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Executives

Gary D. Owens – Chairman, President and Chief Executive Officer

Thomas T. McEntire – Chief Financial Officer

Analysts

Veny Aleksandrov – FIG Partners, LLC

Georg Venturatos – Johnson Rice & Company

Michael J. Cerasoli – Goldman Sachs & Co.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Travis Z. Bartlett – Simmons & Co.

Peter Hatfield – Dahlman Rose & Co. LLC

Hamed Khorsand – BWS Financial, Inc.

Gregory P. Garner – Singular Research

Jason Kraft – Cato Partners

Joseph Lydon – Westlake Securities LLC

A.J. Strasser – Cooper Creek Partners

William J. Dezellem – Tieton Capital Management LLC

David Griffus – Waychee Capital Management LLC

Geospace Technologies Corporation (GEOS) F4Q 2012 Earnings Call December 12, 2012 10:00 AM ET

Operator

Welcome to the Geospace Technologies’ Fourth Quarter 2012 Earnings Conference Call. Hosting the call today from Geospace is Mr. Gary Owens, President and Chief Executive Officer. He is joining by Tom McEntire, the Chief Financial Officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to Gary Owens. Sir, you may begin.

Gary D. Owens

Good morning and welcome to the Geospace Technologies’ fourth quarter and year-end conference call. In fact, this is the Company's first conference call and we appreciate your participation in it. I’m Gary Owens, the Company's Chairman, President and CEO. Also with me is Mr. Tom McEntire, the Company's Vice President and Chief Financial Officer.

Before I begin discussing the quarter and the year allow me to say that if you'd like to listen to a replay of today’s call, it will be available via webcast by going to the Investor Relations section of our website at www.geospace.com.

I should point out that the information we will discuss this morning is time sensitive and therefore may not be accurate on the day one listens to the replay. I warn you that many of the statements we will make today will constitute forward-looking statements within the meaning of the Private Securities Litigation Act of 1935. These statements are made with management’s current expectations and knowledge. The statements are based on risks that are known and unknown, are influenced by uncertainties and other factors that we are unable to predict or control. Some or all of these may create undesirable results or cause our performance to differ materially from any results or performances we may express or imply. These risks and uncertainties include the risk factors you can find in our filings with the SEC, including the filings on Form 10-K and our quarterly filings on Form 10-Q.

Fiscal year 2012 was an unusually active year for general corporate matters. Our former parent company OYO Corporation sold their remaining 20% stake in the company in February. In early October, we changed the Company’s name and ticker symbol to reflect our transition from OYO Geospace Corporation, OYOG to Geospace Technologies Corporation, GEOS.

Later in October, we approved a 2-for-1 stock split, effective in the legal form of a 100% stock dividend. The final sale by OYO Corporation of its holdings in the company and the subsequent stock split has added considerable liquidity for the trading of our stock. Subsequent to the end of our fiscal year, we announced the creation of a new branch office in Bogotá, Colombia, to provide sales support equipment rentals and field service support to our customers in South America.

The Bogotá branch office is expected to become operational in the second quarter of fiscal year 2013. We are also building a wireless rental fleet in the Russian Federation through our subsidiary INOVA. We recently executed a wireless rental contract with a Russian customer for the winter season and we intend aggressively to market our suite of wireless products for sale in rental in the Russian market there in the year 2013.

Our efforts in Colombia and the Russian Federation reflect our increased focus on international acceptance of our wireless data acquisition systems. Throughout the year we issued several momentous announcements relating to our seismic reservoir products.

In February, we announced the receipt of $15 million seabed data acquisition system to be permanently installed in the deepwaters of Brazil for the BC-10 field operated by Shell and their partners Petrobras and ONGC. Due to unforeseen delays with certain contract vendors we now expect to recognize revenues from that contract in the second quarter of fiscal year 2013.

In November, we signed $160 million contract with Statoil to provide two permanent seabed data acquisition systems to be installed in the Snorre and Grane fields in the northeast. Partially in response to the Statoil contract, we recently purchased a 30,000 square foot facility on 3.4 acres near our corporate headquarters in northwest Houston. We have quickly initiated operations at this new facility.

Our land wireless data acquisitions systems also enjoy success during fiscal year 2012 with 73,000 channels sold. Our new wireless rental fleet grew also from 20,000 channels last year to 52,000 channels at September 30 2012. Over the course of fiscal year 2012, we also improved our wireless systems so that they have lower power usage, increased memory capacity and increased throughout, speeds and other new features.

During the fourth quarter of the fiscal year 2012 we entered into agreements to rent over 1,100 wireless sea nodes to two customers. And since the end of the fiscal year we also received an order to sell 200 wireless sea nodes to a Russian customer.

In November, at the Society of Exploration Geophysicists' Annual meeting held in Las Vegas, Nevada, we announced a new land wireless nodal system available in single and three channel configurations called the GCX-1 and GCX-3. Although the systems can be used in any land environment and in special applications in high theft and environmentally constraint areas. The GCX nodal system works seamlessly with our existing land and marine wireless data acquisition systems.

I'll now turn the call over to Tom, who will cover the Company's financials in more detail. Afterwards, I will return with some final closing remarks and we'll be happy to any questions you may have.

Thomas T. McEntire

Thank you, Gary and good morning everyone. I will start by giving an overview of our consolidated results of operations for the fourth quarter and full year of fiscal year 2012. Then I will drill deeper into our revenues for each of our five product segments. Finally, I will close with some information concerning our balance sheet and cash flows.

Let me remind everyone that all earnings per share amounts have been adjusted to give effect to the 2-for-1 stock split Gary spoke about earlier. Also while we will provide some guidance on revenue recognition and cash flows for fiscal year 2013, we will now provide any earnings guidance.

For the fourth quarter ended September 30, 2012 we reported revenues of $36.9 million, an increase of 12.6% over revenues of $32.8 million for the fourth quarter of fiscal year 2011.

Our net income for the fourth quarter of fiscal year 2012 increased 18.9% or $4.3 million or $0.33 per diluted share compared to fiscal year 2011 net income of $3.6 million or $0.28 per diluted share. Compared to past quarters, we attribute this sequential decline in revenue and earnings to the erratic order flow into the timing of product shipments which is dictated to us by our customers.

For fiscal year ended September 30, 2012, we’ve reported record revenues of $191.7 million, an increase of 10.8% over revenues of $173 million for fiscal year 2011.

Our revenues for fiscal year 2012 also a record, increased 18.2% to $35.1 million or $2.74 per diluted share, compared to fiscal year 2011 net income of $29.7 million or $2.36 per diluted share of last year.

We report our revenue segments in five different categories; they are traditional seismic exploration products, wireless seismic products, seismic reservoir products, industrial products, and thermal solution products. I will discuss each of these product categories for fiscal year 2012 and their comparison to fiscal year 2011.

