Ion Geophysical Corporation (IO) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the ION Geophysical third-quarter earnings call. (Operator Instructions). This conference is being recorded.

And I would now like to turn the conference over to Ms. Karen Abercrombie. Please go ahead, ma'am.

Thank you, Anna. Good morning, and welcome to ION Geophysical Corporation's third-quarter 2014 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. We'll be using slides to accompany today's call. They are accessible by a link on the Investor Relations page of our website, iongeo.com. There you will also find a replay of today's call.

Moving on to slide 3, information reported on this call speaks only as of today, November 6, 2014; 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 during this call may constitute forward-looking statements, which 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 10-K, and on our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure 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, who will begin on slide 4.

Thanks, Karen, and good morning, everyone. Yesterday we reported third-quarter revenues of $107 million, up 33% over third-quarter 2013. Our total year-to-date revenues were $373 million, up 13%. Despite our growth in revenues, which was primarily driven by OceanGeo, we reported a net loss of $25 million in the quarter, or $0.15 per share. As expected, our base business revenues, margins, and operating income were impacted by the sustained slowdown in exploration spending by oil and gas companies.

Seismic in particular has been hit hard, with forecasts of declining spending through 2015. With predictions of reduced global oil demand caused by a slowdown in global economic growth, geopolitical tensions, and regional economic sanctions, this reduced seismic spending is likely to continue through 2016. Although our third-quarter results were disappointing, our third quarter is typically our weakest, and is not reflective of our expectations for the fourth quarter.

We mentioned a potential slowdown in exploration spending on our third-quarter call, a year ago. Since then, we have been proactively managing through it. We have reduced costs in our systems and data processing business, and have continued to maintain discipline regarding the exposure we'll take on our new venture programs. We have steadfastly executed our strategy of leveraging our innovative technologies to develop and deliver solutions to our E&P company customers, and we are focused on generating positive cash flow.

The energy business is cyclical, but we are a completely different company today than we were going into the last downturn, five years ago. We are a lot stronger and better positioned. Whereas in 2009, our business was largely centered around our land and marine equipment businesses, which generated half of our revenues; today, over 80% of our revenues come directly from our E&P company customers.

In 2009, our equipment businesses, especially the land business, consumed a lot of cash. As an example of how much we have weatherproofed our business, over the past 12 months we have generated net cash flows, before financing activities, of $61 million compared to 2009 when we had use of cash, before financing activities, of $40 million. Although we are in negative earnings territory, we are positively generating cash, and at the end of Q3 had cash balances of $130 million, and total available liquidity of about $200 million.

We have diversified our portfolio to include offerings that span the entire E&P lifecycle. Our deliberate entry into the production-oriented ocean bottom services business is a prime example. Year-to-date, OceanGeo has had both excellent operational and QHSE performance; as well as solid financials, with net profits in each quarter, and contribution of significant cash.

Our strategy was to get our crew into West Africa, an area with significant tendering activities. OceanGeo is currently completing a survey there, and has just completed negotiating another program that should carry us through the fourth quarter. In addition, we are actively negotiating another large tender there which should provide OceanGeo with a substantial backlog for a good portion of 2015.

With several active tenders in the region, we feel we are well positioned with the crew in West Africa to generate significant long-term backlog in that area of the world. Whereas the market for towed streamer acquisition has softened, the market for ocean bottom is quite robust.

As we have mentioned before, we are extending our offerings into the 3D market. In collaboration with Polarcus, we recently completed acquisition of a multi-client, 3D seismic survey offshore Ireland. This was the first survey under a previously announced multi-year strategic alliance with Polarcus to jointly develop, execute, and market 3D multi-client seismic programs globally. The survey was an industry-funded opportunity in advance of an upcoming licensing round, and represented a key opportunity for us to enter the 3D multi-client market, a natural extension of our traditional 2D BasinSPAN expertise.

We see this market as a growth opportunity for us, and are currently working to secure client commitments for additional 3D multi-client programs in other areas of the world.

Our software segment revenues were up 9% in the third quarter, and up 16% for the year. Our core command-and-control software products remain solid. And we are diversifying our software portfolio to include E&P systems for managing simultaneous operations, or SimOps, another example of extending our solutions into the latter stages of the exploration and production lifecycle. SimOps is an integrated visualization and data management solution companies can use to manage simultaneous operations in both seismic and production environments.

