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ION Geophysical Corporation (NYSE:IO)

Q4 2012 Earnings Conference Call

February 14, 2013 10:00 ET

Executives

Karen Abercrombie - Vice President, Corporate Communications

Brian Hanson - President and Chief Executive Officer

Greg Heinlein - Senior Vice President and Chief Financial Officer

Analysts

Georg Venturatos – Johnson Rice

Justin Baker - Sidoti & Company

Rudy Hokanson – Barrington Research

Peter Hatfield – Dahlman Rose

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Ion Geophysical’s Fourth Quarter Earnings Conference Call. During today’s presentation, all participants will be in a listen-only-mode. Following the presentation, the conference will be opened for questions and instructions will be given at that time. Today’s conference is being recorded today, February 14, 2013.

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

Karen Abercrombie - Vice President, Corporate Communications

Thank you, Alicia. Good morning and welcome to Ion Geophysical Corporation’s Fourth Quarter Earnings Conference Call. We appreciate you joining us today. As indicated on slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer and Greg Heinlein, Senior Vice President and Chief Financial Officer.

Before I turn the call over to them, I have a few items to cover. If you’d like to listen to a replay of today’s call, it’s available via webcast by going to the Investor Relations section of our website at iongeo.com or via a recorded instant replay for the next couple of weeks. The information provided in yesterday’s earnings release. That information rather was provided in yesterday’s earnings release. I should also point out that we’ll be using some PowerPoint slides to accompany today’s call. They are accessible via a link on the Investor Relations page of our website.

Moving on to slide 3, information reported on this call speaks only as of today February 14, 2013 and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made by Ion during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control that may cause our actual results or performance to differ materially from any future results or performance, expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by Ion from time-to-time in our filings with the SEC, including in our Annual Report on Form 10-K and in our quarterly reports on Form 10-Q. Furthermore as we start this call, please refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements.

I’ll now turn the call over to Brian Hanson who will begin on slide four.

Brian Hanson - President and Chief Executive Officer

Thanks Karen and good morning everyone. Yesterday, we announced strong fourth quarter and full year 2012 results driven by continued growth in our solutions and software businesses. Full year revenues were strong at $526 million and gross margins were up. We are pleased with the $0.39 of earnings we delivered to shareholders in 2012, up 160% from 2011. We are also pleased with the distribution of those earnings across the year as compared to prior years when the vast majority of earnings for the year we generated in the back half.

We generated a third of our earnings in the first half of the year surpassing our stated goal of 25%. Our strategy of delivering T&P company solutions got to leverage our key technologies that leverage our key technologies is paying off. This allows us to demonstrate the value of these technologies to our own customers, develop more lasting relationships and generate higher quality revenue streams.

We continue to grow these E&P revenues and in 2012 they represented two-thirds of our total revenue up from 45% in 2009. This E&P revenue growth was driven largely by our solutions segment comprised primarily of our multi-client and data processing businesses. In 2012, our solutions segment revenues increased 33%. I would like to share a few key observations about the E&P market and how they correlate to what we have seen in our business. E&P CapEx was up 10% in 2012 and has predicted to grow another 7% in 2013. Barring an unforeseen negative change in the global economy or in the regulatory environment, science point to another year of steady growth especially in international exploration in areas such as Africa, Latin America, the Arctic, and the Middle East, we are benefiting from growth in these areas and are well-positioned particularly in our GeoVentures and data processing business to capitalize on these industry trends.

Our GeoVentures division had another exceptional fourth quarter delivering record revenues for both the quarter and the year driven by a combination of healthy library sales and a substantial increase in new venture projects. Our new venture revenues were up 50% for the year due primarily to increase activity in international offshore programs. We completed acquisition of several new marine programs in the Arctic and offshore Latin America and a LAN program in Europe. We also commenced acquisition of a new marine program offshore Australia.