For traditional seismic products, revenues for fiscal year 2012 of $66.8 million, a decline of 1% compared to revenues of $67.9 million for fiscal year 2011. The slight decline in our traditional seismic product revenues primarily resulted from reduced shipments of the marine products and was partially offset by increased sales of geophones and connector products.

Revenues from our wireless seismic products for fiscal year 2012 of $82.6 million, an increase of 30% compared to revenues of $63.8 million for fiscal year 2011. The increase in revenues resulted from growing industry demand for sales and rentals of our wireless systems that replace less efficient legacy cable based seismic data acquisition systems.

As Gary mentioned earlier, we sold 73,000 channels of our wireless data acquisition systems during fiscal year 2012, and we increased our wireless rental fleet to 52,000 channels at the end of the year. We expect rentals of our wireless products to be a key driver of future sales for this product line.

Revenues from our seismic reservoir products for fiscal year 2012 were $15.4 million, a decrease of 4% compared to revenues of $16 million for fiscal year 2011. In recent prior years revenues for these products have primarily represented sales of rentals of our seismic borehole tools, which are primarily used in map well fracturing activities. Orders for our borehole products tend to be relatively infrequent and difficult to forecast. But as we go forward, we expect revenues in this category to be dominated by our permanent seabed data acquisition systems.

As Gary mentioned earlier we now expect to ship a $15 million Shell system in our second quarter of fiscal year 2013 and we expect to recognize revenues of approximately $70 million or more during fiscal year 2013 from the production of the Statoil systems. Revenues from our industrial products for fiscal year 2012 were $13.3 million, an increase of 20% compared to revenues of $11 million for fiscal year 2011. The increase in our industrial product revenues was driven by increased sales of our offshore cable products with fiscal year 2012 being a record year for this product line.

Revenues from our thermal solution products for fiscal year 2012 were $12.6 million, a decrease of 6% compared to $13.5 million for fiscal year 2011. We consider this decrease to be caused by recurring fluctuations in product sales and orders and not necessarily associated with any particular long-term trend.

Now I would move on to discuss other elements of our financial statements. For fiscal year 2012 our operating expenses consisting primarily of selling, general, administrative and research and development expenses were $31.2 million, an increase of 5% compared to $29.7 million in fiscal year 2011. The increase in operating expenses resulted from expanded activities associated with our sales growth and from increased incentive compensation expenses.

As a percentage of sales, our operating expenses were 16.3% in fiscal year 2012 compared to 17.2% in fiscal year 2011. We believe these results demonstrate our ability to leverage top line growth without corresponding increases in our cost structure.

Our effective tax rate for fiscal year 2012 was 32.3% compared to 33.4% for fiscal year 2011. Our tax rate is lower than the U.S. statutory rate of 35% due to the impact of deductions available to manufacturers and lower tax rates in the jurisdictions that we operate in internationally, or any of foreseen changes in the U.S. tax code in the coming year, we expect our fiscal year 2013 effective tax rate to be between 33% and 34%.

Our balance sheet remains strong, we ended fiscal year 2012 with $146 million of working capital, $71 million of cash and short-term investments, and we had no long-term debt on our balance sheet. Our $25 million credit facility with Frost Bank remains untouched this time resulting in total liquidity of $96 million at the end of fiscal year 2012. We believe the strength of our balance sheet puts us in a good position to meet the opportunities ahead.

From a cash flow standpoint in fiscal year 2012, we generated $43.2 million of cash from operating activities compared to only $1.1 million of operating cash flows last year. Excluding purchases and sales of short-term investments, which we considered to be relatively liquid cash investments, in fiscal year 2012, we used $11.5 million of cash in our investing activities compared to only $300,000 last year. During fiscal year 2012, we invested $31.7 million to expand our fleet of rental equipment as earlier discussed. As expected this investment in rental equipment was significantly offset by $24.2 million of cash proceeds from the sale of rental equipment to our customers.

For fiscal year 2013, we intend to continue the expansion of our wireless rental fleet with key investments in South America, Canada, and the Russian Federation. Currently we estimate fiscal year 2013, gross investment in rental equipment will be about $40 million. As in past years, we expect these renal equipment investments will be significantly offset by cash proceeds from the sale of rental equipment to our customers.

In addition we plan to invest up to $14 million in fiscal year 2013 for additional facilities including the new 30,000 square foot Houston facility Gary mentioned, a 19,000 square foot building in Bogotá, to house our new South American rental business and additional equipment to expand our manufacturing capacity.

Finally I would like to make some concluding remarks about the Statoil contract. For this contract we will recognize revenues using the percentage of completion revenue recognition method. Under this method we will recognize revenues ratably as manufacturing activities occur over the life of the contract. Currently we expect to recognize approximately 45%, 40% and 15% of the contracts revenues in fiscal years 2013, 2014, and 2015 respectively.

Revenue recognition is expected to begin in our first quarter of fiscal year 2013, it should also be noted that cash flows from the Statoil contract will occur at various predetermine milestones stipulated in the contract. While these contractual cash flows will not mirror the percentage of completion method of recognizing revenues, we expect they will provide a significant portion of the funding necessary to offset our investment in materials and equipment.

That concludes my remarks. Now I will turn it back over to Gary.

Gary D. Owens

Thanks Tom. As we mentioned earlier, we did not offer earnings guidance. However, we just finished a record year for the Company, which follows on the previous year's record performance. We are off to a fast start this year, it’s a previously announced Shell subsea contract, will be recognized in the second quarter, we also previously announced Statoil subsea contract will begin contributing this quarter along with the two land wireless systems at 34,000 channels sold to Tidelands and SAE. The Statoil contract gives the company visibility over the next three years, this is the first time we've had multi-year visibility in our backlog.

I will now open the line for questions.

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions) Now our first question will come from Veny Aleksandrov with FIG Partners. Please go ahead.

Veny Aleksandrov – FIG Partners, LLC

Good morning. It is great to be on the first conference call.

Gary D. Owens

Good morning Veny.

Veny Aleksandrov – FIG Partners, LLC

My first question is on the wireless side, you mentioned in the press release that there is a chance of more wireless orders happening before the end of the calendar year. If you get these orders in the next couple of days, is there a chance at the revenue so far in Q1, that also deliver?

Gary D. Owens

Yes, I mean we do have some orders that do not rise to the level of a press release and we have some expectations on additional orders of size, but at the moment they have not been close. We do have expectations to do so, but we’ll see.

Veny Aleksandrov – FIG Partners LLC

So we still have time to call some and recognize some in Q1.

Gary D. Owens

Sure, it’s only the 13 of December we have plenty of time. There is only Christmas, and New Year.

Veny Aleksandrov – FIG Partners LLC

Right.

Gary D. Owens

We do have time and we are hoping for that.

