Ion Geophysical Corporation (IO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to ION Geophysical second-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, and instructions will follow at that time. This conference is being recorded today, Wednesday, August 8, 2012.

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

Thank you, Alicia.

Good morning, and welcome to ION Geophysical Corp.'s second-quart earnings conference call. We appreciate you joining us today. As indicated on slide 2, 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 them, I have a few items to cover. If you'd like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of our website at www.iongeo.com or via a recorded instant replay for the next couple weeks. 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 by a link on the Investor Relations page of our website.

Moving on to slide 3. Information reported on this call speaks only as of today August 8, 2012, and therefore, you are advised that the time-sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made by ION 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 our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control that may cause our 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 ION from time to time in our filings with the SEC, including in our annual report on Form 10K and in our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated into our press release issued yesterday. And, please note that the contents of our conference call this morning is covered by those statements.

I will now turn the call over to Brian Hanson, who will begin on slide 4.

Thanks, Karen. Good morning, everyone.

We're certainly pleased with our second-quarter results, with first-half revenues up 21% over 2011 and year-to-date earnings of $0.13, an improvement of $0.11 over last year. As indicated in our outlook call last December, we expected to shift more profitability in the first half of the year as we diversify our business, and so far are more than pleased with the results.

Our Data Processing business delivered in fifth sequential quarterly revenue improvement, as we continue to push into the international market, particularly in Europe, Africa and the Middle East, an area in which we have historically not had as large a presence. Pre-Macondo, we had also two-thirds of our business in the Gulf of Mexico. Over the last few year, we have had a deliberate strategy to expand this business internationally and reduce our exposure to the Gulf. By the end of the year, we would expect the Gulf of Mexico portion to be approximately 25% of the total portfolio.

In addition to continued sequential improvement and a better geographic distribution of revenues, we ended the quarter with record backlog, which positions the business nicely for continued sequential improvement for the back half of the year. One of the more significant trends this year in marine geophysics has been the introduction and uptake of new broadband technologies for acquisition and processing and seismic data to tackle the problem of ghost notches that have traditionally limited resolution in the marine market. Ghosts notches are produced when an upcoming seismic event reflects down from the water surface and interferes with the upcoming signal measured at the hydrophone on the streamer. The effect of the notches is to significantly degrade the sharpness and quality of the subsurface images.

Other companies have produced broadband solutions that rely on specialized marine acquisition and processing, such as with a dual hydrophone, geophone sensor and the Fiji S Geostreamer and a Phalanded streamer type of acquisition for CGGV's BroadSeis and WesternGeco's ObliQ. These solutions, to date, have not been applicable to conventional flat streamer data despite the fact that the vast majority of data was, and still is acquired, with this flat streamer configuration.

To address this challenge, in June, at the European Association of Geoscientists and Engineers show, the EAGE in Copenhagen, we introduced a new data processing techniques we call WiBand. WiBand delivers better images, broadband results, when processing new data or reprocessing existing data acquired using conventional flat streamers and eliminates the effects of the ghost notch. We believe this new technology has tremendous potential to fulfill an unmet need and is being received very well. In fact, we already have more than 20 2-D and 3-D WiBand projects completed or in progress from eight clients in 15 different basins around the world.

The marine market continues to strengthen. In the Towed Streamer segment we are seeing a tightening of the market. Contractor capacity for Q3 is virtually sold out. Q4 capacity seems to be reducing rapidly. Day rates are up an estimated 15%, as well as backlogs. As we indicated in last quarter's call, we didn't expect this uptick to immediately result in activity for our Marine business for the second quarter, but do feel it positions it well for improvement over the back half of the year.

The first half of the year was also a period of heavy R&D for us in Marine as we invested in sea trials of our new seabed system, Calypso, and continued to invest in the development of our next-generation streamer system. As we mentioned in our first-quarter call, Seabed continues to be strong, and is projected to continue to grow through 2013, as several crews are now tied up well into the middle of next year. Given a few large upcoming tenders, this bodes well for the potential for crew expansion in the OBC market.