I’d like to share a couple of examples of how our GeoVentures group is bringing exceptional value to the market. Several recent large discoveries offshore East Africa have created tremendous interest in the region. We have been engaged to assist the Tanzania Petroleum Development Corporation or TPDC in managing the upcoming leased licensing realm consisting of 9 new deepwater blocks. In addition of the upcoming licensing realm, we recently completed our fourth survey offshore Tanzania and our data has provided the framework from which the TPDC can evaluate on technical and commercial levels the value of their offshore blocks to be included in the upcoming licensing realm. As a result, we have and continued to expect to see an uplift in demand for our East Africa span library which contains over 20,000 kilometers of depth imaged 2D data.

Another exploration hotspot is Brazil. Recent major discoveries in West Africa’s Ghana and Ivory Coast, which are geologically similar to Brazil’s equatorial margin basins have increased interest among oil and gas companies and the conjugate margin in Northern Brazil. Our Brazil span program provides E&P companies with a regional depth imaged framework to better understand the hydrocarbon potential of this exciting frontier region. In anticipation of the upcoming 11th Brazilian licensing realm in 2012, we added an additional 8000 kilometers of regional seismic data to our Brazil span program in the equatorial margin offshore northern and northeastern Brazil. This new data had to be approximately 17,000 kilometers of data we acquired in the region in 2009 and makes ION uniquely positioned to provide the macro-geologic framework that E&P companies will use as the framework for their exploration activities.

We are seeing the benefit of several years of investment in building a globally diverse data library. In 2012, we sold almost $90 million from our data library programs and about a third of those sales were from programs completed between 2002 and 2008 demonstrating that data beyond its accounting economic life holds value over time.

Let me give you an example. We acquired NovaSPAN over 3000 kilometers of regional 2D data offshore Nova Scotia in 2004. In 2010, we collaborated with the Nova Scotia government on their play fairway analysis by reprocessing our NovaSPAN data using GXT’s latest processing techniques. That analysis was instrumental in driving new interest in licensing offshore in Nova Scotia resulting in over $2 billion in exploration licenses while driving new sales of the NovaSPAN data library. It also demonstrates that older data can be refreshed to continue to add value to both the market and to ION. With our new activity in our existing portfolio of library programs, we are very well positioned for upcoming licensing realms anticipated in and around Brazil, Australia, East Africa, Indonesia and Greenland.

Our GXT data processing business had a record year in 2012 generating $116 million in revenues, up 30% over 2011 with seven sequential quarters of revenue growth. We continue to see very strong market for data processing services with growth in both the Gulf of Mexico and internationally, particularly in Europe, Africa, and the Middle East. Our strategy for international expansion has allowed us to capitalize on this trend. In addition, we are seeing a continued focus from our clients on large long-term contracts. Our new Y band broadband solution continues to gain momentum. Since the official launch of Y band at the 2012 EAGE, we have been awarded several key projects that include Y band and the workflow across the Gulf of Mexico, Latin America, Asia-Pacific, the North Sea and Africa.

About a third of our data processing pipeline contains Y band opportunities, and our GeoVentures group is now integrating Y band into some of their programs as well. Our investments in data processing talent and infrastructure continue to payoff. We added over 50 technical professionals in 2012, a 15% increase. We look forward to another strong year in 2013 for this business.

Regarding our marine seismic offerings, we are seeing modest disciplined growth in the marine towed streamer seismic market and growing demand for seabed seismic. The demand for seabed is being driven by the need for higher quality seismic to image complex targets for production. Our VSO seabed system continues to deliver industry leading images and Calypso, our next generation VSO to be deployed this year will deliver similar high-quality imaging along with significant increases in operating efficiencies.

Now, regarding Calypso and our seabed strategy, you may have recently seen that we picked up a 30% ownership interest in the seabed joint venture called GeoRXT from RXT. RXT publicly announced last year that it was struggling with liquidity issues, I was exploring strategic alternatives, including divesting some of its non-core assets. ION has had a good partnership with RXT over the years to a system and their efforts we exchanged some of their obligations to us in an agreement that included transferring ownership and their seabed joint venture with Georadar operating in Brazil called GeoRXT. As a result today, ION owns 30% of this joint venture.