Veny Aleksandrov – FIG Partners LLC

Okay, and my next question is, this year has been great on the seabed front, we got the Statoil, we got Brazilian orders, is there more in the pipeline that you’re working on and I know that this years, this contract can take up to three years to materialize, but are you working some additional contracts?

Gary D. Owens

We are always talking to people and pushing towards either having another tender or talking to people on a closed in, but if we were to receive an order anytime soon that had to delivered in 2013, fiscal year 2013, we would be hard pressed to do so, so we are in the throws of expanding our capabilities for anticipation future orders, and we do and this is expectation and falls in the forward-looking step, we do have expectations that we will have other orders before the Statoil is delivered, but no guarantees on that.

Veny Aleksandrov – FIG Partners LLC

All right. Thank you.

Thomas T. McEntire

Hi, Veny, I would also remind you that these orders have very long lead times, so we could be talking to somebody now and it might not materialize for 12, 24 months from now. So we're constantly in discussions with companies, but it's difficult to kind of bring them to the altering and you don't get a contract finalized, but there are things going on.

Veny Aleksandrov – FIG Partners LLC

I know that they can say 3 to 5 years. I know, and my last question and I will re-queue, on the marine seismic side, is activity little too strong in terms of demand for equipment, what are you seeing?

Gary D. Owens

Veny, our sales for marine products in fiscal year 2012 were less than our normal or what we expected, but we see some strength presumed in that market now and we're expecting to have a better year in 2013.

Veny Aleksandrov – FIG Partners LLC

Thank you so much and I I'll re-queue.

Thomas T. McEntire

Veny, I was at the conference in New York early last week and I was listening to CGG and they were talking about adding new vessels in the calendar year 2013, more vessels in 2014 that are they expect to be pretty large. So you hear that from time to time we don't have any of those orders associated with that yet and we typically don't get those this far out in the cycle, but that kind of goes up and down and just depending on new vessels, accidents that can happen at sea and our normal rework of the product line. So I don't expect a lot to change and it could be bigger if those, if new vessels are being built like CGG suggested.

Veny Aleksandrov – FIG Partners, LLC

Thank you Gary, and thank you, Tom on all work here. thanks.

Gary D. Owens

You bet.

Operator

Thank you. Our next question comes from Georg Venturatos with the Johnson Rice. Please go ahead.

Georg Venturatos – Johnson Rice & Company

Good morning, Gary. Good morning, Tom.

Gary D. Owens

Good morning, George.

Thomas T. McEntire

Good morning, George.

Georg Venturatos – Johnson Rice & Company

I just wanted to follow up on the seabed side. Obviously, it sounds like you’re talking to several customers there for orders and out years. But can you maybe talk about how impactful this relationship with Statoil can be longer-term, if we progress as expected on this first large order?

Gary D. Owens

Well, yes, I mean Statoil, if this is successful, if we are able to deliver this timely and deliver them in the product area expecting, and that we expect to do. And if their ability to take that data and make some reasonable decisions occur. I think there is a strong expectation that this will become more of a norm instead of an exception. But we have our ways to go and to prove all of that in time lap, seismic, the very name implies a multiple surveys then. So, because there’s multiple surveys and because there is multiple data processing and interpretation cycles, and then whatever decision is made as to be borne out. these can take a little while. But I think on the longer-term perspective, we are hopeful that the relationship with Statoil will be a long run.

Georg Venturatos – Johnson Rice & Company

Right, right, understood, thanks. And then on the OBX side, I really see this is one of those products that’s really gaining traction and maybe not everyone is calling this how impactful it can be. can you maybe just talk about what’s driving that increased demand over the last couple of quarters, and where you see outlook for that over the next few quarters and in what areas in particular maybe the North Sea markets, that’s really seeing increased demand?

Gary D. Owens

This is outside of the subsea interest and what’s going on later. this is one of the product lines that has pretty excited. And this is a nodal seabed system that is small, light considerably cheaper than that technology in the past. and our initial survey that we did in Lake Erie and the two that are going on in Peru and the North Sea. if all of that goes as well, we have substantial numbers of quotes outstanding on large size systems. So I think it will be another six months or so before significant orders come through. They will be small orders perhaps, we just stated in these prepared remarks that we sold 200 of OBXs into Russia. And we haven’t delivered those. those will be delivered either in March or April at the moment. So I think that this stands a good chance becoming yet another product line that will sustain our growth.

Georg Venturatos – Johnson Rice & Company

Great, great. I really appreciate the answers guys.

Operator

Thank you. We’ll take our next question from Michael Cerasoli with Goldman Sachs. Please go ahead.

Michael J. Cerasoli – Goldman Sachs & Co.

Thanks, good morning, and then also thanking for hosting the conference call and taking questions. Can you walk us through the customer profile as you look to kind of penetrate new markets, take for example, the Colombian market, how does that customer base compare to say your domestic customers and assuming you’re going to emphasize rentals. are there other ways that you get your products into users’ hands?

Gary D. Owens

Yes. When I characterize this, you’ll have to know there’s exceptions to every rule in the case of seismic, there is hardly a rule that doesn’t have more exceptions in the rule. But yes, in South America, there are a lot of indigenous contractors that work continent. Most of those are relatively small guys they have a few crews, three or four crews or less. So typically they are not a big capital expenditure type of environment, enhance the office opening in Colombia.

So we can serve that market that will more than likely be a primarily, a rental market. I am sure we will make some sales this time goes on, they would typically be smaller size sales, and you’ve seen here in the North American market, just because of jungle work in smaller areas to do. But that will be the Russian market, much like the Canadian market is stronger in the winter months. so there is recording seasons typically are intense, but short. So we anticipate that to be more of a rental market than a sales market, but we will sell channels into that market from time to time. So I think if you go around the world, there’s characterizations that are different and that will be the case in South American and Russia too.

Michael J. Cerasoli – Goldman Sachs & Co.

Okay, that’s very helpful. And then you guys do provide a split of the rentals versus your sales for your wireless system. and I’m curious to know, so the rental fleet quarter-over-quarter stayed flat, but am I right to assume that some of those rentals to convert to sales and you put on more rentals, can you give us just a little bit more color on the rentals versus the sales?

Thomas T. McEntire

Yeah. hi Mike, this is Tom. It changes everyday, I mean we are selling equipment out of our rental fleet, and we’re putting new equipment in our new rental fleet, and it’s a constant churning. So we could have rental units out right now that are going to be, could be sold by the end of the quarter. but we could completely replace them with, they have many or more new units coming into our fleets. So I’m not sure how to answer your question other than it’s just a constantly churning process and it’s likely to grow.

Michael J. Cerasoli – Goldman Sachs & Co.

