Ion Geophysical Corporation (IO) 2012 Q3 法說會逐字稿

Welcome to the ION Geophysical's Third-Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions, and instructions will be given at that time. This conference is being recorded today, November 9, 2012.

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

Thank you, George. Good morning, and welcome to ION Geophysical Corporation's third-quarter earnings conference call. We appreciate your 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 iongeo.com, or via a recorded instant replay for the next couple of weeks. The information was provided in yesterday's earnings release. I should also point out that we'll be using some PowerPoint slides to accompany today's call. They're 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, November 9, 2012, and therefore, you are advised that 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 this statement. 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 10-K 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 are covered by these statements.

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

Thanks, Karen, and good morning, everyone. Yesterday, we announced solid third-quarter results led by strong growth in our Solutions and Software businesses. Year-to-date revenues were up 20%, with revenue growth across all three of our business segments. Gross margins are up, and we're pleased with the $0.22 of earnings year to date we've delivered to shareholders. Adjusting for the one-time excessive legal expenses associated with patent litigation, we've delivered $0.25 of earnings year to date. In addition, we're pleased with the distribution of those earnings across the last three quarters as compared to prior years where the earnings for the year were typically made in the back half. The fourth quarter is historically a big quarter for ION, and we have no reason to believe 2012 will be any different, so we're feeling pretty good about the year so far.

Briefly, I'm going to cover a few key third-quarter observations about the E&P market. First, E&P CapEx and seismic spending are up, with the possible exception of the North American land market. Barring an unforeseen negative change in the global economy, signs point to continued growth led by international activity, especially in Europe, Africa, Latin America, and the Middle East. Correspondingly, we're experiencing growth in these areas of our business as well. We are seeing continued interest in frontier arctic exploration, and interest by major operators in our under-ice seismic acquisition technology, and in the significant operational expertise and experience we have there. In fact, we are currently back in the North American Arctic for our sixth season of acquisition.

Our North America ResSCAN programs have continued to gain traction, despite a weakening in unconventional shale gas. Our focus is more on the oil plays, as well as the most economically viable gas portions of the Marcellus, which are of continued interest to our super-major and large IOC customers. We now have five programs either complete or in progress across the Marcellus and the Niobrara plays, and continue to invest in our GeoVentures land ResSCAN programs.

In addition, we established a new data processing center in Oklahoma City last quarter, expanding on our land processing capabilities, and bringing us closer to E&P companies. The Gulf of Mexico continues to rebound, with rig counts climbing back to pre-Macondo levels, and multiple lease rounds on the horizon. The increased activity in the entire Gulf of Mexico, including in Mexican waters, has had a positive effect on our data processing revenues.

Zeroing in on seismic, I want to highlight a couple of key trends taking place in the industry. The industry is in a period of change, undergoing two macro trends that represent both challenges and opportunities for its constituents. The first trend is the vertical integration and consolidation in the towed streamer space with CGGVeritas's recently announced acquisition of Fugro's Geoscience Division. This acquisition will result in 75% of the high-end 3D seismic capacity among the largest three companies -- CGGVeritas, WesternGeco, and PGS. Those three companies are more and more vertically integrated companies, developing technology that uniquely differentiates them from the rest of the players.

In fact, we are seeing a natural tiering developing in the towed streamer market as a result of those technologies. The top tier is being carved out by WesternGeco, with the introduction of their isometric system earlier this year. The second tier is being dominated by the top three with their broadband acquisition solutions. These broadband solutions currently are requested in approximately 30% of surveys, and this percentage is on the rise. The third tier includes the conventional service providers who don't have access to broadband acquisition solutions. So, more and more technology is becoming a very relevant part of what once was a fairly commoditized offering.

The second trend is the continued growth of the seabed seismic market, with most capacity sold-out for 2013, and for some crews, well into 2014. This demand for both nodal and cable systems is driven by the need for higher-quality seismic to image complex targets and for reservoir characterization. In the past couple of months, I've had several conversations with E&P companies around the desire for more ocean-bottom surveys and the extremely limited supply. This space tends to be dominated by a few providers, primarily RXT and their JV GeoRXT; Fairfield; WesternGeco with one crew; and the recently announced joint venture between Fugro and CGGVeritas with four crews. Our new Calypso ocean-bottom system positions us well to capitalize on this trend as we see opportunity for crew expansion.