We are currently exploring opportunities to increase our ownership to 50% and expand the joint venture into a global fully integrated seabed seismic company leveraging ION strengths, including GeoVentures project origination and global relationships and GXT data processing and reservoir services with the excellent talents, operational excellence, and relationships that exist already in that team as developed by Georadar. We anticipate that the new joint venture will go to market with exclusive access to Calypso. We believe a fully integrated seabed seismic company backed by too strong partners will be well-positioned to succeed in this fast growing market.

The joint venture will accelerate our ability to improve the Calypso technology and quickly integrated into operations making what we expect to be the most productive OBC system even more productive. To the extent, we elect not to move forward to 50% ownership and the initiative will likely divest our 30% ownership position and monetize the full value of the investment. We expect to collectively make this decision by the next earnings call and look forward to keeping you informed when we have more to report.

As you can see from the results, our towed streamer business grew sequentially in the fourth quarter up 65% over Q3 while our year-over-year growth was down due to the 12 streamer sale made in the fourth quarter of 2011, which was not replicated Q4 2012. We did have some smaller system sales during the quarter, but continued to see marine contractor customers cautious and the CapEx spending hitting into 2013.

Our software business achieved record revenues in 2012, up 13% driven by healthy concept systems Orca and data software sales. Since ION acquired concept systems from 2004, this business is growing revenues at an annual rate of 14%. I’m looking back for a moment. We’ve made our investment back nearly six times in revenues and three times in operating income. We also continue to experience solid growth in our concept systems onboard acquisition optimization services business strengthening our foothold and visibility in the E&P companies.

So to sum it up, we had a great quarter in year recording our largest operating income number since 1998 and the second largest in our history. We had record revenues across GeoVentures, GXT data processing and concept systems businesses. We attribute this success in large part to our continued focus on delivering integrated solutions to E&P companies overcome their greatest challenges. Our growth has been led by our solutions business from international markets and we believe that trend will continue for sometime.

In general, the seismic market is healthy. We ended the year with a solid pipeline on the well-positioned for continued growth as international exploration is front and center for us. Our data processing and multi-client businesses are more global than ever and we’re continuing to invest in our technologies, infrastructure, and our greatest asset, our people.

I’ll now turn the call over to Greg.

Greg Heinlein - Senior Vice President and Chief Financial Officer

Thanks, Brian, good morning everyone. Overall, our fourth quarter revenues were up 8% year-over-year. Our solution segment revenues of $121 million improved 45% over the prior year period. Compared to fourth quarter 2011, our software segment sales increased to $11 million, up 14% in local currency while our systems segment revenues decreased 39% to $41 million. Our fourth quarter net income was $26.8 million or $0.17 per diluted share and included several one-time items.

These special items consisted primarily of a $12.8 million pre-tax charge for obsolete and marine equipment write-downs and bad debt reserves offset by a $19 million pre-tax gain on legal settlement. The legal settlement was a suit we highlighted in prior quarterly filings. With that overview, let’s take a closer look at our Q4 performance starting on slide 10.

Our Solutions segment revenues increased 45% attributable to increased performance in both our data processing and multi-client businesses. Our data processing revenues increased by 27% driven by our international expansion. Our new ventures revenues increased by 83%, our best ever revenue quarter driven by completion of several new marine programs in the Arctic and offshore Latin America and the land program in Europe. Our data library revenues increased by 19% due to continued demand for completed seismic surveys particularly in Africa, Latin America, Australia and the Arctic.

Our Solutions segment ended the quarter with a backlog of $151 million, up 13% from the same quarter last year. While our backlog is down from the third quarter, this decrease represents our improving efficiency in our data processing business and the partial completion of a large 3D marine acquisition program. Backlog levels for our solutions business provide indication of the strength of future sales and are expected to positively impact our solutions revenues for 2013.