That was a good one, and kind of just my just my last question on seabed monitoring, kind of just speaking a little bit more the long-term opportunity with Statoil is compelling, but you’re going to be thinking about what kind of – what you have in the hopper, what kind of the requests you’re feeling right now. When we think about magnitude and scale, are we kind of back to sort of your $10 million and $20 million range kind of like with the Shell contract or has the bar been raised and kind of what you are seeing from and realize me to want to get too much color, I’m just kind of looking for kind of a ballpark of what sort of requests you are seeing right now?

Thomas T. McEntire

Yeah. we’re not far enough along to really know the answer to that, it’s not really – not willing to give a lot of color, it’s just too early in the process as to know. Basically, you even can go through that process, and it will be at one extreme in money and confidence and a lot of things, we enter into deployment of reports finally defined very well. So we just don’t know the answer yet.

Michael J. Cerasoli – Goldman Sachs & Co.

That’s fair enough. Thanks, again.

Thomas T. McEntire

You bet.

Operator

Thank you. We’ll take our next question from Ryan Fitzgibbon with Global Hunter Securities. Please go ahead.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Hi, good morning guys.

Gary D. Owens

Good morning.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

I’ll talk about the BC-10 project. can you go over what the vendor issues exactly where, what percent of completion of projects in, and then if there’s any cost overruns or pass-throughs associated with the later delivered?

Gary D. Owens

No penalties, no known cost overruns. When you go on the seabed, there are a lot of specialized pieces to this that come from the outside, and most of those vendors like almost all vendors give you a promise of when things are coming and sometimes, they don’t live up to that. So that’s what happened in this case, and it’s not a long overdue delay, but there is an end of a quarter and when it looks like it’s going to be fast as in these slides into another category. It is not a long delay, but it’s effectively moved it out of the quarter.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Understood. And then is it safe to assume there is no adverse impacts on the Statoil projects associated with that vendor at this time?

Thomas T. McEntire

No. No, this is Tom. and that has really nothing to do with the Statoil contract.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay, perfect. And then Gary, in your prepared remarks, you mentioned 34,000 channels announced today. Can you give us the actual numbers sold at this point?

Gary D. Owens

Not yet, toeing in, in February. It’s something of size happens. There might be a press release outage just depends on. If the customer once that known, and if it is a size, so I wouldn’t put a whole lot of emphasis on the fact we have other channels sold during the quarter. We would talk about those in more color if we thought it would be a much benefit or if the customer didn’t mind. So right now, we need to leave it as it is, but if something a size happens before the end of the quarter, we may put out a press release.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay. Can I ask on the Mr. Motor Day announced on the call last week, that they bought 10,000 channels of GSR for about $8 million, does that hit in Q4 or is that?

Thomas T. McEntire

I’m not going to verify the price because that really doesn’t sound right to me, but we did sell them about 9,000 channels at the end of September. It was out of our rental equipment fleets and the price could have been substantially less from that.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay, understood. And then last one from me on the GSR rental side of the business, Colombia being up in Q2, you mentioned the one Russian crew. Can you quantify that how many channels are actually going to Russia and Colombia and how you see that the rental fleet expanding the channel count over the next fall two quarters?

Thomas T. McEntire

We’re going to go in based on the demand that we see right now, and then we will add to it or subtract from it as the market kind of matures and materializes. So we are going to put our toe in the water flows before we jump completely in.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Are you able, Tom to quantify how many channels are going to Russia?

Thomas T. McEntire

Yeah, we would prefer not tell you at this moment I mean it’s not that many channels now, but it could be substantially more later.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay, and maybe if I can dance around it different way, the $40 million in CapEx for the rental fleet expansion, should we think of that as more front-end weighted or spread out evenly through ’13.

Thomas T. McEntire

It’s going to be quite a bit in Q1 and Q2 and then perhaps a sizable portion might come back in Q4.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay, okay.

Gary D. Owens

I'll just add something to that Ryan. I think, as a company we are prepared to meet whatever that demand turns out to be and if the demand is more than that and I am sure the board and management would opt to meet that, and if it's less, we're just not going to put channels in the fleet for no reason. And – but right now that's what we're gearing at to meet and that's our current expectation.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay. And I guess to that point Gary, at this time there is no capacity constraints for expanding the GSR business. You can run this kind of production that you’ve announced for this net sale?

Gary D. Owens

Yeah, I think we're going to be market limited instead of manufacturing capacity limited. There will be hiccups along the way when people want something too fast, but on a yearly basis, I think we can – they won’t, they shouldn't challenge our capacity.

Ryan P. Fitzgibbon – Global Hunter Securities LLC

Okay, that sounds good. Thanks guys.

Operator

Thank you. Our next question will come from Travis Bartlett with Simmons & Co. Please go ahead.

Travis Z. Bartlett – Simmons & Co.

Hi guys, good morning.

Gary D. Owens

Good morning.

Travis Z. Bartlett – Simmons & Co.

Just following up on the wireless side here, you guys have received two nice rewards, just in for Canada in Q1. Can you talk about geographically where else you’re seeing enquiries for the wireless channels, it does seems like recently your most orders have been directed towards U.S. or Canada. But just kind of wondering how you’ve been tracking internationally to a point where we can start to see regular orders going to other countries.

Gary D. Owens

You will see some international sales when we talk again in February. But not as the type or size you have seen here in North America. So they probably won’t rise to the level where we’ll put out a press release early, but we will talk about it during the press release next time.

I think one of the things we were trying to get across in that script is that we’re becoming more intensely focused on international market, we need to start seeing some of those customers overseas or outside of the North American markets, begin the use of that technology and we will have some evidence of that by February.

Travis Z. Bartlett -- Simmons & Co.

Okay. Secondly here, you guys acquired the – I guess the second Houston facility, which I believe was to provide extra space to accommodate the recent Statoil award. Can you just talk about where you expect to be in terms of manufacturing capacity for the permanent monitoring beyond the Statoil word once it's fully up and running?

Thomas T. McEntire

Yeah, actually the new facility was initially purchased so that we could finish testing the Shell system and that's what we are using it for right now. The Statoil cables are being built in our existing facilitate and as we get enough cables to conduct a test we’ll move them over to the new facility and that's what that new facility is going to be used for initially.

In terms of production capacity like Gary said earlier, we’re going to be limited deliveries or in the near-term work that already pretty much add capacity in terms of producing this product line. So we won’t have any really added capacity in 2013, but beyond that it doesn't mean that we could have additional capacity as these Statoil systems starts to require less production and as we perhaps add new capacity either internally or purchase new capacity.

Travis Z. Bartlett -- Simmons & Co.

Okay, good, and then last one for you guys. So the Statoil and Shell obviously provides some pretty significant earnings visibility that the company generally does not see. Can you just talk a little bit more specifically about what this visibility does for the company going forward and then what additional opportunities that provides for Geospace?