Prompting this growth is Seabed's unique ability to deliver phenomenal image quality, resolve geophysical challenges others methods cannot and operate in areas difficult to access. Despite its increasing popularity, though, Seabed still represents a relatively small but growing percentage of to total marine seismic market. Historically, Seabed acquisition costs have been high and cycle times long, relative to Towed Streamer acquisition.

To narrow the gap at the EAGE show in June, we launched Calypso, our next generation Seabed acquisition system. Calypso, leverages our industry-leading VectorSeis Ocean Sensor to deliver superior images while significantly reducing costs and cycle time, and also, increased the operating depths to work in a range of 5 meters to 2,000 meters of water, which opens up markets like deeper water areas off Brazil. It was extremely well received by our customers, and we expect to receive commercial orders for Calypso by the end of the year.

Our Software division continues to experience steady growth. We strengthened our leadership position in the high-end command-and-control software segment in the second quarter, installing Orca on two additional vessels. In addition, we are seeing an emerging requirement by oil companies for our acquisition optimization services. Our concept system specialists provide survey planning and design services and work with clients onboard vessels to dynamically optimize their towed streamer or seabed acquisition at every step of the survey.

Although still relatively small, this businesses grew almost 70% in the first half of the year, compared to the first half of last year, and provides us with another strategic entry point into oil and gas companies. Moving onto to the multi-client side of business, on slide 7, this map depicts our multi-client revenue hot spots around the world in the first half of the year. As you can see from the size of the circles, we continue to enjoy heavy demand for our multi-client programs offshore both coasts of Africa, Latin America, Australia and Northeast Greenland.

Our GeoVentures Division had an outstanding quarter in terms of revenues and operating profits. We have solid revenue growth in both our Data Library and New Venture businesses, ending the quarter with a robust record backlog.

Our SPAN data is increasingly being used by oil and gas companies and national governments to support upcoming leasing rounds. For example, we recently completed a new 3-D gravity gradiometry program in Greenland, which we plan to integrate into our 2-D data set to give oil companies a 3-D structural interpretation over 30,000 square kilometer area, coincident with the areas coming up for the 2012 and 2013 lease rounds off Northeast Greenland.

It is in complex challenging environments, such as this, that we excel in solving some of the industry's toughest challenges. This area in particular, with its ice-covered waters, would be extremely difficult to shoot with today's 3-D conventional seismic. We've also been engaged by the Tanzania Petroleum Development Corporation to manage the upcoming offshore licensing round, to be launched in September off the coast of Tanzania and are well-positioned with basin SPAN data to support the ramp.

On land, we commenced acquisition on an additional ResSCAN program in West Virginia and that will have four 3-D programs under way encompassing over 600 square miles across the Marcellus and Niobrara Shale plays. Through these programs, we're proving the value of multi-component data for understanding rock properties to help operators in these plays become more efficient at well location and maximize our highest priority wells, which is essential in today's oil and gas environment.

We're also improving our strategy of using these programs to pull through of sales of seismic acquisition equipment. In the second quarter our ResSCAN program stimulated sales of 10,000 stations, or 30,000 channels of INOVA's new Hawk Cableless Recording System to one of our primary acquisition contractors.

In general, activity is robust despite tension caused by European and Middle East issues. As result of expected growth in international activity, renewed activity in the Gulf of Mexico, as well as increasing activity in new frontiers such as is the Arctic, industry analysts are predicting seismic demands to grow by 20% this year. We are well-positioned to grow with these rates.

As international exploration is front and center for us our GeoVentures and Data Processing businesses are more global than ever. We continue to drive technology innovation in the industry, and we are taking full advantage of pull-through opportunities to benefit our marine and land equipment units.

I'll now turn the call over to Greg, who will cover our Q2 financials in more detail.

Thank you, Brian. Good morning everyone.

Overall our second-quarter revenues were up 19% year-over-year. Our Solutions segment revenues of $72 million improved 47% over the prior-year period. Compared to second-quarter 2011 our Software segment sales increased to $10 million, up 6% in local currency, while our Systems segment revenues decreased by 23% to $23 million.

With that overview, let's take a closer look at our Q2 performance starting on slide 10. Our Solutions segment revenue was attributable to increased performance in both our Data Processing and Multi-client businesses. Our Data Processing revenues increased by 37% driven by international expansion, as well as continued strengthening in the Gulf of Mexico.