Turing to slide 11, our software segment achieved it’s best fourth quarter ever as revenues increased 14% in local currency and 16% in U.S. dollars compared to fourth quarter of 2011. As we mentioned in previous quarters, we continue to realize steady subscription sales of Orca and data software demonstrating consistent demand for concept systems, command and control software platforms. We’ve maintained our leadership position in the high-end command and control software market.

Our acquisition optimization services to which we provide onboard services to others acquisition increased 75% over fourth quarter 2011 achieving over $1 million in quarterly revenue for the first time. Through these services, we are seeing good opportunities to significantly reduce customers acquisition cost.

Moving on to slide 12, Systems segment revenues decreased 39% year-over-year. We continue to experience soft revenues attributable to modest capital spending for ION products by our contractor consumers related to new vessel introductions. Contributing to the decline is the year-over-year comparable from the delivery of the towed streamer systems sold in the fourth quarter of 2011 that was not replicated in 2012. While marine contractor consumers are seen improving day rates, they remained financially disciplined in our limiting new vessel builds. However, we continue to invest strategically in R&D to drive our next generation of marine products.

Turning to slide 13, as we indicated in our last call, INOVA’s revenue ended down 7% in the third quarter compared to a year ago, recording $25.1 million of revenues. INOVA delivered an additional 18,000 channels as a new G3i cable-based recording system and made a few additional U.S. based vibrator sales. INOVA’s third quarter operating loss was $8.1 million, an improvement from the same period in 2011 in which they had a loss of $23.5 million.

We estimated INOVA fourth quarter revenues to be in the range of approximately $59 million to $61 million with an operating income of $1 million to $2 million compared to an operating of $6.4 million one year ago. For ION’s calendar year as we estimated, INOVA generated slightly positive net earnings to ION compared to a loss of nearly $23 million in 2011.

Similar to last quarter, we expect to book 49% of INOVA’s estimated fourth quarter financial results in our first quarter of 2013. INOVA’s fourth quarter numbers or estimates which we believe offer some visibility into the impact we expect the joint venture to have on our financial results. However, these are not final audited numbers. Turning to slide 14, as expected we generated free cash flow of $15 million this quarter, $25 million better than the same quarter last year, a good quarter given our multi-client investments. We built up our cash balance to $61 million approximately the same level as one year ago.

Moving on to more details in the balance sheet on slide 15, the asset side of our balance sheet continues to demonstrate strength with a most significant investments being in multi-client projects resulting in a data library net book value of $230 million, up $54 million from a year ago. Our balance sheet remains healthy without any increase in debt or working capital. As just mentioned cash on hand stands at $61 million and our credit facility has an additional $78 million of capacity. Our equity book value continues to grow with the improved profitability this year.

Turning to our last slide 16, we enjoyed strong growth in 2012, 16% higher revenues than 2011. We expect continued year-over-year momentum in revenue and earnings growth in 2013 led by our global data processing business expanding GeoVentures’ offerings, a robust OBC market and improvements in the land equipment market. While our margins improved noticeably in 2012. For 2013, we will be making incremental investments in sales and marketing, data processing, and interpretation personal, hardware and software as well as research and development for new marine technologies.

We expect our 2013 investment in multi-client data library to be in the range of $140 million to $160 million, which is consistent with 2012. We estimate interest expense for 2013 to be between $4 million and $7 million and our effective tax rate to be between 25% and 30%. Exploration budgets are forecasted to grow significantly in 2013 and the seismic industry continues to show capital discipline. We expect those trends to benefit ION further in 2013 across each of our segments. In closing, we’d like to thank our customers for their continued faith in us and our employee who strive to give us a competitive advantage every day.

With that, we’ll turn it back to the operator for questions-and-answers.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Georg Venturatos with Johnson Rice. Please go ahead.