Gary D. Owens

It enables us to see better, it’s the very important quality. Well yeah obviously when you have backlog, it’s normally consumed in a very short period of time, so planning and long-term planning is difficult. But when you have something of this size in a plant our size, it gives you a lot more free time to layout the plans to continue to grow the company. And that’s not just manufacturing, but that’s R&D and safety and QC efforts.

You know, we hired. If you saw the press release, we hired over 200 people in the fiscal year that just ended in for a company only began the year little over a 1,000 employees of which 700 or 650 of those were in Houston. You add 200 people more in Houston and you can imagine the kind of training and efforts you have to put on QC to swallow, to add many more people. So when you have an order of this size, it gives you a lot of opportunity to sit back and have plan what’s going to happen in the coming years. So that for us it’s a great relief to have something of that magnitude for that far out.

Travis Z. Bartlett – Simmons & Co.

Fair, well very good, that's it from me. I'll turn it back over. Thanks guys.

Gary D. Owens

You bet.

Operator

Thank you. We will take our next question from Peter Hatfield of Dahlman Rose. Please go ahead.

Peter Hatfield – Dahlman Rose & Co. LLC

Good morning guys.

Gary D. Owens

Hi Peter.

Peter Hatfield – Dahlman Rose & Co. LLC

It sounds like you’ve gotten some good feedback on the OBX system that you ran so far. Just turning back to that, could you discuss the likelihood moving forward that you will be selling these systems, as opposed to renting them, like you’ve done so far. And then could you also give us a sense of how large a significant order would be in terms of channel count and revenue potential?

Gary D. Owens

Yeah, the guys who were out renting this at the moment have expressed that their intent is run a purchase. So it's – we will be renting these as well but it appears to us, we have a good opportunity before the end of the fiscal year 2013 to receive purchase orders. The sizes of these are all over the math. I mean there is – like we just said in the prepared remarks, you saw when that was the smallest 200, but we've had inquiries into purchase several thousand of these. So it really depends how aggressive they want to be in doing these kind of crew operation.

This is a brand-new area. Most of the time it’s been laid down in pickup cables and then those that had been on the box seabed are large and therefore you can't count the remaining on a reasonable size boat. These guys are trying to figure out what they want to look like when they grow up. So we are breaking new ground on one of those crews are going to look like, and it’s been interesting of sitting down and talking to a lot of them what they plan to be. These revenues can be up in the $20 million a piece for the large size systems down to $0.5 million for small size system, we just need some more time to figure out what it’s really going to look like when they materialize.

Peter Hatfield – Dahlman Rose & Co. LLC

Okay, great. That’s all from me, thank you.

Gary D. Owens

Thanks Peter.

Operator

Thank you. We’ll take our next question from Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand – BWS Financial, Inc.

Hi, good morning, guys. Gary, could you talk about this current quarter, December quarter as far as the seasonal trends you are seeing and we are really about two weeks away from the end of the quarter?

Gary D. Owens

It’s Canadian driven in large part, I think both of the press releases we put out on Tidelands and SAE, the first use of those systems are for the Canadian winter. Now both of those companies have operations in the U.S. and in the case of SAE, were wide. They have found their first crew up operations was in Peru, so they could move it anywhere. Some of the quotes that we have outstanding or outside the seasonality to your question at the moment, it’s been driven by the Canadian market.

Hamed Khorsand – BWS Financial, Inc.

Okay, Tom at what point will we see some improvement in gross margin and I know that you guys have been hiring a lot than in the last two quarters, so when does the revenue start to offset that expense?

Thomas T. McEntire

Yeah Hamed, our margins are driven a lot significantly by product mix as you know, as we’ve gone through it before so it really depends, but as this reservoir monitoring products become much bigger portion of our revenues going forward, you should expect to see some margin expansion on those because they're going to be higher than average margin and it will become a bigger part of our revenue.

Hamed Khorsand – BWS Financial, Inc.

Okay. And my last question here is, historically the revenue trend has always been, I mean in a good environment were crude is above 80, your revenue has been pretty strong and if I look at what you did in fiscal ’12, it was only about 10% year-over-year revenue growth number. So I mean do you think there was a shortfall in demand for any of your products, or what do you think happened there?

Thomas T. McEntire

Well, as we stated in our prepared remarks, the fourth quarter coincidentally was very light, similar to last year and we attribute that to just the timing of order flow and the timing of deliveries, which the customers play a big role in. So it's not like our backlog has to climb significantly or whatever we’ve got a pretty robust forecast internally going forward and we are excited about the future. So it’s hard to look at our earnings, for those of you that are familiar with your story and if you go back and look to many quarters you're going to find a soft win in there. And we have good wins and we have soft wins, but we feel like we're continuing to move in an upward direction.

Hamed Khorsand – BWS Financial, Inc.

Okay. One more just I want to ask you, if I may. Given that you guys did this hiring over the last two quarters, because the Statoil contracts and demand you have seen, do you guys have a sustained business plan in place two years from now, when on a call and guys just talking about headcount restructuring?

Thomas T. McEntire

Headcount usually just is driven by product demand, so we just have to see how all of that goes, but yeah our anticipation in planning efforts have to do with growth so our expectation is that we will continue to add people in space as time goes on, but another global meltdown or something can alter that plan in a hurry.

Hamed Khorsand – BWS Financial, Inc.

Okay, all right. Thank you.

Operator

Thank you. And we'll take our next question from Greg Garner with Singular Research. Please go ahead.

Gregory P. Garner – Singular Research

Thank you for taking my question for having the conference call gentlemen. Lot of my questions have been answered, but on the new GSR system, the GCX, can you give us more understanding of these new characteristics and are these just incremental improvements or are these features that expand the market and any sense on what the competition is doing out there in the wireless plan?

Gary D. Owens

As we stated in the prepared remarks, that GSR versus GSX, the difference in those two is power, significant power reduction, and significant memory increase. As technology moves outside of our Spectra like memory capabilities and chips that require lower power to operate, that’s important in seismic; size, power, weight and cost, is quite drive technology in our space and when those are capable come to pass, we will utilize those to improve products because the seismic industry is driven by those. It’s significant enough we change the name of the system. As time goes on when we introduced new technologies, we tried to differentiate that through its name. As far as competition is concerned, we have some and right now, we think we're in pretty good shape with those – with the ones that we are competing with, but they don't always tell us what they are working on. We are not in that loop. So we never take them for granted and we’ll continue to drive our product development as technology allows us to, but we are always looking over our shoulders.

Gregory P. Garner – Singular Research

Okay, but you’ve not seen anybody else talking to potential customers, your current customers who ordered new product or they are not seeing well input output as this new product I'm going to wait for, you're not hearing anything like that. Is that…

Gary D. Owens

Not with features that we don't compete with. We always hear about either a competition or and what they offer, and we are always looking tradeshows and other reasons for what they do, but I don't see any thing that we don’t haven't expected, let’s say that way.