Our Narwhal for ice management was the first application of this technology, but we're seeing a broadening of the footprint of opportunities for this application to include production operations. We now have two Narwhal deployments underway, and we recently signed a contract for our first production SimOps engagement. We see tremendous growth potential in our software segment with SimOps, a market we estimate to be, in its nascent state, in the neighborhood of $1 billion. SimOps has the potential to be exponentially larger than our traditional command-and-control software business.

While our data processing business has been under some pressure this year, as in prior downturns, we would expect companies to move into a data reprocessing mode, GX Technology's sweet spot, as they pull back from seismic acquisition.

So, in summary, while we had a disappointing third quarter, we are confident we are well positioned for the eventual upturn from both the portfolio and financial perspectives.

I'm going to turn the call over to Greg now to go through the financials, and then I'll come back and wrap up.

Thanks, Brian. Good morning, everyone. Our third-quarter revenues were $107 million, a 33% increase over third quarter of last year. This increase was predominantly due to revenues contributed by OceanGeo. Our consolidated gross margins increased to 27% compared to an adjusted 19% in third-quarter 2013. And our operating margins were a negative 5% compared to an adjusted negative 18% last year. This increase in both gross and operating margins was driven primarily by the mix of revenues from new venture programs within the solutions segment over a very weak third quarter last year.

Our adjusted EBITDA for the quarter was $13 million compared to a negative $4 million one year ago. This year-over-year increase was primarily the result of an improved mix of revenues in the solutions segment. Overall, we reported a net loss of $25 million, or $0.15 per share, compared to an adjusted net loss of $20 million or $0.13 per share during third quarter of last year. Our improved income from operations was offset by an increase in our income tax expense relating to our non-US businesses, including OceanGeo, as well as a valuation allowance taken against US losses from which we cannot currently benefit.

Turning to slide 7, our third-quarter solutions segment revenues were $46 million, a 6% increase from third-quarter 2013. Within the solutions segment, new venture revenues were $18 million, up 54% from third-quarter 2013. Data library revenues were $3 million, down 37%; and data processing revenues were $24 million, down 8%. While new venture revenues were up, all businesses within our solutions segment were impacted by the continued softness in exploration spending.

Solutions had an operating loss of $6 million, a negative 13% operating margin, up from an adjusted operating loss of $13 million, and a negative 29% operating margin in the third quarter of 2013. While an operating loss, the improvements in operating margins was due to the mix of new venture revenues, and a result of reducing our cost structure in the second quarter. Our year-to-date investment in our multi-client library was $57 million compared to $86 million in the same period a year ago.

Turning to slide 8, our software segment revenues increased 9% compared to third-quarter 2013. This was primarily led by increases in Orca and Gator licensing revenues from various global customers. Our software segment operating profit was $6 million, with a 56% operating margin, compared to $6 million and a 62% operating margin in the third quarter of last year.

This decrease in operating margin was due to an increase in research and development for our next-generation software products. As Brian mentioned, while not a significant contributor to our third-quarter revenues, we now have two Narwhal deployments in production, and recently signed our first production SimOps engagement agreement.

Moving on to the next slide, systems segment revenues were $25 million, a decline of 6%. This year-over-year decrease was due to a reduction in sales of land geophone strings, while new positioning system and repair and replacement revenues were relatively flat compared to third quarter of last year. Systems operating profit was $3 million with a 12% operating margin, compared to an adjusted operating profit of $4 million, a 14% operating margin, for the third quarter of last year. This decrease in our systems operating margin was primarily due to our continued development of our next-generation ocean bottom systems.

Turning to slide 10, ocean bottom services segment revenues were $25 million, related to work performed in OceanGeo's project offshore West Africa. Work began in late July and was completed in early November. Ocean bottom services operating profit was $2 million, a 7% operating margin in the third quarter. As Brian mentioned, West Africa is an area with significant tendering activity, and OceanGeo is in active negotiations with clients on potentially longer-term projects.

Turning to slide 11, INOVA's revenue in their second quarter was $11 million, a significant reduction from their second quarter of 2013. INOVA recorded a net loss of approximately $11 million, of which our 49% share was approximately $5.6 million, impacting our third-quarter results.

INOVA continues to be impacted by a soft land seismic market, and has experienced significantly reduced equipment purchases by BGP. We currently estimate INOVA's third-quarter results in terms of both revenues and operating loss impacting our fourth quarter to be fairly consistent with their second-quarter results.

Turning to slide 12, as of September 30 our cash balance stood at $130 million, and our net debt -- defined as total debt, less our cash balances -- was $56 million. During the first nine months of the year, we generated $37 million in free cash flow compared to a use of free cash flow of $20 million in the period one year ago. Our adjusted EBITDA was a positive $90 million, a 68% increase from the first nine months of 2013.

