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Geospace Technologies (NASDAQ:GEOS)

F1Q13 Earnings Call

February 7, 2013 10:00 am ET

Executives

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

Thomas T. McEntire – Chief Financial Officer, Vice President, Secretary

Walter R. Wheeler – Executive Vice President and Chief Operating Officer

Analysts

Brian A. Uhlmer – Global Hunter Securities LLC

Veny Aleksandrov – FIG Partners, LLC

Georg P. Venturatos – Johnson Rice & Co. LLC

Joe Maxa – Dougherty & Co.

Travis Z. Bartlett – Simmons & Co. International

David M. Rose – Furey Research Partners LLC

William J. Dezellem – Tieton Capital Management LLC

Hamed Khorsand – BWS Financial, Inc.

Operator

Welcome to the Geospace Technologies’ First Quarter 2013 Earnings Conference Call. Hosting the call today from Geospace is Mr. Gary Owens, President and Chief Executive Officer. He is joined 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, please begin.

Gary D. Owens

Good morning and welcome to the Geospace Technologies’ first fiscal quarter call. We appreciate your participation in the call today. I’m Gary Owens, the Company's Chairman, President and CEO. Also with me are Mr. Tom McEntire, the Company's Vice President and Chief Financial Officer, and Mr. Wick Wheeler, the Company’s Executive Vice President and Chief Operating 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 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 the 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 might express or imply. These risk 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.

As you might expect, we are very pleased with the Company’s performance in the first quarter. We posted all time records for revenues, net income and return on stockholder’s equity.

Our first quarter revenues increased 80% over last year’s first quarter and net income grew by 153%. By any measure, the first quarter’s performance was extraordinary and sets a new standard of achievement for our company. Tom will give more color on our financial results in a few moments.

During the first quarter, we closed the purchased of 19,000 square foot warehouse in Bogotá. We are pleased to announce that Mr. Jaime Vergara, formerly with Sismopetrol, a Columbian seismic contracting company, joined our Columbian operations as its Branch General Manager. This operation will offer product sales, rentals, and infield support to our customers utilizing our wireless and other seismic products throughout South America.

We are in the final phases of modifying the new warehouse and we expect to open our doors for business during the second quarter.

During the quarter, we began recognizing revenues from the $160 million Statoil contract used in the percentage of completion revenue recognition method. Revenue recognition for this contract is expected to accelerate in the second quarter as manufacturing activities begin to reach full stride.

As mentioned in our last conference call, the permanent fee based seismic reservoir monitoring system ordered by Shell is expected to be shift in the second quarter. Revenue from this contract is now expected to be approximately $17.7 million. However the incremental increase from the previously reported value of $14.9 million is predominantly composed of cost which will be passed through to Shell with little or no market.

During the first quarter, we closed on the purchase of 30,000 square foot warehouse near our Pinemont property in North West Houston. We now fully occupy that facility and are using it as a final testing base for the Shell and Statoil subsea cable systems.

As stated in our first quarter press release, we recognized revenues of $46.9 million from the sale in mineral of land wireless state acquisition system to four different customers, including our new customer in Canada. These revenues contributed significantly through our financial performance in the first quarter. And in addition, we have continued to increase the size of our international rent fleet of wireless channels and we expect a good winter season in Canada during the second quarter.

We are also proud to report that we recently executed our first wireless product rental agreement with a Russian customer for the current winter season.

Interest remained high for our new OBX subsea nodal system. There in the first quarter, we had two OBX systems, two customers operating in the North Sea in Peru. We have recently received two small OBX orders from Russian customers; one for a purchase and the other for a short-term rental. Another small OBX system is expected to be rented to a customer operating in Africa. We expect to shift each of these OBX systems in the second quarter of fiscal year 2013.

The high activity level at our Pinemont factory has put a strain on our capacity. In response, we have recently initiated approximately $10 million of new purchase orders for additional equipment to increase our manufacturing capacity, primarily in our machine and cable shops. This investment is in addition to the two new warehouse buildings previously mentioned. We are evaluating additional investments in machinery to increase our manufacturing capacity.