Gregory P. Garner – Singular Research

Okay. Thanks and the Petrobras reservoir monitoring order; is it safe to assume that that's a small version of the Statoil, is that a good way of looking at it or…

Gary D. Owens

Yes, it is a smaller lateral field and the size of these things are depended on the shape of reservoir and lots of it in most instances, so it's believe me anytime you get a contract, they can be anything, just and the reservoir itself shapes a lot of that.

Gregory P. Garner – Singular Research

So, if this is a smaller does that mean in the same way in Statoil may take a while to really understand how well its helping Statoil makes good production decisions over time, would this being for smaller area help Petrobras go to their process sooner and consequently some results from that to either potentially moving to other fields or expanded at that fields may come sooner than the timeframe for Statoil implementation?

Gary D. Owens

It might, but we don’t have real good hand along that, I think the Shell is a very capable partner for Petrobras, they help advance that kind of technology there. They are one of the companies as far as the seismic industry is concerned. They has a lot of influence and it’s usually ahead of the curve. So yes, having someone that’s experienced in this kind of data acquisition like Shell is a real benefit for the host in this case Petrobras. So they are very well could be a faster reaction from them than from Statoil who is doing this on their own.

Gregory P. Garner – Singular Research

Is there any sense for the timing for when they will have a sense for how or maybe beneficial being smaller orders that mean it would happen quicker or not, in other words what we know in a years time.

Thomas T. McEntire

No, I don’t think from that standpoint no, I think you still have to allow enough time for the reservoir to change, be able to catch that and make decisions. So if the reservoir is not changing any differently than the one in Norway then you shouldn’t expect a time difference there.

Gregory P. Garner – Singular Research

Okay. All right. Thank you very much.

Operator

Thank you. We’ll take our next question from Jason Kraft with Cato Partners. Please go ahead.

Jason Kraft – Cato Partners

Hello Gary, hello Tom, how are you?

Gary D. Owens

Hi, Jason.

Jason Kraft – Cato Partners

I'd like to go a big picture here, and just bear with me. You have the wireless product since ‘08 and its safe to say given the traction you had so far that with the early adopters you have purchased it that you got some pretty good references out there, I think we all agree. So my question and it's a little higher level here in terms of just the overall market. Given the useful life of the cable or wired systems that are currently out in the field, and if we assume that many of these systems were purchased in that 2006, 2007, boom kind of timeframe. Can you characterize the upgrade opportunity that you may have in front of you in 2013 and 2014 as these cable systems, the installed base reached its useful and?

Gary D. Owens

No. I think it’s a hard question to answer, because worldwide you have – if you get out of North America. The boom wasn't universally applied to the plan it unfortunately. So I think with our emphasis of what's happening in the Russian market and in South American market, we just don't have a feel of how fast all of that will turn. There is certainly a big reluctance, people writing stuff off and (inaudible) way just for the sake of change. They will have to see benefits. And most of this is going to be additional crews that our new market entrant that kind of in and see the way to enter our marketplace so that's a difficult question to answer. This is something we just we play by year as we go through.

Thomas T. McEntire

Jason this is Tom, another comment is that based on our experience, we understand our customers will depreciate those cable systems as long as 10 years. And so whether they term away in 10 years or sooner or later we really don't know, so but assuming it is 10 years and you would be looking a few years later down the line for those systems to be replaced and weather they buy cable systems or wireless systems, who knows.

Jason Kraft – Cato Partners

With 158,000 channels out there right now that you guys have in terms of purchased. What you think your addressable market is going forward over the next several years of the wireless product. But what's the bogey, is it millions five, four, three what you guys look at as far as target for perfect control upgrade?

Gary D. Owens

If you ask with different manufacturers, you're going to get different answers, but from our standpoint we’re going after all of them, so I think this a substantial part of those channels are candidates for us to replace. So that's our attitude; that’s what we're going after. Almost everyone that we placed out there with very few exceptions or standalone crews that don't add channels and some of the crews are north of 15,000 channels when they are single channel boxes and then multichannel boxes in the 25,000 channel categories.

So I don't think there is a size limit within those channel count areas, and that’s the fast bulk, if you don’t get higher than that channel count and that’s the best bulk of the world. Right now we are going to target all of those that move. The one that’s going to be the hardest are those that are in countries they have a difficult time getting capital or hard currency. And there is a lot of those out there, but they still buy western products, so it’s just going to be slower because of those problems. But we intend to go after anyone who acquires seismic data that could be a customer. I doubt CGG is going to flog to our door, but outside people make their own systems, which is not a whole lot of those, we intend to go after.

Jason Kraft – Cato Partners

Okay, thanks for the time.

Gary D. Owens

You bet.

Operator

Thank you. We’ll take our next question from Joe Lydon with Westlake Securities LLC. Please go ahead.

Joseph Lydon – Westlake Securities LLC

Hi, Gary and Tom, I just have one real quick question, most of my questions have been answered, but with respect to the Statoil contract, you’ll say that 45% should come in through ’13, which is about $72 million. How is that going to be stacked in the years, they are going to be more back-end loaded or more in front-end loaded or kind of evenly dispersed?

Gary D. Owens

Yeah, Joe, good question. It’s going to be relatively a small amount in Q1, but as we get into Q2 and we really get going on this thing. I think you could see the rest of the $70 million kind of evenly spread with the last three quarters, and what we are going to try to do is, update the street every quarter on how much we think we’re going to recognize for the full year based upon what we’ve done. So we are just getting into this, and we've got some work to do to see where we are at, at the end of Q1 and will try to give updates going forward.

Joseph Lydon – Westlake Securities LLC

Okay. That sounds good. And congratulations on your first conference call.

Gary D. Owens

Thanks.

Joseph Lydon – Westlake Securities LLC

Okay guys.

Operator

All right, and we’ll take our next question from A.J. Strasser with Cooper Creek. Please go ahead

A.J. Strasser – Cooper Creek Partners

Hi guys thanks for taking my question.

Gary D. Owens

You bet.

A.J. Strasser – Cooper Creek Partners

Can you maybe talk a little bit about as some of your customers buy equipment that they’ve been renting? Is that what Mitcham is doing and what sort of the – is there a considerable difference in the profitability versus volume from you directly?

Thomas T. McEntire

Yeah, A.J, this is Tom. When we sell rental equipment and depending on how old it is, it's a typically not going to have as good of a margin, as new equipment will. We are depreciating our rental equipment over five years and customers can earn equity in the rental equipment at our quicker pace than that if they decide to buy it. So the margins on rental equipment sales are going to be softer than new equipment sales, they always will be.