Georg Venturatos – Johnson Rice

Good morning, Brian, good morning, Greg.

Brian Hanson

Good morning, Georg.

Greg Heinlein

Good morning, Georg.

Georg Venturatos – Johnson Rice

I wanted to start with the GeoVentures business in the particular may be the data library side obviously highlighted very strong exposure in Brazil and East Africa for the upcoming lease rounds. Are there any areas where you may be feel under exposed and do you plan to maybe accomplish filing in those gaps potentially with this $140 million to $160 million spend in '13?

Brian Hanson

Hi George, it's Brian. I don’t think – I don’t think we feel that we are under exposed relative to the opportunities that are coming up with upcoming lease rounds because by the nature of our programs we are very early on designing our programs and getting into regions in the world that we anticipate will be hot. So, when we look at the lease rounds that we’ve highlighted that are coming up to me in the not too distant future we feel that we’ve actually built out some very comprehensive programs and data subs in those areas.

Georg Venturatos – Johnson Rice

Great and then from a seasonality perspective obviously we’ve seen this transpiring in 2012, but we should probably expect that data library revenues to be little more are evenly distributed than we have seen in previous years given lease rounds throughout the year, is that correct?

Brian Hanson

I wouldn’t even hazard to guess the nature of data library I’ve said back once their library sales for the last seven or eight years and every years a new treat George, so your guess as good as mine.

Georg Venturatos – Johnson Rice

Right, thanks. And then lastly and then I’ll re-queue on the data processing side just given the international expansion efforts we’ve seen and capacity expansion how does that kind of breakout today from a international versus Gulf of Mexico perspective in terms of exposure?

Brian Hanson

Yeah, that’s a good question. We are seeing international activity really leading the charge for growth in the business. And so when we look at capacity the vast majority of our activities on international projects I’d say today probably two-thirds of what we’re doing is focused internationally and our resources are more stretched than ever before on the offices that are outside of the Houston area.

Georg Venturatos – Johnson Rice

Okay great. I appreciate the answer, Brian.

Operator

Thank you. Our next question comes from the line of Justin Baker with Sidoti & Company. Please go ahead.

Justin Baker - Sidoti & Company

Good morning gentlemen.

Greg Heinlein

Good morning, Justin.

Brian Hanson

Good morning, Justin.

Justin Baker - Sidoti and Company

I have a couple of quick questions. One you mentioned with the JV with GXT, Brian I think you mentioned something with regards to exclusive access for Calypso – exclusivity for Calypso. I was wondering if you could just give us some detail on that?

Brian Hanson

Well, it’s a little premature to give too much detail Justin simply because it’s something we’re exploring at this time. So, obviously there are some public information out there on the transaction we deal with RXT we’re in conversation with Georadar. At this point we’re exploring the – we’re exploring the opportunity. We’re really trying to come together in a meaningful way and develop a global seabed seismic company that truly is fully integrated. So, placed to the strengths of much more than just being a logistics provider for the contractors do today but really demonstrating on delivering value for oil companies by integrating our capabilities all the way from deal origination and operations excellence through integrating processing and interpretation skill sets that we do today for them. And it just seems logical that if we were doing that the best way to do that is to do it through delivery mechanism that doesn’t – that is exclusive with Calypso. So, that we’re not creating competition for ourselves. So, it’s a thesis more than an absolute at this time and we’re going to explore that over the next 90 days and while we’re going to make a commitment to do that or take advanced streamer model with Calypso for the remainder of the year?

Justin Baker - Sidoti and Company

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Joe Maxwell with Dougherty & Company. Please go ahead.

Joe Maxwell - Dougherty & Company

Thank you. Good morning guys.

Greg Heinlein

Good morning, Joe.

Brian Hanson

Good morning, Joe.

Joe Maxwell - Dougherty & Company

Follow up on the RXT joint venture opportunity. First of all, are you – is Calypso being used by anyone else at this time? And then if – and then I’m just trying to see if there has been any feedback from any potential trials you had out there?