In summary, we are experiencing a period of high growth that requires additional investments in capital equipment and additional investments in people. This growth is coming from demand for our new products and an increased attention on the production of our permanent subsea cable data acquisition systems.

We are pleased with the acceptance of these products by the marketplace and we accept the demand this places on us. During the first fiscal quarter ended December 31, 2012 our headcount increased by 52 employees of which 31 are located in Houston. Our worldwide headcount now stands at 1216. We plan to continue to add employees in the near term. These are exciting times indeed.

I will now turn the call over to Tom who will over the company’s financial results in more detail.

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 first quarter of fiscal year 2013 and then I will drill deeper into our revenues for each of our four product segments.

Finally, I will close with some information concerning our balance sheet and cash flows. And while we will update our estimates of revenue recognition and cash flow for fiscal year 2013, we will not provide any earnings guidance during this call.

For our first quarter ended December 31, 2012, we reported record revenues of $77.8 million, an increase of 80% over revenues of $43.4 million for the first quarter of last year.

Our net income for the first quarter of fiscal year 2013 also a record was $22 million or $1.70 per diluted share, an increase of 153% from last year’s net income of $8.7 million or $0.68 per diluted share. We report our revenue segments in four different categories they are traditional seismic products, wireless seismic products, reservoir seismic products, and non-seismic products.

I will discuss each of these categories for the first quarter of fiscal year fiscal year 2013 and their comparison to the first quarter of fiscal year 2012. Revenues from our traditional seismic products for the first quarter of fiscal year 2013 were $14 million, which were flat with last year’s revenues.

Revenues from our wireless seismic products for the first quarter of fiscal year 2013 were $46.9 million, an increase of 162% compared to revenues of only $17.9 million last year. The increase in revenues resulted from the sale of 47,000 wireless channels, consisting of both new channels and used channels from our rental fleet.

We continue to believe that demand for our wireless products is resulting from continued industry acceptance of all wireless systems in lieu of less efficient legacy cable base seismic data acquisition systems.

Regarding our rental fleet, we added 13,000 channels during the quarter, resulting in 65,000 wireless channels in our international rental fleet as of December 31, 2012.

Revenues from our reservoir seismic products for the first quarter of fiscal year 2013 were $11.2 million, an increase of 106% compared to revenues of $5.4 million last year. As expected, our revenues for this product line increased due to the initiation of revenue recognition for the Statoil order. For the quarter, revenues from the Statoil order were $8.7 million. In the future, we expect revenues from this product segment to be dominated by our seabed reservoir products including the expected sale and delivery of now $17.7 million Shell seabed system in the second quarter.

Regarding future revenue recognition for the $160 million Statoil order, we reiterate our estimate at approximately 45%, 40%, and 15% of the Statoil contracts revenues will be recognized in fiscal years 2013, 2014, and 2015 respectively.

Revenues from our non-seismic products for the first quarter of fiscal year 2013 were $5.5 million, a decrease of 6% compared to revenues of $5.8 million last year. This decrease is due to lower sales of our industrial sensors and thermal imaging products to our European customers, which we believe is related to the region’s economic crisis.

Now I am going to move on to discuss other elements of our financial statements. For the first quarter ended December 31, 2012, our operating expenses consisting primarily of selling, general, administrative and research and development expenses were $9 million, an increase of 12% compared to $8.1 million last year. The increase in our operating expenses primarily reflects higher personnel cost and general expense increases associated with our increased sales and asset expansion.

As a percentage of sales, operating expenses were 11.6% for the first quarter of fiscal year 2013 compared to 18.6% last year; this demonstrates our ability to leverage our top line growth without proportionate increases to our cost structure.