Now I'll turn to ION highlights by business segment. We saw another strong performance by our Solutions segment. On the data processing side, we're seeing a buoyant market, with continued growth in both the Gulf of Mexico and internationally, particularly in Europe, Africa, and the Middle East. Our data processing group delivered record revenues in Q3, their sixth sequential quarterly revenue improvement, and ended the quarter with record backlog. We're seeing significantly larger projects including OBC and land processing projects, resulting in larger overall bid volume.

Our new WiBand broadband solution continues to gain momentum. When we introduced this new technology at the EAGE conference in June, we had over 20 test or evaluation projects in process. We now have four commercial projects underway, and several additional bids pending. We're excited about the reception of this broadband tool.

We expect continued quarter-over-quarter growth in data processing revenues, and we are continuing to invest in people, hardware, and software to ensure we have the capacity to meet increasing demand. We also continued to expand our data processing global footprint, recently bringing two new centers online -- the one I mentioned earlier in Oklahoma City, and another in India.

Moving on to our multi-client business, we enjoyed record third-quarter revenues, and closed the quarter with record backlog. Our multi-client revenues increased 25% over the third-quarter 2011, driven by strong new-venture underwriting of international offshore programs and data library sales, many of which have been driven by multiple upcoming lease rounds. We completed acquisition of six programs last quarter, including BasinSPAN programs offshore Brazil and east Africa, a 3D gravity gradiometry program offshore Greenland, and two ResSCAN 3D land programs in North America.

We saw strong demand for our data library programs offshore Africa, South America, India, and the Gulf of Mexico, resulting in a 50% increase in data library revenues versus the same period last year. We attribute this success to the breadth of our portfolio, which we believe positions us well for future growth. Q3 was a good multi-client quarter for us, and based on strong international markets and our expectations about where we're positioned in front of lease rounds, we expect to see our normal solid Q4 uptick in data library revenues.

Overall, the marine market is robust, with vessel utilization up markedly, and tender activity and day rates up. ION realized sales in 2011 for most of the larger new vessels that entered the market in 2012, which resulted in a softer year for our Marine division this year. However, we are equipping a couple of smaller vessels with a number of our towed streamer products -- one vessel in Q3, and another in Q4. In addition, we continue to enjoy a healthy repair and replacement business, given our extensive penetration of positioning, acoustics, and other products.

On the seabed side, there is a large volume of contractor backlog that has not yet been awarded. Given that contractors often place equipment orders upon being awarded contracts, orders for our new Calypso system may be pushed out a quarter or two into 2013. In the meantime, we have continued to realize solid revenues from sales of our current-generation VSO II seabed system, partially offsetting the softness in our other marine product lines. The backward compatibility of Calypso will provide the market strong assurance of our support to this growing business.

Our Software business delivered a record quarter, led by a 30% growth in revenues from Orca software and hardware sales. In addition, we're growing our on-board acquisition optimization services business, strengthening our foothold and visibility into E&P companies.

To sum it up, in general, activity is robust despite uncertainty in the North America land market. We are pleased with our third-quarter and year-to-date results. At the beginning of the year, analysts predicted seismic demand could grow in the mid-teens, and so we're pleased we've generated a 20% increase in revenues to date. Most of our growth has come from international markets [and] the Gulf of Mexico, and we believe that trend will continue, at least in the near term. We believe we're well-positioned to grow, as international exploration is front and center for us, our data processing and multi-client businesses are more global than ever, and we continue to invest in our technologies, infrastructure, and our greatest asset, our people.

I'll now turn the call over to Greg.

Thanks, Brian. Good morning, everyone. Overall, our third-quarter revenues were up 18% year over year. Our Solutions segment revenues of $92 million improved 26% over the prior-year period. Compared to third-quarter 2011, our Software segment sales increased to $13 million, up 30% in local currency, while our Systems segment revenues decreased slightly by 4% to $31 million. Our third-quarter results included unusually high external legal expenses resulting from two previously disclosed patent infringement lawsuits, one brought by WesternGeco and the other brought by ION against Sercel. Adjusting for these unusual legal expenditures net of tax, our net income for the third quarter would have been $17.4 million or $0.11 per diluted share.