With respect to Mitcham, we had some rental equipment out and we worked out a deal with the customer and Mitcham to allow Mitcham to take that equipment from us and so that's how that transaction worked.

A.J. Strasser – Cooper Creek Partners

Is it safe to say then you won't recognize a meaningful amount I guess from the Mitcham deal?

Gary D. Owens

No, we've already recognized that revenue back in September.

A.J. Strasser – Cooper Creek Partners

Okay. And what deal of the wireless sale that you’ve announced between the two customers in the Q1, what’s the total order value for those?

Gary D. Owens

Together there are somewhere between $25 million and $30 million.

A.J. Strasser – Cooper Creek Partners

Okay, and now the question on the margin, the operating margin on the seismic side this quarter was 24%. Can you talk a little bit about why it's so much less than the prior three quarters and even if I go back a year where your revenue was lower in Q4 of ‘11, the operating margin was higher. So it is the function of mix and I guess kind of ex-Statoil and Shell this is sort of a decent run rate that we should get doing?

Thomas T. McEntire

Well, certainly compared to the previous quarters, the volume of product sales drives our margins or bottom-line margin, so when you’re going to have lower sales, you're going to have lower margins. The revenue mix in this quarter was about normal and we feel like, I mean we had in terms of our lower amount of sales, the pieces of (inaudible) don't look to unusual and so it's again driven by volume and our operating expenses are relatively fixed to a certain extent and so the margin is going to be driven by sales volume and the mix of that volume.

A.J. Strasser – Cooper Creek Partners

So again just to clarify, the outside Statoil and the Shell deal which obviously have a higher margin, so it just excluding that part of the business, is this sort of a decent run rate as we look into fiscal ‘13 for what operating margins are on the rest of the business on the seismic side?

Gary D. Owens

We don’t really give any guidance on what our revenue mix is, but we’re going to just tell you in our lumpy quarters where the lumps are high and the revenues are high, the margins are going to be higher, and when we have soft quarters like Q4, the operating margins going to be somewhat less. And the mix can change quarter-to-quarter and year-to-year just depending on how the market is that year. But how that being said, we do expect our wireless product revenues from sales and rentals to continue to grow and become a bigger part of that mix and may traditionally have margins that are higher than our average margins, so with that being said, yeah it should get better.

A.J. Strasser – Cooper Creek Partners

Okay. And then just one last question here, if I may. As we can more kind of high level, I think there is obviously some of your biggest purchasers of your equipment have spend significant capital over the last couple of years. As we kind of think about some of the softness that we are seeing in the energy market, how should we think about what the scenario maybe of some of the biggest purchasers of your equipment kind of our little – how just sort of sold out here?

Gary D. Owens

Yeah, who knows, but in the first quarter one of the announcements that we made with one of our biggest customers, it's not the biggest customer in terms of the channel count by another sizable systems, so they haven't seen real evidence so they – some one to filing up, because they bought already. You guys have usually get this tend to buy more, hasn’t make an impact. So we are helping that’s not the case. But yes, there is so much being said on the news about the fiscal cliff and our second recession and all of those things get back really comes into play and if that has an impact on the economy, is it certainly will have an impact when everybody including us, but right now, it’s how we are planning for that’s what we are seeing.

A.J. Strasser – Cooper Creek Partners

Okay, well thank you for taking my questions, I appreciate it.

Thomas T. McEntire

Sure.

Operator

All right. We’ll take our next question from Bill Dezellem with Tieton Capital. Please go ahead.

William J. Dezellem – Tieton Capital Management LLC

Yes, thank you. A couple of questions, first of all you mentioned that you’ve had 52,000 rental channels in place at the end of September, how many do you have in place today?

Thomas T. McEntire

Bill, we’ll update that information in February, after our Q1 call, so we don’t really give that information out until we published the quarter results.

William J. Dezellem – Tieton Capital Management LLC

We’ll look forward to that number and maybe the February number then.

Gary D. Owens

Good luck.

William J. Dezellem – Tieton Capital Management LLC

The next question is related to the Statoil transaction what incremental fixed cost do you anticipate being in place specifically as a result of the Statoil deal.

Thomas T. McEntire

We just purchased a new 30,000 square foot facility and so we’ll have all the fixed costs of depreciation in utilities and taxes and what not for some new capacity, but other than that, I can’t imagine there is too much.

Gary D. Owens

Yeah, over the cost of the contract we will be adding some more equipment, some of which will take a while to get here, because they are custom, but I don’t think in the next as far as fiscal year ’13 outside of the buildings that Tom just mentioned, not likely to see anything of sized, we will continue to expand some of our sharp capabilities, but you probably well noticed that in the financials.

Thomas T. McEntire

And Bill, I’ll just add one more thing, our output – fixed cost per unit output what our expectation is going to decline just because the output is going to be so much greater than it has been. So, yeah, there will be some additional fixed cost, but I think the margins are going to be favorably affected overall.

William J. Dezellem – Tieton Capital Management LLC

And what is the dollar amount that the additional facility will cost you on an annual basis when you put all in the depreciation and utilities et cetera.

Thomas T. McEntire

We just closed on the acquisition last week and we’re still adding some of those things to the billing, so we don’t have that at our finger tips.

William J. Dezellem – Tieton Capital Management LLC

All right, thank you. And then two additional quick questions, do you anticipate using percentage of completion accounting on any additional aspects of your business A) and B) would you anticipate future reservoir contracts of this in the reservoir part of the business and those will be percentage of completion or will it really be simply be depended upon the size of the contract?

Gary D. Owens

Yeah, Bill that’s a good question and we try to outline this in our policies in our 10-K, but just to quickly go over it. If we have a project that has significant designs and custom applications for a customer, if there is a significant amount of engineering effort, and if the contracts require us to receive payments over a schedule that’s dictated in the contract, those things will require us to use percentage of completion. However, magnitude as you mentioned will also enter into it, if we got a project, if we can complete in 90 days under normal kind of production conditions, that will just be done on a trial transfer basis like we do with all of our other products, but if it meets those other three criteria and it’s going to take us more than 90 days then we are going to use percentage of completion.

Gary D. Owens

Hi, Bill. This is Gary. This morning we released the 10-K so nobody has really had much of a chance, I know on the phone call to go through it, but to that particular question, if you go to page 24 of the 10-K we spend sometime talking about that very thing, that’s a very astute question.

William J. Dezellem – Tieton Capital Management LLC

Great, thank you and you’re right I actually have not made it to page 24 yet, but…

Gary D. Owens

Since we only filed it about 45 minutes ago, I doubt, anybody got very far in, but that’s a real good question, we spend sometime at the Board going through that and the Audit Committee, we’ve discussed and okayed, but it’s on page 24 and we spend sometime trying to talk about that going forward?