In August, we entered into a new credit facility with a group of Western banks, replacing our previous facility with China Merchants Bank, which was scheduled to mature in March 2015. The lenders under this new facility have currently committed $80 million of revolving credit, subject to a borrowing base. But the facility allows for an additional $95 million of indebtedness through a combination of revolving credit capacity and term loan, up to $175 million in total. As of September 30, we had not drawn any amounts under this new facility.

With that, I will turn it back to Brian.

Thanks, Greg. While it feels like we're on the decelerating side of the downturn, we're maintaining our cautious outlook, and anticipate the slowdown will continue through 2016. Fortunately, as I said earlier, we saw it coming and had been practically managing our business, focusing on generating cash, exercising spending discipline across all our businesses, and continuing to diversify our portfolio deeper into the E&P lifecycle.

With that, we will turn it back to the operator for Q&A.

(Operator Instructions). Joe Maxa, Dougherty & Company.

Question on the OBS side -- having some success. I did notice that the operating profitability of that segment was weaker compared to the last couple of quarters on similar revenues. So I want to address that, maybe get a little color.

And then going forward into 2015, sounds like a lot of opportunities. What do you expect that op margin to be? And just wondering if it's just competition that's driving down that profitability, or maybe just a little more color. And then if there's a possibility of perhaps adding a second crew to generate additional revs, if it is a strong market.

Yes, sure, Joe. First of all, I'll tell you what happened with the profitability in the third quarter was, when we went into -- when we originally tendered for that job in West Africa, we did it under the assumption we're going to roll Calypso in on that crew. And when we transitioned over there, we started the job with VSO, which is less efficient. So we had the incremental efficiencies built into our quote for Calypso. And ultimately we didn't put Calypso on that job. We didn't want to interrupt the job, so we shot it with VSO. It was less efficient, so we had a little bit of margin pressure. It wasn't because of anything competitive. It was just our assumption of what technology we were going to use on the job.

The jobs that we're going to -- we have also, since then, made a decision that we're going to keep running that crew as a VSO crew in West Africa for a while. And the reason we're going to do that is a lot of the tenders that we're working on are based on 4D surveys that were originally shot with VSO. So, what we're hearing loud and clear from our customers is they want the same technology to repeat the survey. They don't want to introduce any variables into it. So we're going to continue to roll into 2015 with VSO in West Africa.

And Calypso is actually slated now to move in -- to go on to the second crew, as we go through crew expansion. And we believe that second crew, although we're not going to say where we're going to roll it out, we've targeted an area that's more of a deepwater environment and very conducive to Calypso, with its hardened engineering that's suited for 2,000 meter water depths. So that's why you had a little bit of margin pressure. We won't see that margin pressure moving forward, because we're going to be quoting all these projects with the assumption we're using VSO.

I see. And your intention -- or it appears you may be able to use this Calypso in 2015.

I think, when I take a look at our experience and the length of time it takes to tender and get permits, and get everything lined up, I think that our best opportunity for rolling out a second group is probably very late 2015 or very early 2016. It just takes time. And if you go back and look at our history, and how long it took us to boot up with crew one and get it internationalized, and get it up to QHSE specs and functioning well, it took us over a year to do that.

Okay, okay. I wanted to follow up on a different topic. On the data library sales, obviously Q3 has been weak, two years in a row. Last Q4, you had very strong sales. What are your initial signs looking at Q4 for this year?

Well, I'll tell you, it's hard for us to -- always hard for us to gauge how the quarter is going to roll. and it's so subject to discretionary funding. I'll tell you, one of the -- there's a few of the things we're looking at. One is there are a few trade shows that we attend around this time of year -- August through November. And they are usually fairly good indications of what kind of activities levels that we should expect. And we're getting mixed messages. So, in two of those shows, it was very positive, and one of those shows was negative. So it's a little bit hard to read the tea leaves there.

The second thing is, with the recent sanctions with Russia, and Exxon and Shell having to pull out of that market, we're hypothesizing that you might see a little bit extra capital budgets that haven't been spent, that may free up for the fourth quarter. But we're in a little bit of the storm here, so it's hard to predict.

Right. Okay, that's helpful, though, thank you.

Georg Venturatos, Johnson Rice.

I also wanted to start on the ocean bottom services side of the business. Sounds like that extension is likely in place that puts you with work through most of 4Q. When you look at the tender opportunities for 2015, what's your expectations for start dates there? Do you see any potential gaps, as we roll off that existing contract?