With that overview, let's take a closer look at our Q3 performance starting on slide 12. Our Solutions segment revenue increase was attributable to increased performance in both our data processing and multi-client business. Our data processing revenues increased by 27%, driven by continued international expansion, as well as strength in the entire Gulf of Mexico. Our GeoVentures multi-client revenues, which include new ventures and data library, increased by 25% -- our best-ever revenue in a third quarter. As Brian mentioned, we experienced a 50% year-over-year increase in data library sales from across our broad portfolio. The mix of data library sales was extremely profitable for us.

As good a quarter as this was, I'd like to point out that we had a couple of library sales planned in Q3 that slipped to October. We look forward to sharing more about those sales in our fourth-quarter call.

Our Solutions segment ended the quarter with record backlog of $199 million, up 87% from the same quarter last year. Backlog levels for our Solutions business provide an indication of the strength of future sales, and will positively impact our Solutions revenues for the remainder of 2012 and into the first half of 2013.

Turning to slide 13, our Software segment also realized record revenues in the third quarter, as revenues increased 30% in local currency and 28% in US dollars. In the third quarter, we continued to realize steady subscription sales of Orca and Gator software, demonstrating consistent demand for concept systems, command and control software platforms. We added one Orca installation during the quarter, further solidifying our leadership position in the high-end market.

We continue to see increasing demand for our acquisition optimization services, through which we provide on-board services to others' acquisitions. Through these services, we are seeing good opportunities to significantly reduce customers' acquisition costs. We expect to return to a modest historical growth rate for the fourth quarter.

Moving on to slide 14, Systems segment revenues decreased 4% year over year, as we continued to experience soft revenues attributable to modest capital spending for ION products by our contractor customers, related to new vessel introductions. We continue to realize healthy seabed revenues, partially offsetting the softness in our other marine and land sensor product lines. As we've said all year, we continue to ramp up our R&D spend as we invest in our next-generation technologies.

Turning to the next slides, as we indicated on our last call, INOVA experienced solid revenue growth in their second quarter compared to a year ago, recording $47.4 million of revenues, up 41% over the same period in 2011. This was driven by a 30,000 channel sales of their new HAWK wireless product, strong US-based vibrator sales, and the delivery of an additional 9,000 channels of their new G3i cable-based recording system to (inaudible).

INOVA's second-quarter operating loss was $4 million; an improvement from the same period in 2011 in which they had a loss of $8.3 million. We estimate INOVA's third-quarter revenues to be in the range of approximately $23 million to $27 million, with an operating loss of $7 million to $9 million compared to an operating loss of $23.5 million one year ago. Their third-quarter revenues have been historically weak, and they are taking steps to drive stronger 2013 revenues as the international land market slowly returns.

We remain positioned to recognize a modest profit from INOVA in 2012. Similar to last quarter, we would expect to book 49% of INOVA's estimated third-quarter financial results in our fourth quarter. INOVA's third-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 slide 16, as expected, we did not generate free cash flow this quarter, attributed to our usual large third-quarter multi-client investments, as well as increases in receivables due to a great deal of revenue booked by our Solutions segment late in the quarter. While this reduced our cash balances, we are planning for our cash position to slowly rebuild over the next few quarters.

Moving on to more details in the balance sheet on slide 17, the asset side of our balance sheet continues to demonstrate our asset-light strategy with our most significant investments being in multi-client projects, resulting in a data library net book value of $212 million. Total cash on hand was approximately $47 million, and our credit facility has an additional $77 million of capacity. Our equity book value continues to grow with the improved profitability this year.

Turning to our last slide, in summary, we've enjoyed strong growth through the first three quarters of 2012 -- 20% higher revenue than the same period in 2011. We continue to expect solid year-over-year revenue and earnings growth led by continued strength in our global data processing business, expanding GeoVentures offerings, a robust OBC market, and improvements in the land equipment market. Our margins were strong this quarter, and have continued to increase compared to the prior year.

We expect gross margins to remain in this range in Q4; of course, depending on the mix of data library sales and our System segment revenues. We expect our 2012 investment in multi-client data libraries to be north of $140 million, having already invested $106 million in the first three quarters of 2012. Based on our market outlook and robust pipeline of order activity, we are confidently investing in each of our businesses, and remain positioned to achieve year-over-year improvement as we finish up 2012 and transition into 2013.

We would like to remind investors that we are scheduled to present on November 13 at the Bank of America Merrill Lynch Global Energy Conference in Miami, and on December 4 at the Dahlman Rose Conference in New York City. Please watch our website for more information.