Our effective tax rate for the first quarter of fiscal year 2013 was 30.6% compared to 32.8% for last year’s first quarter. Our tax rate is lower than the U.S. statutory tax rate of 35% due to the impact of deductions available to manufacturers and lower tax rates in the international jurisdictions where we operate. In addition, the first quarter’s tax rate includes the benefit of a catchup adjustment relating to the United States Congress’s recent extension of the research and experimentation tax credit. We expect our effective tax for the remainder of fiscal year 2013 to be approximately 32% to 33%.

Our balance sheet remains strong; at the end of the first quarter, we had $159 million of working capital, $65 million of cash and short-term investments, and no long-term debt on our balance sheet. Our $25 million credit facility remains untouched this time resulting in total liquidity of $90 million at the December 31, 2012. We believe the strength of our balance sheet puts us in a good position to meet the opportunities ahead.

For the remainder of fiscal year 2013, we intend to utilize capital to build up our OBX inventories and we expect to increase our net investment in our production of the Statoil system. In addition, we will continue the expansion of our wireless rental fleet, especially as we ramp up our rental equipment operations in South America. We currently estimate that our fiscal year 2013, gross investment in rental equipment will be approximately $30 million to $40 million. But as in past years, we expect these rental equipment investments would be significantly offset by cash proceeds from the sale of rental equipment to our customers, similar to what we experienced in the first quarter.

In addition, we plan to increase our total fiscal year 2013 investment in plant and equipment to approximately $20 million including the two new warehouses and additional capital equipment Gary referred to earlier. We believe our cash balances on hand or internal cash flows, sales proceeds from rental equipment, stage payments from Statoil order and available borrowings under our credit agreement are sufficient to finance our capital needs throughout fiscal year 2013.

So operator that concludes our prepared remarks and we are ready to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the side of Brian Uhlmer with Global Hunter Securities, your line is open.

Brian A. Uhlmer – Global Hunter Securities LLC

Thank you, good morning Gary, Tom how are you?

Gary D. Owens

Great.

Brian A. Uhlmer – Global Hunter Securities LLC

Yeah looks that way, good quarter. And a couple of questions obviously – number one, I want to start with the wireless sales, was curious on that sales $46.9 million, is that all encompassing those sales as well as the rental revenues, can you give us a sense or what the breakout was for specifically for rental revenues?

Thomas T. McEntire

Yes, Brian it’s predominantly sales, small portion of its rental revenues, we don’t break those out, report on them separately, but the lion share of that’s going to be product sales.

Brian A. Uhlmer – Global Hunter Securities LLC

Okay. And as we look at the 65,000 channels in rentals throughout the year like you just said that you think you are going to make some of your cash flow by sales of rental equipment, how should we look at the 65,000 channels in terms of how much revenue they are going to provide throughout the year, and what portion of that do you see being sold versus rented?

Gary D. Owens

I wish I had a crystal ball to be able to tell you that, but we are trying to meet our rental equipment needs with our customers, which is driving new channels to be put in and of course, customers decide to buy the channels that they are renting and we have more demand, we will sell those channels and put it a new one. So it’s only a guess Brian, we don’t have a forecast of that.

Brian A. Uhlmer – Global Hunter Securities LLC

Okay. And then on the rental channel side of beat this one down, what the percentage look like, what’s in North America versus what’s in internationally, and maybe just some qualitative discussion on how the international adoption of GSX is going from you guys will be great?

Thomas T. McEntire

The rental channel breakdown between North America and international is again predominantly North America. We put a couple of thousand channels over into Russia, we got a winter rental going on right now in Russia, and most of our other rentals are in North America and South America, predominantly North America. And I’m sorry, what was the second part of your question?

Brian A. Uhlmer – Global Hunter Securities LLC

Just general commentary from you all on how the international uptick in GSX EMEA adoption is going, just?

Thomas T. McEntire

That’s a goal this year for us is to really try to expand internationally. And so yeah, we do have customers that are using it again in South America, we have customers in Europe, we have now customers in Russia, Africa, Australia, Asia. So we’re trying to get more exposure there, we’ve done a great job in North America and our plans for this coming year and in future is to expand internationally. So we think it’s going well.