Brian Hanson

Yeah. First let me address the utilization, first let’s look at VSO and so the history of VSO when we launched it in 2004 we did it on an exclusive basis with our RXT and over the course of 2004 through 2009 RXT acquired five VSO systems and 1.5 crews working around the world. Unfortunately the financial collapse of ’08 in the fact that they struggled a little bit and the way they accelerated the deployment of that technology it put pressure on that business and as a result, they struggled since from liquidity issues.

As a result of that, they actually entered into this joint venture with Georadar and spun off a very good crew to Georadar named a GeoRXT and has been operating exclusively in Brazil for Petrobras. So, after this point in time, there has only been two operators of the VSO technology and there has been no Calypso sold into the market. We are obviously going to be end of life in VSO moving to the Calypso platform as we roll Calypso out because the operational efficiencies of Calypso were significantly greater than VSO. So, the two side-by-side Calypso will be much more competitive.

In addition to that, part of what we are doing with RXT as we are moving them after VSO platform. So, today while I should say by the end of the year, we would expect the GeoRXT will be the only operator with VSO. So, it’s a – it just it’s an interesting concept to role of Calypso – the Calypso line to GeoRXT exclusively end of life VSO and then we don’t have an – we can expand that business globally and we won’t have any competition from either the VSO platform or Calypso.

Greg Heinlein

So, that was a long win to answer your first question.

Joe Maxwell - Dougherty & Company

Right, so the Calypso as far as the sales of that product is that relay and you – getting this 50% expanding the 50% of the GeoRXT joint venture.

Brian Hanson

Well, I think it’s again it’s something we’re exploring so, getting to specific details, ION got the answers because we haven’t firmed everything up. So, but it’s me would be – it would be an interesting combination having both 50% ownership in the seabed company and being able to throw the weight of ION behind it and in addition to that giving at exclusivity to the technology. But it’s all – it would have to be one package I can’t imagine one element of that without the other.

Joe Maxwell - Dougherty & Company

Right, let me just certainly other way if you don’t go to the 50% if you divested, what is the outcome for Calypso in that scenario?

Brian Hanson

I think under that scenario, there are just two avenues for Calypso, one is do we get into the seabed business as we just described and take Calypso to market in a more of a services approach through a joint venture or do we continue with out arms dealer model so, the other option is that we elect to continue with the arms dealer model and I can tell you that there is considerable interest for Calypso for contractors to acquire Calypso to data to compete for some of this business that we are seeing around the world. So, we’ve got to a Calypso – Calypso is going to be commercial very soon and so, we are going to have to make a decision either way been on a (indiscernible) and so we’ll make that decision in the next quarter.

Joe Maxwell - Dougherty & Company

I see that’s very helpful. Let me just ask you on the – the new venture program that you completed several of them, you looks like you started the new one in offshore Australia, I’m just can you give us a little more update on the progress of what’s happening in some of these programs and then how should we think about that related seasonality Q1 versus Q4.

Greg Heinlein

Well, the number of projects that we are doing is we’ve completed quite an extensive list of projects in 2012 and there is an extensive list of projects for 2013 so, it’s difficult to get into a project-by-project update on the call here today. If you look at our earnings presentation, the slide back – there is a slide in there that’s a bubble chart and it really shows you where we have exposure around the world and how large those projects are for us. We had – we’ve worked on a number of projects both North American shale-based opportunities this year while our one land program in Europe and Poland and offshore programs all over the world from Arctic, Brazil, East West Africa, (indiscernible) Australia. We continue to have a slate of programs like that for 2013 relative to what the spread of that activity looks like. I would say it feels a lot like from an activity perspective that our first quarter of ’13 will look a lot like our first quarter of ’12. It probably won’t look any better or any worse. We had quite a bit of activity in Q1 of 2012 and we have quite a bit of activity in Q1 of 2013. So, year-over-year, I would expect that it would be – the first quarter would be comparable and then I would think that as year goes on, we’ll see growth.