And then also, just maybe a little more detail on the size, in terms of some of the tender opportunities that are out there, and when you may hear back on those awards.

Sure, Georg. I would think -- the way that our tendering activity, based on where we're at in the process with these guys, I would expect there to be very little gap between 2014 and 2015. And if there is a gap, it will be because we're proactively doing something, some back deck work or something like that, that's needed.

So, I think the way these projects are teeing up, they are looking like they are fairly seamlessly going to flow together. But we do have some initiatives that we want to do in the back deck of that crew. And so we may see a few weeks of downtime to do those, but nothing meaningful.

As far as the size and timing, these are pretty significant awards. And just the next two, which we are very actively involved in negotiating now, the next two awards will take us well into 2016. So they are large, and there are very meaningful. And both of those awards are, as I mentioned before, they are both awards where VSO is the technology used for the prior surveys in both cases. And so VSO is the preferred technology for the next survey.

Understood, understood. Good to hear. On the multi-client side, obviously you spoke about the challenging environment out there. With the $57 million year-to-date invested -- and apologies if I missed this -- but does previous guidance of $70 million to $90 million for 2014, does that still stand? And how do you feel about that kind of full-year range?

Yes, I think our previous guidance still holds. It feels like we're going to be in the lower end of that range, though, Georg. And I'd expect that you're probably going to see something comparable for next year, as well.

Okay, great. Thanks a lot, guys.

(Operator Instructions). Chris Bamman, Sidoti & Company.

I was just curious, just given all the weakness in exploration spending that's really hurting your multi-client library, is any of that market share loss? Or is it just really a lot, just due to the weak spending?

Yes, probably two comments on that. When it comes to that data libraries themselves, Chris, certainly not market share loss. We have a very robust library, and it's in the basins of the world where people have interest. And I think it's still a little too early in the year to rule out a good data library year. A lot of the data library activity, traditionally, is a Q4 event. Q3 is always very soft. So I wouldn't pass judgment on the year until we see how it comes in.

Okay. That's helpful, thank you. And then just one other question. I believe I you said on the third quarter conference call that you had to pay an additional $5 million to Georadar if you got some backlog. Did you have to pay that money?

At this point in time, I don't think we're going to have to pay that money. I think the way everything is lining up, the way that we've got that agreement structured, I don't think -- there's a low probability we'll be paying it.

Okay, thank you.

Joe Maxa.

Yes, Greg, on the taxes, can you give us a little more color what happened there? I certainly wasn't expecting that type of rate. And what would be looking at, going forward? How should we model the taxes?

Yes. Yes, yes. Good question, Joe. So, every company that has tax obligations to both domestic and foreign governments determines estimates on profitability of where they will end up paying for the year. Our assessment, at this point in time, is that our US operations will remain in a loss, and we can't take the benefits of those losses to reduce our taxable expense.

And so what we end up doing is paying taxes in foreign jurisdictions. And those taxes, on what I will call negative pre-tax income, makes it look like a large percentage of taxes being paid. The reality is is that all catches up with itself, based on our assessment of where we're at today in the third quarter, which makes it look very high.

In the fourth quarter, depending on where things shake out, and going forward in 2015, there will be a point where we'll realize the benefit of those US losses. And so we should have a more normalized rate in the, what I'll call in the 20% to 25% range, generally speaking.

I see, okay. Okay, that's helpful. And then just a little discussion on INOVA: weak quarter, weak quarter expected; weak through 2016, perhaps. What are your thoughts on maintaining that relationship? Or is there a potential to move on?

Yes, Joe. I think we need to take a good, hard look at the equipment side of our business now in general, given that we are primarily an E&P-facing company. Irrespective of the -- whether it's INOVA, whether it's our marine business, or whatever -- we have to evaluate how those businesses are contributing to ION. Some of them are really good, positive, cash generators for us; and there's other areas that are not. So we're in a process of evaluating those.

Okay. That's it for me. Thank you.

And it appears there are no further questions.

I'd like to turn the conference back over to Mr. Hanson for any additional or closing remarks.

Okay. Well, thanks for taking the time to attend the conference call. And we look forward to the fourth-quarter conference call.

And ladies and gentlemen, this concludes the ION Geophysical third-quarter earnings call. If you'd like to listen to a replay of today's conference, please dial toll-free at 1-888-203-1112, and enter passcode 906-1808. Or you may dial toll at 1-719-457-0820, and enter passcode 906-1808.

We would like to thank you for your participation, and you may now disconnect.