Brian A. Uhlmer – Global Hunter Securities LLC

Perfect. And my second question is going to be about, first of all, I’m wondering in the past, you’ve kind of discussed the bid activity out there and what you saw on the horizon, if you will, maybe just have a little commentary on where those stand and if you did sell something your increased capacity, what it looks like in terms of, you could be able to recognize revenues on the projects in ‘13 and that’s still kind of ‘14 event?

Thomas T. McEntire

Yeah. there’s always conversations, but there are no conversations that seem to be turns into anything concrete in the short-term. Right now, it’s everything we can do to get it underway on the Statoil, and we mentioned $10 million worth of equipment to boost up our capacity, some of that takes a long time to get that kind of equipment built and delivered in, and so the focus this year is building capacity to meet what we think are coming, but it’s unlikely we’re going to close I think here in the next few months.

Brian A. Uhlmer – Global Hunter Securities LLC

Perfect. And then out into ‘14, there’s a landscape, still a goal you got almost close to $2 million worth of discussion in ongoing increase. Is that fair to say?

Thomas T. McEntire

Yeah. But there is not much visibility as far as talking about closing anything, but all of that I think will take care of itself when we get our capacity up and start pushing on that again.

Brian A. Uhlmer – Global Hunter Securities LLC

Perfect. (inaudible) I turn it back over. Thank you guys.

Gary D. Owens

You bet.

Operator

We will go next to Veny Aleksandrov with FIG Partners. Your line is open.

Veny Aleksandrov – FIG Partners, LLC

Good morning.

Gary D. Owens

Good morning.

Thomas T. McEntire

Good morning.

Veny Aleksandrov – FIG Partners, LLC

Congratulations. My first question is on the OBX product line. It seems very exciting, you have one system that is rented. How about the rental fleet here? Are you building it? How big it is right now? What are your plans for heading to it?

Gary D. Owens

Yes Veny, that’s one of our more exciting growth areas and we are talking to a lot of people, we are talking about systems of size and some of those will be rental needs and so that’s part of the equipment we are putting in the machine chart, is an attempt to get back capacity up and we talked about using some of our cash flow to build up inventories of OBX. That’s an anticipation of what we expect to come in both sales and rentals in that area. So there is not a lot of color I can give other than that, but it’s exciting enough for us to be investing a whole lot of money and hiring a whole lot of people and setting capital aside to address that market. That’s really about all I can say in the short-term.

Veny Aleksandrov – FIG Partners, LLC

Yeah, I understand. But is it – then are you going right into the same model rented and then the client likes it and turns around and borrow it from you, as you did with the GSX?

Gary D. Owens

Absolutely. That strategy has borne well for us and we’re going to continue that through our other product lines due to that matter.

Veny Aleksandrov – FIG Partners, LLC

Okay, perfect. And then if I can ask a question on the borehole, Q1 was kind of flat with Q1 last year. What’s happening there? Are the enquiries do they continue coming because there is renewed interest in the product. I know that they thought, which is stable for you, but we are always hoping for growth and we’re always talking about more money driving, so fracking can – how are things shaping couple over there?

Gary D. Owens

It was slow this past quarter and as Tom mentioned, we do have some backlog and we do have quotes that’s slightly have an improved quarter for this quarter, but it has slowed from what it was a year before. I mean I think part of that is just reflecting the slowdown in the shale plays here in the States. But now there is people talking to it, about shale plays opening up in California and in Europe. And so this will ebb and flow like all of our business product lines and we’re in an ebb, part an ebb but that’s not a product that’s going away or won’t be as important going forward as it has been in the past. So it’s good as the quarter was, it could have been better even if the borrow line had maintained its average, but we’ll see some improvement in the year.

Veny Aleksandrov – FIG Partners, LLC

Thank you so much. I appreciate it.

Gary D. Owens

You bet.

Operator

We’re next to the side of Georg Venturatos with Johnson Rice. Your line is open.

Georg P. Venturatos – Johnson Rice & Co. LLC

Good morning guys.

