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Executives

Prakash Mathew Verghese - Chief Financial Officer and Senior Vice President

Richard C. White - Chairman, Chief Executive Officer and President

Analysts

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Joel D. Luton - Westlake Securities LLC, Research Division

Collin Gerry - Raymond James & Associates, Inc., Research Division

Travis Z. Bartlett - Simmons & Company International, Research Division

Global Geophysical Services (GGS) Q4 2012 Earnings Call February 25, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to your Global Geophysical Services Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Mathew Verghese, Chief Financial Officer. Sir, you may begin.

Prakash Mathew Verghese

Thank you, and good morning, and welcome to Global Geophysical Services Fourth Quarter 2012 Earnings Conference Call. Today's call is being webcast and a replay will be available on Global's website. The press release announcing the fourth quarter results is also available on our website.

I'd like to remind our audience that some of today's comments include forward-looking statements reflecting Global's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results, and cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Global's Form 10-K for the year ended December 31, 2011, Form 10-Q for the quarter ended September 30, 2012, and on our current reports on Form 8-K.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measure is included in the press release announcing the fourth quarter results which, as I have mentioned, can be found on our website.

Now, let me turn the call over to Richard White, CEO.

Richard C. White

Thank you, Mathew, and good morning, everyone. This morning, we reported fourth quarter 2012 revenues of $55.3 million, a loss of operations of $12 million, a net loss of $28.6 million and a loss of $0.76 per share. Our results were a disappointment and we are addressing the underlying issues to drive the company's performance. Let me take you through what we've already done and are planning to do going forward.

Since joining the company 4 months ago, I've had the opportunity to meet with many of our customers, employees, partners and other stakeholders to listen to their concerns and began to share my vision of the future for Global. There is much to do, but I believe we have the people, technologies, products and services to meet the needs of our customers worldwide now and into the future.

Let me provide you a brief update on our outlook for the coming year and some insight on some trends we are seeing before moving on to what I see as priorities for Global in the coming year.

While we had a disappointing quarter, the overall outlook for E&P spending remains robust, particularly on the international front and our observations from recent tendering and bidding activity confirm this view. With E&P spending expected to continue its upward trend and increase by roughly 7% in 2013 over 2012 levels, we expect the overall market for seismic-related services to remain healthy.

Although North America remains fluid, increased service intensity for proprietary programs should drive higher utilization levels over coming quarters.

Latin America is a bright spot. With substantial new programs being tendered across the breadth of the market, creating opportunities for us to potentially expand our business in that region.

In the Middle East, we've seen strong -- we're seeing strong opportunities in the Kurdistan region of Iraq with the possibility of adding another crew or extending the term of our existing crew in that market. At the same time, we are seeing many large tenders being proposed for Southern Iraq, Libya, Egypt, Algeria and India. In continental Africa, we are seeing bid proposals for Somalia, Ethiopia, South Africa and Kenya. In addition, we're seeing OBC transition work being tendered in Abu Dhabi. As noted in our earnings release, we have recently made the decision to open a new office and data processing center in Dubai in support of the opportunities we see now and going forward in this vital region.

Now, I'll cover one of our newest service offerings and provide some color on the trends we are seeing as we look forward into 2013.

Further expanding our service offering and reservoir characterization, in 2012, we began to offer seismic service -- microseismic services to the E&P industry. During the fourth quarter, we announced the appointment of Larry Scott, an industry veteran, to further our focus on the microseismic opportunity and lead this business going forward. With dedicated leadership and by bundling our AUTOSEIS recording system with our proprietary Tomographic Fracture Imaging process, we believe Global is well-equipped to actively participate in the emerging market for scale grid deployments across the unconventional resource plays. While currently a niche business, we see solid opportunities for growth as customers begin to realize the benefits of our TFI imaging process for both realtime and long-term reservoir monitoring.

Now, a little on the trends. Global has made a substantial investment -- investments in our Multi-client library and other technologies over the last several years. I believe these investments leave us well-positioned to take advantage of what we see to be several of the key trends in the industry going into 2013.