Our GeoVentures Multi-client revenues, which include new ventures and data library, increased by 55%, driven by more than doubling of revenues from our new venture programs as we commenced acquisition on an additional in land program in the Marcellus shale, continued the acquisition on our 2D land survey in Poland, completed acquisition on our 3D gravity gradiometry project offshore Greenland and continued acquisition on several new programs offshore Africa and Brazil.

In addition, we experienced a 20% year-over-year increase in data library sales from across our broad portfolio. The mix of data library sales was extremely profitable for us this quarter. Our Solutions backlog ended the quarter at $153 million, up 31% in the same quarter last year. Backlog levels for our Solutions business provide an indication of it the strength of future sales and will positively impact our Solutions revenues for the remainder of 2012.

Turning to slide 11, Software segment second-quarter revenues increased 6% in local currency, and 3% in US dollars compared to the second quarter 2011 as steady subscription sales of Orca and Gator software continue to demonstrate consistent demand for Concept System's command-and-control software platforms. We added two Orca installations during this quarter, further solidifying our leadership position in the high-end market. As Brian mentioned, we're also seeing increasing demand for our acquisition optimization services through which we provide onboard services to others' acquisitions. We are seeing good opportunities to significantly reduces customers' acquisition costs with this offering.

Moving to slide 12, as we expected, we experienced a soft quarter in our Systems segment with revenues declining 23%. While this business continues to benefit from marine repair and replacement sales, we experienced a slowdown of positioning sales in the second quarter, attributable to the lack of new vessels introduced into the market and the continued softness of contractors' spend activities. Delivered during the quarter, we delivered an ocean-bottom cable system, but as previously mentioned, this revenue will be recognized over a three-year period. The typical revenue range for these complete systems is around $25 million to $35 million.

We continue to ramp our R&D spend as we invest heavily in our next-generation seabed and towed streamer technologies. This helps explain our increase in operating expenses during the quarter.

Turning to slide 13, as we indicated in our first-quarter call, INOVA had a fantastic Q1, which contributed to our Q2 results. Their first-quarter revenues were $56.8 million up 75% over the first quarter of 2011. Due to excellent sales of the new G3i cable-based recording system and vibrators, including three the new UniVib peak force small vibrators.

INOVA's first quarter operating income was $8.9 million, up from a loss of $6.6 million in Q1 of 2011. INOVA estimates second-quarter revenues to be in the range of approximately $45 million to $49 million with an operating loss of approximately $3 million to $4 million compared to an operating loss of $10 million one year ago. Their second-quarter revenue improvement is expected from sales of an additional 9,000 channels of G3i. A major milestone for INOVA during the quarter was the sale of 10,000 stations of their new wireless Hawk acquisition system, as Brian previously mentioned.

Typically, INOVA's strongest quarters are its first and fourth quarters due to increased rental activities during the winter season. With the positive momentum from INOVA's past two quarters, we are confident in INOVA's ability to be modestly profitable in 2012. Similar to last quarter, we would expect to book 49% of INOVA's estimated second-quarter financial results in our third quarter. INOVA's second-quarter numbers are estimates, which we believe offer some visibility into the impact we expect the joint venture to have on our financial results. However, these are not final audited numbers.

Turning to the next slide, our cash balances have remained strong again this quarter, even as we continue to invest in our multi-client libraries and have ramped-up our R&D spend on our next-generation marine products. Moving onto the balance sheet, slide 15, the asset side of our balance sheet continues to demonstrate our asset-light strategy with our most significant investments in multi-client projects, resulting in a data library with a net book value of $187 million. Total cash on hand was approximately $83 million.

In May, we amended our credit facility, which had been comprised of a combination of a revolver and a term loan facility. As part of the amendment, our then outstanding term loan of $98 million was converted over to revolver with $175 million of total capacity.

Turning to our last slide, to wrap up, we have enjoyed a strong first half of 2012. We continue to expect solid year-over-year growth, led by recovery in the global data processing business, expanding GeoVentures marine and land offerings, a robust OBC market and continued year-over-year improvements in the land equipment market, supported by INOVA's exciting new product offerings.