Gary D. Owens

Good morning, Georg.

Georg P. Venturatos – Johnson Rice & Co. LLC

Just want to start on the Statoil order, great to see progress on that in the first quarter roughly $9 million or revenue. I know you reintegrated that annual breakout through 2015 and we should see some acceleration next quarter, are we still kind of roughly expecting that to be evenly distributed over 2013, at least with the remaining revenue?

Thomas T. McEntire

Yeah, Georg, we kind of talked about that before the call because we anticipated that question and it will not be evenly distributed, but if you’re building a model that’s probably how I’d build it right now. We don’t exactly know how that’s going to unfold, but that’s probably good enough.

Georg P. Venturatos – Johnson Rice & Co. LLC

Okay, and then next I just wanted to revisit the additional space you’re looking at beyond the $30,000 square foot facility you just got, just in terms of – is this for existing demand that you have now or is it a little more forward looking and additionally is it more geared toward the seabed side or is this also wireless manufacturing capacity space that you need as well?

Gary D. Owens

It’s a band aid. It was a solution that we could get too quickly and so we took advantage of it because we didn’t have a whole lot of choices but we are looking at serious expansion here but we’re not in a – we haven’t gone far enough down the road to really submit enough to verbalize that very well but we will use that space going forward and for the next year or two it will be concentrated on doing the fat test for the Shell and Statoil products. And then once we solidify if what our next growth phase is going to be from a investment and facility standpoint, then will likely redefine what we use that for, but right now that’s our best description of what we’re going to do. We have to expand from where we are right now, so we’ve got lot of investigations going into how to do that.

Georg P. Venturatos – Johnson Rice & Co. LLC

Okay, great. And then lastly just more of a wide spread question, but on the Canadian winter season and Russian winter season, how are you kind of seeing activity levels compared to maybe last year’s pretty strong performance.

Gary D. Owens

I think it’s – of course we didn’t have anything in Russia rented last year, so $1 would have been better. Then last year, if we’re talking about comparative stuff that should be a good winter for us, the Canadian winter is close to – I don’t know exactly how it compares but It’s about the same. But I can tell you there’s a lot fewer crews from a general standpoint, not specifically related to us in last year, but the cruise channel accounting employee account is considerably larger per group – but I think from our company stand point it will be a – you will see a good revenue from the rental fleet in both of those places.

Georg P. Venturatos – Johnson Rice & Co. LLC

Okay I appreciate the answer guys, thanks a lot.

Operator

We’ll go next to the side of Joe Maxa with Dougherty & Company, your line is open.

Joe Maxa – Dougherty & Co.

Thank you good morning guys.

Gary D. Owens

Hi Joe, good morning.

Joe Maxa – Dougherty & Co.

Wanted to ask a little more on the wireless side, are you going into I guess on the last call we have a announced contracts that gave some visibility, don’t see as many this quarter, how should we be thinking about that segment in Q2 and the rest of the year.

Gary D. Owens

Well we just, we gave you what our visibility is at the moment and we’re talking to other people, we have closed and some of those orders last quarter were conversions of rentals to purchases that we ended up announcing in, you don’t really have to shift. You just do some paper work to convert the lease into purchase and those kind of if I am correct, it’s just like last quarter, had no warning and so they just happened. They get close to the end of their rental period and contractors are looking at what you’ve got ahead of them and they make a decision at that point when they have to return it to it. So it’s all those kind of negotiations that are always out there to convert, but the visibility is what we have already said.

Joe Maxa – Dougherty & Co.

Is this a period where you would normally get conversions?

Gary D. Owens

Sometimes at the end of the winter seasons in Canada and elsewhere it could happen, but we don’t have any knowledge of that at this point.

Joe Maxa – Dougherty & Co.

Right, okay. And I wanted to ask a little bit more on the OBX; last call, you mentioned potential for these orders to hit for back half of 2013. Is that still what you are anticipating with the increase in investments and what not?