Brian Hanson

Joe, the other way I would answer that is Greg is if you look at the quarterly profile over the entire year and used those ratios each quarter as a percent of the total year. There is nothing in our programs that would suggest those percentages of each quarter represented to the full year will change in 2013 versus 2012.

Joe Maxwell - Dougherty & Company

Okay, thank you. I’ll jump back in the queue.

Operator

Thank you. Our next question comes from the line of Rudy Hokanson with Barrington Research. Please go ahead.

Rudy Hokanson – Barrington Research

Thank you very much. I was wondering if you could explain a little bit more about what you are saying in the systems area and in terms of hesitancy of operators wanting to move forward with some equipment buys and when you are talking about R&D and investment in new products if you can may be give some color as to what you think we’ll be I guess the term is will be demanded going forward. What are people holding back on if it just a matter of spend or is that a need for something new that you hope to answer with your R&D and if you could give some color on that.

Brian Hanson

Yeah, Rudy, that’s actually, there are couple of excellent questions and they are both I think the answer is different for both of them. Relative to the hesitancy for equipment purchases, the reality is that the marine contractors have not had yet enough increase in utilization and day rates that they are exactly flush with cash and so, they are being conservative from a capital deployment perspective and I attribute some of them sort of the near – the near-term issues around being conservative around spending partially due to that – partially due to the fact that – that’s it’s a capital deployment issue. But there is a bigger issue and the bigger issue is around the sort of the development of technology in the marine business and what’s happened in 2012.

In 2012, we have seen the market almost tier and we’ve seen a tier with the introduction of WesternGeco’s isometrics offering in the middle of the year with AGE and that really is a – that’s a four component streamer that also through acquisition has the ability to cross line in (indiscernible) it’s pretty – it’s pretty interesting and so that is differentiating itself as almost the number one tier offering for a towed streamer seismic. And then secondly, you’ve got broadband solutions out there that both WesternGeco, PGS, and CGG offering and there is some uniqueness to those and so, they are being differentiated off of what I would categorizes conventional towed streamer sizable, which the rest of the contractor community offers. And so we are seeing tiring in the technology and so over the long-term, I’d say there is a greater interest in marine contractor seeing R&D dollars being deployed into developing broadband solutions and possibly something that may compete with WesternGeco’s isometrics offering.

Rudy Hokanson – Barrington Research

Okay, thank you very much.

Operator

Thank you. (Operator Instructions) and our next question comes from the line of Peter Hatfield of Dahlman Rose. Please go ahead.

Peter Hatfield – Dahlman Rose

Good morning, guys. My first question is on the multi-client business. You obviously had a strong quarter and I was wondering in terms of the amortization level it’s significantly lower than we’ve seen in the past that’s 25% of multi-client sales and you did have a relatively high proposition of new ventures sales. So, I was wondering if you could share a little bit more color on that for me.

Greg Heinlein

Hey, Peter, good morning. The amortization is always dependent upon where the sales occurred and where those programs are and there are expected economic life and so any given quarter sales can be more profitable if they are more fully amortized and what Brian talked about in his script was third of our sales occurred in sales or libraries that were from 2002 to 2008 so fully amortized and therefore very profitable. We can’t always say that’s going to happen every quarter and in some quarters, we’ll have higher amortization effects as a result of more recent sales.

Peter Hatfield – Dahlman Rose

Okay, okay. My next question is on the – on your outlook for the cable less land-based acquisition systems in the type of growth we are seeing in the market and then also FireFly’s role in that, your expectations there.

Brian Hanson

Peter, you want to – would you want to refined that question little bit for me because that’s a broad, I could talk for now on that one.

Peter Hatfield – Dahlman Rose

I guess specifically your outlook for sales of the FireFly system in 2013 relative to the growth of wireless systems in general.