First, the land seismic business is currently transitioning from legacy cabled systems to nodal recording technology. While others still have -- others may still be faced with substantial capital outlays as this transition continues, Global has been ahead of the curve in the technology transition and disposal of legacy systems. We believe Global is the only land seismic acquisition provider of scale to have fully converted worldwide to nodal technology -- nodal acquisition technology going into 2013. This transition has been facilitated in no small part by our investment in our AUTOSEIS nodal recording system.

Next, we expect the emergency service areas of Microseismic and E&P consulting to gain further traction as companies continue to seek ways to improve their understanding of the reservoir.

And finally, we see the continued convergence of geoscience and engineering as an important trend in developing a better understanding of unconventional reservoirs. We believe seismic will play an increasing role in this process. And recent commentary about the significance of subsurface information from the leading oil service companies confirm this view.

In light of this, we are actively pursuing partnerships with oil field service providers to provide our customers better reservoir optimization solutions.

Now, I'll try to give you some perspective on what our priorities will be as we head into 2013. First, we view the reduction of the company's debt level through free cash flow generation as our overarching objective. As part of that focus, we're going to spend a lot less on our data library program development efforts and we'll reduce our CapEx spend to maintenance levels. We do not believe this reduction in PP&E CapEx spend will impact our ability to meet any expansion opportunities that we see. The operational efficiencies we are seeing with the conversion to our AUTOSEIS nodal recording system, together with the volume of recording channels we have at year end, provide us sufficient flexibility to meet our customers' needs.

We've also made several adjustments to the cost structure of the business. Over the last 4 months, we have reduced headcount by approximately 12%, resulting in a cost reduction of nearly $10 million on an annualized basis. The majority of that reduction has been in the SG&A.

We are also reducing the company's fixed cost structure through enhanced service provider relationships. As an example, since the beginning of the year, we have entered into a formalized relationship with a specialty drilling contractor to provide outsourced drilling -- outsourced drill services for programs requiring that capability. While cost structure changes and investment level adjustments are critical, we also need to address the revenue side of our business. The company's backlog has sequentially declined for the last 6 quarters. At the end of December, it was approximately $100 million. We have to arrest this decline and have started to do so. As we noted in the release, since the start of the year, we have added several programs to the company's backlog. On a pro forma basis, these additions would have increased the backlog above the third quarter's level.

Another of our key revenue priorities is to increase the mix of Proprietary Services. As part of scaling back library investments for North America, we expect to free up capacity to address the Proprietary Services market. Doing so should have a dual benefit. Assets that were previously using net cash on library programs should start generating cash by being redeployed to proprietary programs. Combined with the cash margin from data library late sales revenues, we believe there's a clear path for free cash flow generation. In addition to this rebalancing of our revenue stream, we will further our efforts to leverage existing assets like our library, develop new partnerships to drive revenue through certain of our niche businesses, broaden our focus on marine acquisition and take advantage of the opportunities we're seeing in international markets.

I've made several new appointments over the last few months to bring a more focused effort on these initiatives. In addition to managing the revenue mix change, we are also focused on the more basic elements of our business: Improving our ability to plan and assess risk during the bidding process; improve the project management; improve the execution in the field and in our data processing centers; better communication with our customers; and delivering products that exceed our customers' expectations. We believe these fundamental elements will translate into repeat business and ultimately, into more direct negotiating opportunities while acting as drivers of performance in the organization and providing a higher level of focus and service for our customers.

Finally, we must begin to leverage the significant investments we have made in our library, AUTOSEIS and other legacy assets to drive cash flow generation in our business. We are evaluating a range of alternatives in support of this effort. I look forward to updating you on our progress on these initiatives in the coming quarters. Now, I'll turn the call back over to Mathew.

Prakash Mathew Verghese

Thanks, Richard. Let me first comment on our fourth quarter results before turning to the year ahead. Our net loss of $0.76 a share for the quarter included a number of charges. The most significant of these was a $14.3 million noncash charge that is reflected in our tax expense that relates to foreign tax credits. In reviewing the FTCs, in combination with the company's NOL tax loss carryforwards, we concluded it would be appropriate to book the valuation allowance for our foreign tax credits. Included within SG&A is a bad debt provision of $3 million, as well as a charge of $1.7 million in costs associated with the shutdown of idle crew capacity.