Before I wrap up, I wanted to say a few words about the recent WesternGeco lawsuit. You'll recall that in 2009, WesternGeco sued us for patent infringement, claiming that our DigiFIN product infringed several of their patents. You'll also recall that we and WesternGeco are not competitors. We sell technology and equipment to contractors to the oil and gas industry. WesternGeco sells its complete seismic survey services to oil companies. In August, the jury returned a verdict finding that we infringed the WesternGeco patent claims by supplying DigiFIN from the US. The jury voted to award WesternGeco $12.5 million in royalties for our past DigiFIN sales, and $93.4 million in lost profits earned by our contractor customers while performing lateral steering seismic surveys using DigiFIN outside of US waters. After hearing all the evidence in the case, we continue to believe we did not infringe WesternGeco's patents.

The ultimate decision on the case in the trial court rests with the judge, not the jury. A judgment has not yet been entered in the case, so the next step in the case is for the judge to enter a judgment. The final judgment will determine the results of the trial. When he enters a judgment in the case, the judge can choose to follow the jury verdict or to change to a different result or even to order an entirely new trial.

If the final judgment is adverse to us, we intend to appeal the case. We filed motions with the trial court asking the court to overrule the jury verdict on infringement, patent validity, and damages. We believe that, for many reasons, the verdict isn't consistent with the law, and we're optimistic that the trial judge will overturn at least part, if not all, of the verdict. If we're not successful with the trial court's judgment, we believe that we will prevail in our appeal of the case.

As I'm sure you can appreciate, this is a pending matter, so we're limited in what we can say about the lawsuit. We will provide updates when there are any material developments in the case. We'd ask for your understanding in not asking further questions about the case at this time.

In closing, we'd like to thank our customers for their continued faith in us, and our employees who strive to give us the competitive advantage everyday. With that, we'll turn it back to the operator for questions and answers.

(Operator Instructions) James West, Barclays.

Brian or Greg, the Solutions backlog at record levels here, exiting 3Q close to $200 million, first off, very, very impressive. Is there anything different about this backlog now than there has been in the past? Normally, you would kind of work through the backlog within probably two to three quarters. Is there anything in there that's longer-term or should we expect the same type of really strong kind of turn in the backlog over these next few quarters?

Yes. James, this is Brian. I don't think I'd characterize anything in the backlog that's longer-term than we have had historically. Probably what is in the backlog that's a little bit unique compared to prior years is we've got our first 3D project in the backlog, which is a little bit larger than a typical 2D backed project.

Okay.

As we (technical difficulty) that multi-client business, we're moving into the 3D landscape. They're just bigger projects.

Is the move into 3D -- traditionally, you mostly [all trade] on 2D, BasinSPAN, is the move into 3D, are your customers pulling you that direction? Or is it a strategic move on your part?

It's a little bit of both, actually.

There's no concerns about bumping up against some of your customers in the Systems business by moving into 3D?

No, it's the same model. It's the same model that we're using with our customer to perform the services. Where we're uniquely differentiated in a project, that's where we bring value and then we'll subcontract it out to our customers.

Okay, okay. Got you. On the Marine side of the business, obviously, you highlighted several times that the Marine side of the business is extremely strong, we've got good pricing power, vessels are mostly sold out here. When would you anticipate or are you already seeing some of your customers coming to you to talk about additional new build and ordering new build capacity?

Yes, actually, we're not seeing that conversation yet. I think what we're seeing more and more in the industry is people trying to wrap their minds around the change, the shift in technology and trying to get an understanding of what they're going to use or where they're going to get access to the next generation of technology for upcoming vessel builds. I think there's a lot of there's a lot of head scratching going on right now.

With Schlumberger's step change here in technology, does that position you better or worse to provide something comparable or something competitive for other customers?

Yes, I think it makes companies such as ours that focus on developing technology extremely relevant for the future of this industry.

Okay, makes sense. Thanks, Brian.

(Operator Instructions) Georg Venturatos, Johnson Rice.

Just wanted to touch on the data processing side, obviously we've seen some nice expansion there, revenue growing sequentially, looks like that should continue. Just wanted to get an update on where we are in those capacity expansion efforts and how that's going?