Gary D. Owens

That’s the anticipation, it’s not the fact yet. We are gearing up to meet that timeframe, because that’s our expectation and I mean if we don’t gear up to meet that expectation, we won’t meet it. So we are – as Tom mentioned in his part, we’re spending capital to buy machines, primarily that’s one of the main drivers for it. And we will put some of that in the rent fleet as well. So, yes, we still anticipate that to be, but we still got work to do.

Joe Maxa – Dougherty & Co.

And lastly from me on the traditional seismic side, little bit flat year-over-year, are you seeing any pickup or should we look for similar type numbers? What’s your visibility look like there, I guess I will have to ask.

Thomas T. McEntire

That sort of a business, Joe this is Tom. That part of our business, we have very little view of what’s coming down the pipe. Those orders come in and get turned around rather quickly. So we don’t have a long backlog, usually six to eight weeks is the bad yet, and that’s as far as we can see, so it’s hard to say, but we were flat the first quarter and we don’t get guidance on each product line. So it will remain to be same.

Gary D. Owens

The Colombia office will be renting among other things, some of our traditional equipment we are building traditional products that we will put into that rental. So it’s, we may get, the market itself may not change, a whole lot, but where it will be focused may from our standpoint. But we need to open the office and see who is beating down the door before we have much of an insight on that.

Joe Maxa – Dougherty & Co.

Okay, thanks guys.

Gary D. Owens

You bet.

Operator

We’ll go next to the line of Travis Bartlett with Simmons & Co. Your line is open.

Travis Z. Bartlett – Simmons & Co. International

Hi, good morning guys.

Gary D. Owens

Hi.

Travis Z. Bartlett – Simmons & Co. International

Congratulations on the quarter.

Gary D. Owens

Thanks.

Thomas T. McEntire

Thank you.

Travis Z. Bartlett – Simmons & Co. International

First of all, I just wanted to follow-up on the wireless side, and from the smaller work that you expect to deliver in Q2, can you just kind of discuss with us the aggregate order of magnitude in some of these awards that are on the books thus far for the quarter?

Thomas T. McEntire

Yeah. Travis, this is Tom. We’ve got a good four or five solid orders right now, but the systems are small, and we’re looking at probably 5,000 channels in total for these customers and the important thing is that they are all international customers, we are hitting some places that we haven’t hit before. And so we are hoping that they will bring follow-on orders in the future, but we are talking about five relatively new customers here, so not huge in magnitude, but nevertheless they are still important to us.

Travis Z. Bartlett – Simmons & Co. International

Great, sure. Okay, then the secondly here on the rental side, can you maybe just talk a little bit about the composition of the rental fleet at this point? So kind of in general terms, how large of a portion does OBX represent currently? And then secondly, how do you expect this proportion to change overtime as you continue to build out the rental fleet?

Thomas T. McEntire

OBX is a very small portion in terms of the total cost of the rental fleet. I am going to say maybe a couple of thousand total channels, and so it’s just not a huge part, but to your point, and it’s a good question, is that it will become a bigger part of our rental fleet based upon, what we are seeing is indications from customers for either purchases or rentals of these systems. So we do see it becoming a bigger part as the future unfolds.

Travis Z. Bartlett – Simmons & Co. International

Okay. And then presumably these are higher margins versus the GSX?

Thomas T. McEntire

We will see.

Travis Z. Bartlett – Simmons & Co. International

Okay. That’s all I have. Thanks guys. I will turn it back.

Thomas T. McEntire

You bet.

Operator

We will go next to the side of David Rose with Furey Research Partners. Your line is open.

David M. Rose – Furey Research Partners LLC

Hi guys, congratulations on a great quarter.

Thomas T. McEntire

Thank you.

David M. Rose – Furey Research Partners LLC

Sounds like the business momentum with the OBX system is really picking up and you guys are continuing to be pretty excited about that. Can you guys speak to any customer experiences, early success stories that you’ve had with your customers using the product that could be accelerating demand. Whether this is the business where you expect just like your GSX system to have big important customers, they have a large repeat orders over time with the success that they have with the product.