We recorded revenues of $55.3 million for the fourth quarter of 2012, compared to $113.1 million for the same period ended in 2011. Revenues from Proprietary Services were $28.9 million. Revenues from Multi-client Services were $26.4 million, which included data library late sale revenues of $5.6 million.

During the fourth quarter, revenues were split evenly between U.S. and international markets. Our backlog realization rate for the fourth quarter fell short of forecast as program delays reduced data acquisition activities within both segments. The Q4 library late sale revenues of $5.6 million were short of estimates as anticipated contract closures extended beyond year end.

For the full year 2012, Global generated revenues of $339 million, operating income of $42.4 million and EBITDA, adjusted for Multi-client amortization of $70.6 million or 21%.

During 2012, our international operations represented 48% of our revenues. Revenues from Proprietary Services represented $183 million or 54% of the 2012 activities.

Let me now walk you through some of the numbers for our data library.

Global's aggregate net cash investment in its data library assets at the end of 2012 was $190 million. That amount is calculated by taking the cumulative cash investment in our library assets through December 31, 2012 of $573 million and deducting the cumulative customer cash pre-commitment revenue of $383 million through the same period. Global's data library assets generated late sale revenues of $41.6 million during 2012. Cumulative cash late sale revenues through December 31, 2012 are $109 million. The component figures for our data library activities are included in Table 3 of our earnings release.

Let me now switch gears and spend some time on the financial aspects of the points that Richard covered earlier.

The transition of Global's assets toward proprietary programs will occur over the next several quarters. During that period, we are expecting revenue volatility in our North American data acquisition revenues. Practically, that could mean revenues from data acquisition activities are sequentially down, which is consistent with our first quarter experience in prior years.

Our transition to a greater weighting of Proprietary Services will also have the direct effect of reducing our levels of Multi-client investment. Our average gross cash investment in data library assets over the past 3 years has been approximately $170 million per year. For 2013, we estimate gross library cash investment to be approximately $75 million.

Based on the remaining incremental cash requirement for the Multi-client programs in our backlog and the pricing structure for the nominal new program additions we expect to commence during 2013, Global does not expect to increase its net cash investment in library asset beyond year end 2012 levels.

2013 will also mark the year in which meaningfully higher levels of non-cash data library, backstop amortization charges may flow through to operating income. Backstop amortization charges are intended to ensure that our data library investments are amortized at a minimum on a 4-year straight-line basis. The actual amortization charge is booked at the time of recognizing the corresponding revenue if the amounts are higher than the minimum backstop amounts.

For 2013, the estimated noncash backstop amortization charges could be approximately $27 million, of which $7 million would flow through during the first half of the year. These charges will be reflected under operating expenses for our Multi-client segment. For 2014, the estimated minimum amortization expense required by our backstop amortization policy could be approximately $70 million.

To reiterate, these are noncash charges. Actual amortization expense for these assets could flow through in earlier periods if the corresponding late sale revenues for these assets occur prior to backstop periods.

Finally, with respect to our PP&E CapEx, our transition to nodal recording technologies should allow us to operate at maintenance levels of CapEx during 2013. As such, we estimate PP&E to be between $10 million to $15 million.

With that, we are happy to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jeff Tillery from Tudor, Pickering, Holt.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

The commentary around the shift towards proprietary focus in North America, what do you see -- can you just provide some color around what you see as the revenue opportunity in North America? Or is the business just inherently going to shift towards mostly international?

Richard C. White

I think we expect in 2013 revenues in North America to be relatively flat with what they were in 2012 with a significant increase in Proprietary versus Multi-client. And on the international side, we expect to see some growth in both Latin America and in Europe, Africa and Middle East.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And in the commentary in the press release around the bookings that have occurred on the Proprietary side being sufficient to take backlog back up above Q3 ending levels, is that just for the proprietary backlog alone or would that be for Global Geophysical in aggregate?

Prakash Mathew Verghese

That is Global in aggregate, but the majority of that, the overwhelming majority of that being Proprietary and International.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Sure. And that -- on the late sales, where the negotiations drug into Q1, can you give us a feel for magnitude and whether or not you feel like those will close in the first quarter?