We are back to pre-Macondo levels relative to building on our capacity. What I mean by that is, all the seats on the airplane are full and so we're working day by day to both attract in talent in the business and to build out computing infrastructure to support it. They really are sort of our limiting factors to grow that business at this point. It's pretty much back to the way it was, I'd say, from 2005 through 2011 timeframe. That's typically what has driven or gated our growth in that business.

Georg, I would add to that, that our international presence taken over the last year is really paying off. We're seeing multiple opportunities and bid activities outside of our typical Houston strong points. It's global in nature and very complementary to everything we're doing out in the GeoVenture side as well.

Okay, great. Then on the ocean bottom cable side, obviously, it sounds like that market's pretty strong. Just wanted to get a sense from, in your view, what's really driving that strength in recent quarters from the operator perspective?

Yes, the reality of a lot of that work, Georg, is that they're big projects, they're multi-year projects. I think what's really occurred over the last two to three years is that a number of those projects have been completed and the oil companies have had the opportunity to work with the data. It's just been this awareness that the quality of the data is so much better than doing it from shooting from the surface that they have designed a number of large projects on the heels that they're going out to tender with. The challenge that they have is that there's just really no capacity out there, so I know a number of companies who have large bids that they want to put out to tender, but there's not enough capacity to touch them until 2014. There's a little bit of a struggle going on and that's why we see crew expansion occurring in 2013.

Great, appreciate it guys.

Justin Baker, Sidoti & Company.

If possible, could you just talk a little bit more -- I know, Brian, had mentioned kind of some head scratching in terms of technology and that type of thing, but can you talk a little bit more about expectations near-term, if you can, for the streamer sales and what the market dynamics would be for that?

Yes. My first comment would be around what WesternGeco rolled out with their IsoMetrix system, so I'd classify that as a very advanced streamer technology and it's one that absolutely has an advantage over what's in the market today. The reality is that there's no other system out there that truly can compete based on the way that system's designed at this point. There's a gap, there's a need to develop something that is comparable.

Then if you go down and you look at the broadband acquisition techniques that are being employed by WesternGeco, CGG, and PGS, they're all unique offerings. Each one of them is taking a different approach to shooting broadband and that is differentiating them with the rest of the industry. First and foremost, everybody who's not in the top three are looking for options to deliver a broadband solution. That is one of the potential drivers to their future streamer replacement programs. Can they get access to broadband acquisition approaches and then thus, can they compete in that tier 2 market?

As far as the tier 3, the more commoditized market, there really is not a lot of movement right now. I think there's a concern on the part of a lot of contractors in that market that it's going to be hard to compete with broadband acquisition technology with their commoditized offering. They're looking for a solution, so that really plays well for a Company such as ours with active R&D programs that are in the streamer space, because we're one of the potential solutions for them for the future replacement of the streamers.

Okay, great. Thank you. The other question that I had is, with regards to the Tanzania licensing round, I don't know how much you're able to talk about that, but the delay there, is that having any impact on your opportunities surrounding that? Can you talk at all to what the situation is there?

Yes, actually the delay, actually, has been quite positive for us because it's given us more time to sell the data libraries that we have to potential participants. What we initially thought might have been a negative delaying that out, turned into a benefit for the Company.

All right. Excellent, thank you, gentlemen.

(Operator Instructions)

Tom Plumb, SVA Plumb Financial.

I have some questions about INOVA and if you could address the seasonality and whether next year all the profits that we'll see from that will be in the first half of the year again?

Yes, Tom, this is Brian. I really can't speak a lot to 2013 at this point; it's still a little premature. We haven't even completed going through a review of their planning process for next year. As far as seasonality in general, I'd probably characterize that business a little less that it's seasonal and more that it's just lumpy. You just have big quarters and then smaller quarters and it just behaves like that. Last year, they had a weak third quarter as well. But I don't really see or a lot of seasonality in that business, just lumpiness.

So at this time, you can't predict whether or not it will be breakeven or profitable next year?

Yes, it is a little premature for us to be talking about 2014 when we haven't even finished the planning process.

Tom, and for all investors, that's true for ION in total, it's not just INOVA.

There is no reason at this point in time, that we don't believe that they'll be profitable in the next year, we just simply haven't got the data yet.

Okay, thank you.

Thank you. I'm showing that there are no further questions. I'll turn the call back to management for closing remarks.

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

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation. You may now disconnect.