William J. Dezellem – Tieton Capital Management LLC

Okay, great and seriously thank you for pointing out that specific page, we’ll go to it and then the final question, and I’m not even sure if this has any legitimacy to it at all whatsoever, but given the success that you are having with the seismic exploration part of the business, to what degree do you see that pouring additional traditional seismic sales like geophones or other things as time goes on that this will assist you to gain market share with that traditional seismic business?

Gary D. Owens

Yes, well, let me answer it in this way guys that’s another astute question. When you go to our investor presentation on our website; there is a graph, bar graph that breaks down the segment that Tom reported through during his part of the prepared remarks, and the traditional products it has included in the past, phones, cables and connectors, that’s part of that group. Well, obviously, if you think about it would be obvious, when you are making your own data acquisition system, that system in of itself requires sensors and cables and the like. The seabed system requires cable and sensors and connectors and all.

As we’re delivering complete systems those parts that normally would have been fallen into the traditional market are falling into the data acquisition segments, which takes which converts part of our capacity and that was in one part of that segment into another. Once you are selling data acquisition systems and there has to be repair and replacement, then yes it pulls connectors, cables and phones revenue through that part of our bar graph. So the answer to your question is yes, it does, and the reason why is that, that made any sense at all.

William J. Dezellem – Tieton Capital Management LLC

Perfect sense. So basically the more penetration you have of the exploration of the GSX, GSR, et cetera as time progresses the maintenance component will lead to your customers coming back to you and should result in higher core traditional seismic the sales?

Gary D. Owens

No, the answer is yes. But at this point of our development, our company development, you can imagine that when you are selling your own data acquisition systems, a connector for example that is normally sold in the traditional seismic part of the bucket, we characterize that as a commodity type product, so the margin on that reflects the commodity type products, but once that connector gets attached to a higher margin data acquisition system sale that same connector gets converted the margin on that particular connector gets converted to the margin of the data acquisition system.

So in a longer perspective of how the company may grow if the data acquisition becomes significantly bigger than it is, then that will have an impact on margins, it doesn’t at the moment, because it’s not big enough, it does have an impact, but not a huge one, but that would be the consequence in time for successful to the extend we tend to be on the data acquisition systems.

William J. Dezellem – Tieton Capital Management LLC

Thank you both.

Operator

Thank you. We’ll take our last question from David Griffus with Waychee Capital. Please go ahead.

David Griffus – Waychee Capital Management LLC

Good morning guys.

Thomas T. McEntire

Good morning.

David Griffus – Waychee Capital Management LLC

Gary, just a quick question about the OBX systems it sounds like this is a relatively new opportunity, new product line, it sounds like maybe pretty impactful, could you talk about Geospace’s ability to recognize the revenue in fiscal ’13 on some of these, and can you talk about your capacity to deliver these systems, if you were to get awards through six months from now?

Gary D. Owens

I wish I was a lot smarter than I was, I’m really I’m to be able to answer real well, so this is among the many other things we said this is probably one of the more forward-looking ones, but and I’m basing it on levels of quote and interest in the number of different companies that are interested in it, including the oil companies that’s helping to drive some of that, but it deals, I know that’s a horrible way to talk about this. But it feels like we have a significantly high interest in that product lines, to the extent, that it could become a very significant part of 2013, but it is likely to be the latter half just because it’s going to take sometime to manufacturer and deliver if these particular products once we get an order.

But our ability to make that is, for the most part it is pretty easy. Right now the demand on our sensor group is significant, it’s severe I would say. The seabed cables, the borehole impact all the wireless sales that are dictating especially the three component versions of that. It is having a high demand on us and this OBX has a high demand on sensors too. So right now, that’s why we’re most concerned about as far as needing capacity going forward, but we’re taking steps to try to fix that certainly easier to address than it is, increasing our subsea cable product.

So right now, my answer is I think this can be significant, I think it will be on the last half although there may be some smaller impact on the front-end, on the second quarter part, just depends on the size of the system we have to deliver. We’ll have to see it’s still pretty new.

David Griffus – Waychee Capital Management LLC

Okay. And then just so the capacity you think you can take steps to address. Can you talk a little about the two rental systems that you have out in the field right now and do you anticipate converting notes to sales this year and furthermore can you talk about the economics of the rental of the OBX systems and is it a similar arrangement to the rentals of your wireless systems or it’s kind of rent on model?

Thomas T. McEntire

Yes, it is a rent on model and it is handled similarly to our land. The two systems, no we had – first in September, in our press release in August when we talked about that after the end of the second quarter, which was – after the end of the third quarter, we had put our first OBX in Nevada that went into Lake Erie and it was a Canadian oil company that had hired the contractor to rent and try this out. They have now finished their job, they have processed it and the oil company has commented that it’s the best data section they’ve had in Lake Erie. And that contractor was here last week, the end of last week, and met with us in regards to what the results were and what the customer was saying and they have a meeting this week with the customer and they have, I think it’s the beginning of our planning process between them and that contractor and that could be very good news for us in the short-term.

We have one system that’s improving – a lake improve and the oil company is actually leasing it from it. They are in the water and that the acquisition has been going well. They haven’t processed it or had any results from that, but we know on a crew basis that’s going well.

And the one we had in the North Sea just finished and they have shipped, the system is in process of being shipped back to us. So they have not, they just finished. So they’re still processing, the early steps of processing that data. So we’re just kind on the front end of that, the finished first half it’s very good. So I think this has a very promising future just based on our early few months in the water.

David Griffus – Waychee Capital Management LLC

Okay, and one last one from me. One thing we didn’t talk a whole lot about in this play is borehole seismic and I was just wondering if you could address that market, what opportunities you are seeing both domestically and internationally, and I know it’s a pretty high margin product for you guys. I just wanted to hear you just talk about that and what’s your outlook this year is for that product line.

Gary D. Owens

That’s one of those real short visibility. We usually get an order and ship it within a month or so. Right now that level is just not much different than it has been going forward with no visibility, I think it won’t be much different than in the past, but we’ll just – certainly everyone get concerned about natural gas price and what effect that had on the gas as part of the shale plays and that’s the offsetting part about Halliburton and which is one of our bigger customers going international with the product and further development and then usually here from the Chinese on the shale play that they are working on. But I think the overall bottom line when you draw the line under they won’t be a lot different than it has been. But that’s one of our known’s that we have going forward.

David Griffus – Waychee Capital Management LLC

Great, well thank you gentlemen and congratulations on your first conference call.

Gary D. Owens

It was a lot of fun.

Operator

All right, and I would now like to turn the floor back to Mr. Ovens to give closing remarks.

Gary D. Owens

Well, thanks to everyone to listening to our first earnings call. Hope, the next one’s are much shorter than this hour and a half, but we look forward to speaking with you again in February. Thanks again.

Operator

This does conclude today’s conference. Please disconnect your lines at this time and have a wonderful day.

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