Prakash Mathew Verghese

We expect so, Jeff. There were probably north of $10-ish million in late sale revenues that moved forward and we're optimistic of getting the ones that have not already closed, closed, plus the usual stuff that we see incrementally at the start of the new year where there are refreshed budgets.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Then, my last question is just around the balance sheet. So it looks like the revolver here in another couple of months will shrink. And it looks, I guess depending on what happens from the first quarter cash flow standpoint, it looks like that could consume some of the cash-on-hand. I guess, am I thinking about that the right way and is there any restrictions as to where some of the cash is geographically in terms of being able to be able to use that to reduce the revolver?

Prakash Mathew Verghese

In reverse order, the cash that we've got outside of the U.S. has largely been fungible and we've not had any issues nor anticipate any moving it around. With respect to the revolver, there is a $17.5 million tranche that is scheduled to expire at the end of April. We'll either amend it and get that commitment extended, or for whatever outstandings there may be under that, get that pared down.

Operator

Our next question comes from Joel Luton from Westlake Securities.

Joel D. Luton - Westlake Securities LLC, Research Division

Previously, you all had said that you expect to generate about $30 million to $40 million in cash this year. Do you still expect that after the weak fourth quarter? Any comments on that?

Prakash Mathew Verghese

Joe, I think that specific comment was on the expected magnitude of debt reduction that we're expecting during 2013. We still have that point of view. Ideally, we'd get a little bit north of that, but we still expect that to be the case.

Joel D. Luton - Westlake Securities LLC, Research Division

Okay, okay. And then transitioning into more Proprietary versus Multi-client library, what's the risk associated with that? Is there some timing issues with keeping the crews active when you're more in a proprietary market?

Richard C. White

I'll answer that. Joe, we would have preferred to have maybe 12 months to transition over this period, but we needed to make a decision very rapidly that we needed to move towards a Proprietary focus in North America and that decision was made in about the middle of fourth quarter last year. So the guys are scrambling, trying to find additional work. They're out visiting the customers and trying to shore up their -- the backlog on the Proprietary side.

Joel D. Luton - Westlake Securities LLC, Research Division

Okay. And then just one last question about the revenues for the fourth quarter. Could you give -- go into a little bit more depth in terms of why the revenues were so soft and why there were apparently some delays and stuff? Could you give us a little bit more detail on that?

Prakash Mathew Verghese

Happy to. Internationally, a couple of our programs were slow in getting started up and permit-driven primarily and just getting that -- getting 2 of the programs going on the U.S. side onshore, delays attributable to a handful of permits onshore were the culprits. And then Marine also, we had a late restart following the issues that we had and had noted in Q3 related to the hurricane. So a combination of factors across the board. As we said, execution on our end and we're working on that.

Joel D. Luton - Westlake Securities LLC, Research Division

And do you think going forward, that with these delays and stuff that, that should translate in a little bit better revenues for you in the next -- I know you, in your press release, you said you expect the second half of the year to be better. But going in the first and the second quarters, do you think maybe -- what should we expect there?

Richard C. White

I think you'll see some improvement on the revenue side. We have several large tenders, as Mathew referenced in the fourth quarter, that were late getting started that are kicking in, in certainly late first quarter, early second quarter. So I think you'll see an improvement in the -- you'll see an improvement in the first half over the first couple of quarters over the fourth quarter last year.

Prakash Mathew Verghese

I do want to reiterate, we're expecting there to be sequential decline in revenue in Q1 related to the data acquisition portion of our revenue streams. Not late sales, but the data acquisition portion. So I want to be conscious about that comment for Q1.

Joel D. Luton - Westlake Securities LLC, Research Division

Okay. And then when you say revenues, how about year-to-year -- year-over-year? Do you expect revenues to be down year-over-year not compared to the fourth quarter?