Gary D. Owens

And so this is OBX question right?

David M. Rose – Furey Research Partners LLC

Yeah.

Gary D. Owens

Yeah.

David M. Rose – Furey Research Partners LLC

Yeah. Saying if you think, you’ll see, if you have success stories with your customers using the product that’s helping accelerating demand and whether or not this business will represent your business, I mean will be similar to the GSX system business where you have important big customers that have large repeat orders over time.

Gary D. Owens

Yeah. But I think this is going to be more of a niche product than the GSX, and by that I mean this will be shallow water, and some in medium depth waters. We have offerings for deep, all the way to the shallow end. And the concept of the OBX is different from most sea nodes and that is very small and light weight as opposed to very big and heavy and there’s coupling questions about such an approach. So a lot of these rentals that are occurring at the moment is to go tests where there are a large number of channels of small equipment, opens up some ways to explore that a few heavy nodes, don’t address. And we don’t have one job that has been completed and has been processed, and we have not seen the data, a person that we’ve been told that the data was exceptional.

So we one data point is not a trend so we need to see how the rest of these things go, but the initial feedbacks on this is very encouraging, and the people that have expressed interest in these – our feeding of that good start, and so we’re anticipating that this is going to be a tool that is used, but it is the crew count for this kind of activities, not representative of what the crew count is on land.

So it will be smaller, but it will have large, some of these will have large channel counts associated with it, and we will have to see how that new niche area grows. I mean it’s a new imaging tool, and that is hard to predict, how that gets accepted, and how fast and but at the moment there is a lot of different contractors and oil companies are getting presentations asking to come down, and see us or us to go see them, and go through the presentation, we’ve given a lots of quotes. So we are anticipating the demand enhance the investments in the equipment and the investment in the rental fleet and inventory.

David M. Rose – Furey Research Partners LLC

Great that’s very helpful, thanks guys.

Operator

We’ll go next to side of Will Dezellem, with Tieton Capital Management. Your line is open.

William J. Dezellem – Tieton Capital Management LLC

A group of questions, first of all, relative to the Statoil contract, would we be roughly correct, if the revenues would be going from approximately $9 million this quarter to approximately $21 million in the remaining three quarters, if its back with level loaded and then Tom you said it was not going to be exactly, but for modeling purposes, that might be close?

Thomas T. McEntire

Yeah Bill, I mean going back to the math, we expect 45% of the revenues to happen in this fiscal year, so I think you are right in that would leave $21 million for each of the remaining three quarters.

William J. Dezellem – Tieton Capital Management LLC

Great, thanks.

Thomas T. McEntire

It could happen that way.

William J. Dezellem – Tieton Capital Management LLC

Right, understood. And then the five new customers, is that were referenced with the 5,000 channels of GSX orders this quarter. Even though these orders are small, are these customers that have the potential to place sizable orders, and ultimately could end being big dollars or is that not necessarily the case for all five of them?

Gary D. Owens

Yeah, not necessarily the case for all five, but a couple could end up being substantial users of the product.

William J. Dezellem – Tieton Capital Management LLC

And then Wick I don’t believe that you had a chance to say anything on the cost here, so would you please describe since you are roughly a year and now into this COO role, the issues that you are spending most of your time on today and how you anticipate that might change over the course of the next 12 months?

Walter R. Wheeler

Well, right now I am spending most of my time trying to assist in our increase in capacities for these things. This federal project is clearly a large capacity component. This OBX is going to be another one, so pretty much just operations as the main medium of product.

Gary D. Owens

We don’t train people gradually. We just throw them in the heat of the fire and ask him to have figure it out. Wick has done a great job.

William J. Dezellem – Tieton Capital Management LLC

All right, it’s nice to see you have fire to throw him into.

Gary D. Owens

Yes.

