launching additional programs in those areas. So if I took them geographically on land; as I mentioned, we have four active programs in North American shale plays. We would expect to continue to add to that.

We have launched the 2D program in Poland. It's a very large program. We will be shooting for the majority of 2012 in Poland. We have got a couple of active crews going there.

In the marine side of the house we have and continue to actively shoot projects in Brazil and areas of Africa. Then I would expect also that we are going to launch another program in the Arctic this year. It will probably be comprised of a couple different locations. So a lot of activity on the multi-client side.

Okay, great. Just to dig a little deeper on the domestic side, maybe if you could just talk about how the learnings maybe from the ClearfieldSCAN has helped you move into the Niobrara and maybe made you a little more efficient there. And then maybe how much running room you had in those two plays before maybe looking for some other basins to explore.

Sure. There is a -- to answer to the latter question first, the running room, we have a significant pipeline of activity that we are working. And we believe that our offering is fairly differentiated so we would expect that we will certainly be moving out of the Niobrara. I don't want to get too specific given the nature of the business.

But some of the learnings, I would say the learnings are really more operationally focused, George. The first project obviously that we did it was our first time doing it and we had a lot of learnings around the complexity of permitting the job, around using the FireFly system to shoot the job. So we had weather issues and so we learned a lot about shooting programs and land seismic during that first job.

Then when we moved into the second job in Lakeview we got better at it. The third job that we worked on we actually were quite efficient. So I think the heavy lifting relative to learnings is behind us, and I think now we are positioned to operate extremely efficiently.

Also, I would add that it's our expectation in the near future that we will also be utilizing INOVA's Hawk technology to continue to shoot projects. So we would expect the incremental operational efficiencies picked up from using that equipment.

Great. Appreciate the answers, Brian.

Welcome.

(Operator Instructions) Novid Rassouli, Sidoti & Co.

Congratulations on the strong quarter, guys. So the strong gross margin in the first quarter, I just wanted to see if I could get a little more color there. Was that just incremental data processing revenue or was that more being driven by the system side with the OBC? Just if you can give us some more details there.

Yes, it was primarily data processing. As Brian mentioned, it has a fixed capacity structure. We will look to add to it throughout the year and then the next year, but for the most part larger jobs, more jobs coming in. So it's just a fixed capacity gain (inaudible).

Great. Are you guys expecting to see this kind of serve as a base the way it has historically and just to see the margins incrementally tick up moving into the back half of the year?

I would expect that from a growth perspective that we will see that business grow comparably to the 2006 and 2010 time frame. From a margin perspective, I would say that the margins are probably going to be more reflective of Q1 margins. We won't see too much incremental improvement because we are now running back-half capacity, so we are having to invest and add to our cost structure in order to execute growth on the top line.

Okay, that is fair. Then one other question, from the CGG transcript in fiscal 2011 they had mentioned that Sercel was capturing 100% of the equipment sold to Chinese crews in the Middle East, namely Saudi Arabia.

I just wasn't sure -- I just want to see if you could give some color there as to what is going on in the Middle East. I always thought the story was that you guys were going to be taking market share there, and I didn't think that they had 100% market share. So I was just wondering if you could just help me understand what is going on there and where you see it going.

Sure. Let me start first with who is playing in the Middle East. That market is primarily been dominated by three large contractors -- obviously CGG, WesternGeco, and BGP. Over the course of the last several months, the last four large tenders that went out in Saudi -- three of them, I believe, were in Saudi; one was in Oman -- BGP won them all. And so what you are seeing is BGP is really dominating that market.

Historically our cable system, the offering was not compatible with systems that were endorsed for the Middle East and that is why we launched on that R&D project to come up G3i. So when they were awarded those large awards they were required to buy a kit, and so we didn't have an approved system at that time so they bought the Sercel system because that was approved in -- pretty much Sercel was the entrenched player in that market at that time.

I can tell you though through that period they bought all of their vibes from us. So Sercel was enjoying all the cable system sales; we were enjoying all the high level of vibrator sales activity. My guess is it was probably over 100 vibes. It was a pretty good number.

But, as you also could tell during this quarter, we have launched G3i. BGP has actually purchased 15,000 channels of that system, and so we would expect that is the first step to BGP taking not only our vibes into the Middle East but taking the cable system too. So we believe this is certainly a good time relative to shifting that purchase share over to INOVA.

Great, that clears it up. Do you have any goals as to, or ideas of what you could capture in 2012 or 2103 moving forward? Kind of the build out of your G3is in the Middle East.

Not that specifically, George, because it's a little bit fluid relative to the projects and when they are going to be awarded, what is going -- I don't have perfect visibility into that. But we certainly do have stated goals as to what we are trying to convert at the INOVA board level, how much of BGP's purchase volume we are trying to convert from Sercel to INOVA.

And I would remind you that the INOVA Board is comprised of both the senior leadership of BGP and the senior leadership of ION, so we believe we are very well aligned with BGP. And the intent is certainly to drive the majority of their purchasing volume through INOVA, so that is why we are so excited about G3i. It gives BGP the vehicle to drive that volume into that.

Great. Thanks so much.

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Thank you for taking the time to attend our conference call. We look forward to talking to you during our second-quarter call.

Ladies and gentlemen, this concludes ION Geophysical's first-quarter earnings conference call. You may now disconnect. Thank you for using ACT conferencing.