Brian Hanson

Yeah, a couple of comments, first of all INOVA spent a quite a bit of time through 2011 and early 2012 investing in an R&D project that really focused on damming down FireFly and coming out system called Hawk and so today I characterized Hawk is a system that is similar to dual spaces cableless system. It has a little bit more feature and functionality, it’s competitive with them, but I think Geospace have done an excellent job rolling out here system in the north American marketplace and has a quite a nice installed base right now so, it’s a little bit of an up fill battle for Hawk to penetrate the north American market. What we are seeing we are seeing interest in some traction both in Hawk and (indiscernible) cable system g3i is in the middle east and quite a bit of interest in Russia in the (indiscernible) union and also mainland China and so we’re quite optimistic that 2013 will be a year both with good Hawk sales and good g3i sales in those markets in fact g3i is not that older system quite frankly it’s going to be enrolled that in the last year and there is already over 100,000 channels in the installed base so, I think 2013 will be interesting for INOVA.

Peter Hatfield – Dahlman Rose

Okay, great, that’s all from me, thanks.

Operator

Thank you. Our next question is a follow-up from the line of (indiscernible). Please go ahead.

Unidentified Analyst

Thank you. Regarding the INOVA, higher revenue – roughly similar revenues to last year and this quarter lower profitability what’s I guess the difference?

Greg Heinlein

Yeah, Joe, it’s Greg, INOVA last year had a benefit of some favorability around R&D and some grants that they had that did not recur in 2012 and so you saw the effective that year-over-year 2011 plus 2012.

Unidentified Analyst

I know you’ve given guidance for the full year but are you think that could be profitable in this year?

Greg Heinlein

Yeah, yeah, we expect improvements over the modestly profitable guidance that we’ve given for 2012.

Unidentified Analyst

Okay, that’s good. And on the data library side, I know you have been well positioned for those rounds coming up in brazil and other locations given the timing of one in brazil particularly should we see less seasonality in the first quarter than in prior years?

Greg Heinlein

Yeah, Joe. Again I got to tell you it is so difficult to predict seasonality and the library sales I mean that you do have the upcoming licensing in that for the brazil we’ve already sold data libraries for that in anticipation of that round, we continue to expect some more but I just can’t – I couldn’t give you any color on seasonality I’ve given up trying.

Unidentified Analyst

Okay. And then Greg, how about the little commentary on operating expenses what would be a good number we should be looking at and what was drown into the Q4 number?

Greg Heinlein

Yeah, Joe, we don’t give specific guidance in particular line item type guidance, what I try to provide some color in the script was while we had a great year in 2013 is expected to be another great year and even better year. we are making investments that will impact operating expenses for 2013 and it’s across the board if you go back to that script, it’s sales and marketing it’s continue growing our data processing personal and both hardware and software and then R&D of it around some of our marine technology so, we are excited about 2013, we had a great 2012, but we will see increases in some operational expenses around those investments.

Unidentified Analyst

Can you tell you how much of the special items we are in the sales and marketing and G&A lines in the fourth quarter?

Greg Heinlein

I can’t I’ll try and cover that if we need to in follow-up calls, but we did provide a breakout in our operating lines of the income statement and in our margins where most of that $12.8 million Joe would have hit operating expenses or a little bit of cost of goods sold for our marine division.

Unidentified Analyst

Lastly from me on your $9 million of legal expenses in 2012 you said expect a more normalized level in 2013. Can you give us an idea what that normalized level is for you?

Greg Heinlein

Yeah it’s roughly half of that.

Unidentified Analyst

Okay. That’s all from me. Thanks a lot.

Operator

Thank you. I’m showing no further question in the queue at this time. I would like to turn the conference back to management for any final remarks.

Brian Hanson - President and Chief Executive Officer

Thank you for taking the time to attend our conference call. We look forward to talking to you again on our first quarter call. Thanks.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.

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