William J. Dezellem – Tieton Capital Management LLC

And finally, in the press release and I believe it may have even been the very last sentence in the second last paragraph, but relative to your comment about investing in new product opportunities and clearly, if we look at Geospace today versus the Company five or ten years ago, new products that’s really what’s driving the success that we and investors are enthusiastic about. The question is, what can you tell us about new product opportunities as you see them going forward., and as much as you can say we’re happy to listen?

Thomas T. McEntire

Not very much, we have talked about this in our press releases and a little bit on our last call, but we introduced a new product at the SCG show that’s called GCX, which is a battery and phone encompassed in the same housing as the data acquisition system. That’s another very niche product line, but when we’re talking about investment in new products, it’s taking filling in the holes in the product line, and in the marketplace, and the GCX is an example that since it’s public.

We’ll talk about, but when you release a product, you and it starts, it goes into the field and starts working, you get a lot of feedback, you get feedback from the contractors and you get feedback from the oil companies and a lot of them look at your technology and they have some idea that if you just did this to it, it would open up an opportunity for them in some godforsaken place or some situation that they’re having trouble with, and when you start trying to address that problem, you spend more time thinking about that and that often leads to something that you’d didn’t originally think of.

So that the investment here is keeping your eyes and ears open, being receptive to what your customers need and want, and what they tell you and figuring out solutions for them and how to market that in a boarder sense in the GCX, the OBX are all examples of doing exactly that, but as far as things that we haven’t talked about in the past, we would like to not talk about that until we have something tangible to discuss in the marketplace that which time we’ll tell everyone.

William J. Dezellem – Tieton Capital Management LLC

So following upon that Gary, it’s sounds as though a couple of things; number one is that the new product introduction that have made you successful historically, and there is no reason to even imagine that your not continuing to work on many more new products, and it sounds as though the more new products that you introduced actually the more new products that gives you a window into introducing, and I hope that doesn’t sound too circular.

Thomas T. McEntire

Yeah. I’m confused, I think if you along those lines there is a way for you to follow that, and we breakout R&D as a separate line, and you can watch that we’d hired engineers lately. As we grow revenues and are able to we’d like to accelerate product development some of our ideas, and we do that by hiring engineering guys, and building our facility for them to do, so just watch that line and see how that reacts and as long as that is growing then we’re continuing to invest into new products and new ideas.

William J. Dezellem – Tieton Capital Management LLC

Thank you all for the time

Operator

(Operator Instructions) We will go next to the side of Hamed Khorsand with BWS Financial. Your line is open.

Hamed Khorsand – BWS Financial, Inc.

Hey good morning. Just a couple of questions; one is, given the capacity constraints you were talking about, do you think you missed revenue opportunities?

Gary D. Owens

Not that we know of, but there is some of the areas like (inaudible) areas that we’ve had to pull back on as far as pushing product line because of limitations in our capacity in the cable shot. So there is likely that we had missed some opportunities that’s not in our core business, but at the moment I don’t know of any orders we turned down yet.

Hamed Khorsand – BWS Financial, Inc.

Okay. And my other question is, given your capital expenditure plans this year and then more sales going international, I guess are you going to be requiring financing at all or you are going to bring cash back to the U.S. to support the CapEx?

Gary D. Owens

No, we don’t expect to have to go to marketplace, I hope we do. It would mean that the demand was much bigger than we presently anticipate, but now I think we have enough liquidity and cash flow to handle that.

Hamed Khorsand – BWS Financial, Inc.

Okay. And then my last question is on this GSX product line. I guess you have customers with older GSR units. Are you seeing a smooth transition between the two product lines and how customers are ordering?

Gary D. Owens

Yeah, no, I think that transition went well, I am very pleased with how the X and the arm mixes together fine, so there is no issue there.

Hamed Khorsand – BWS Financial, Inc.

Okay, right that’s it for me, thank you.

Gary D. Owens

You bet.

Operator

There are no further questions in queue at this time; I’ll turn the floor back to Gary Owens for any additional closing remarks.

Gary D. Owens

Thanks for attending the conference call and we’ll see you next quarter. Thanks a lot everyone, bye-bye.

Operator

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

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