Our margins, excluding the Systems segment, were strong this quarter. We expect gross margins to remain consistent in Q3 and drop slightly in Q4, depending on the mix of library sales and commercial timing of our Calypso system. We continue to expect 2012 investment in multi-client data libraries to be in the upper end of the of $130 million to $150 million with acquisition activity to grow in the back half.

Based on our market outlook and robust pipeline of order activity, we are constantly investing in each of our businesses and remain positioned to achieve year-over-year improvement for the remainder of 2012. We would like to remind investors that we are scheduled to present on September 5 at the Barclays Capital CEO Energy Conference in New York, and also on October 3 at the Johnson Rice Energy Conference in New Orleans. Please watch our website for more information. 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, we'll turn the call back to the operator for questions and answers.

Thank you, sir.

(Operator Instructions)

Georg Venturatos, Johnson Rice & Co.

Good morning, Brian. Good morning, Greg.

Good morning, Georg.

Just wanted to touch on the data processing side. Obviously, your strategic expansion efforts in international markets is clearly started to pay dividends. You did speak of a recovering Gulf of Mexico, I know that's a smaller piece going forward, but can you just give more a little more color on where we stand in that recovery?

Yes, sure, Georg. This is Brian. There's a couple things, obviously this last lease round was a fairly successful lease round. Really, the activities that led up to that lease round didn't really benefit us because a lot of what we have done in data processing in the Gulf was quite a while ago.

But, we would expect that as a result of that much activity in this lease round -- the success of it, that activity levels will in general start picking up in the Gulf. We're also starting to see that in bid activity. In addition to that, we are seeing some of our customers that participated in the Gulf, historically, that exited the Gulf over the last couple years, are returning to the Gulf. So people we have a history with are coming back to ION and presenting project opportunities for us.

Okay, great. I know we had talked about potential capacity expansion efforts in that business, as well. Just wanted to know how that recruitment of talent and that progress was to date?

Yes, we have been running -- as we indicated in prior calls, we have been running the plane pretty much at full capacity now for the last three to five months. We have been very aggressively building up both computing infrastructure and recruiting. And actually, the second quarter of the year was probably the second-strongest recruiting quarter that I've seen in many years here for data processing. So, we are having some very good results there.

Great. And then lastly, obviously, we have seen some R&D efforts, significant interest in Calypso. Do you have a sense of when that Next Gen streamer might be available? Is it in an early '13, maybe, delivery?

That's a good question, Georg. I would say our road map right now calls for the availability of a portion of that system to be available late 2012. But it is R&D, and so practically speaking, there is a potential that it slips into the early part of 2013, but it's certainly around that time frame.

Okay great. I appreciate the answers. Brian.

You're welcome.

Thank you, ladies and gentlemen.

(Operator Instructions)

Nathaniel Pulsifer, Pulsifer & Associates.

Good morning, Brian.

Good morning. (technical difficulty) Do I understand that they have a different fiscal year from ION? Or, is it because of the various accounting requirements that you give an estimated revenue and an estimated income?

Yes. INOVA reports on the one quarter lag through us due to a number of reasons

Okay, I remember that now. Can you give me some more color on the Tanzania licensing issue? Did I understand you to say that you were an agent of Tanzania for the forthcoming licensing round?

Yes, we are actually managing a licensing round for Tanzania. That's correct.

What does that involve, administratively, what does that involve?

Well, you know I'm not sure that I can get into the specifics of exactly what our role is in there. But, I can you that we are working very closely with them to coordinate the round. And, in addition to that, we've worked very closely with them to shoot basin spans and do some other work there so that we have data available to potential participants who want to participate in that round.

I see, that's very good, and it recognizes competence of you and your team. Final question, although you are very busy with oil and natural gas discoveries, has there any thought been given using the ION technologies in this worldwide search for water?

You know, we obviously recognize that there are opportunities to use our technology broader than oil and gas, in mining, in water etc. But, quite frankly, we are very much focused on the oil and gas market. That is our bread and butter.

Thank you.

Thank you. There are no further questions at this time. I will turn it back over to Management for any closing remarks.

Great. Well, thank you everyone for taking the time to attend our conference call. We look forward to speaking more after the third quarter.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.