Prakash Mathew Verghese

Joe, I think that one of the open questions is some of the timing issues related to North America transition while we're certainly expecting the bookings to grow the overall backlog level, the start up. The dual issue of wrapping up our Multi-client commitments on existing programs and starting up Proprietary is going to create volatility in North America. And as Richard said, we're expecting that to be flat, but there could be some underlying volatility in that. I don't think we're looking at this year, which is clearly a transition year, as an area where there is going to be a lot of robust top line growth relative to 2012 and so we're thinking about it slightly differently. Our focus is really take the assets, scale back investments substantially from what we've been doing the last couple of years, generate free cash flow. And to reiterate Richard's point, there's a dual benefit of affecting the transition of taking crews that had been generating library data and transitioning them to Proprietary. That's a dual benefit issue on cash flow, which is what our focus is.

Operator

[Operator Instructions] Our next question comes from Collin Gerry from Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Quick question. Mathew, you went through the, sequentially, the revenue side and point taken on that, how should we think about margins from a sequential basis? In the context of a sequential decline in acquisition revenues?

Prakash Mathew Verghese

I think giving effect to cost structure changes on the Proprietary side, it's reasonable to assume EBITDA margins probably in the range of roughly 15% over the first half of the year with the opportunity for that to step up by 500 to 750 basis points over the second half of the year on Proprietary. On library, pre-commitments will be equivalent or slightly ahead of what our cash investment is going to be. And therefore, essentially, cash EBITDA for library should be equal to late sales.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. And then on your comment on the 15% in the first half of the year. Just for reference, could you give us what the comparable metric would have been for this past quarter or the second half of the year?

Prakash Mathew Verghese

Most recent completed quarter would have been negative.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Maybe for the full year of 2012.

Prakash Mathew Verghese

Yes. Yes, full year, generally, would have been about 20%.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. Okay, that's great. And then I'm just trying to put some context around the numbers there. On the -- on that side and given the shift that we're seeing or that you're pushing in to the Proprietary side, talk to us about the pricing dynamics that you're seeing on the Proprietary side. Has getting into that market at a more accelerated pace created some pricing issues or has it been more seamless?

Richard C. White

I think it's been seamless. We have to do a better job in terms of getting with our customers to let them know that we're in the Proprietary business again. So there's been a lot of sort of meeting with customers and making sure they understand that we're in the Proprietary business and we're not entirely focused on the Multi-client side. So I don't think pricing has been the issue. It's probably more of the perception in the industry that we were not willing or not available to do Proprietary work in the past and we're trying to change that perception with our customers.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Last one for me. You mentioned the cost reduction on the SG&A side. I'm just thinking about how the timing of that? It was $10 million on an annualized basis -- was the correct number?

Richard C. White

Yes.

Collin Gerry - Raymond James & Associates, Inc., Research Division

And so, should we see that hit immediately Q1? Or does that -- is that kind of an end of Q1 situation where maybe it has a full quarter's impact on Q2?

Prakash Mathew Verghese

It will be Q2 before you see full quarter impact.

Operator

[Operator Instructions] And our next question comes from Travis Bartlett from Simmons & Company.

Travis Z. Bartlett - Simmons & Company International, Research Division

Last quarter, you guys talked about the intention to begin selling AUTOSEIS to third parties. So first of all, have you begun selling AUTOSEIS to third parties? And then where do we stand today in terms of outlook for third party sales in 2013?

Richard C. White

We are still actively trying to sell and/or lease AUTOSEIS to third parties. As of today, we do not have any sales or leases that I can report. But we have a sales group now that's focused on that and we're getting a lot of customer meetings and a lot of opportunities presented to us. So I hope that in the next call, we'll be able to talk about that in a lot more detail and more positively.

Travis Z. Bartlett - Simmons & Company International, Research Division

Okay. And how impactful do you think this could be in overall 2013 results, I mean, should you start to get this going successfully?

Prakash Mathew Verghese

Travis, I think we probably need 1 quarter or 2 before we can give you some perspectives on kind of what the unit volume scenario for the year looks like. So give us a quarter. As you know, we've just gone through a set of management transitions related to our AUTOSEIS business unit. So we'll have more commentary, as Richard said, on the next call.

Travis Z. Bartlett - Simmons & Company International, Research Division

Sure. Okay. And then last one here, just looking across your seismic fleet today. Where does the fleet stand in terms of cable versus wireless systems? And then what percentage of the overall fleet is wireless today?

Richard C. White

We are 100% wireless today or nodal. We call it nodal rather than wireless. But we are 100%. All 9 of our land crews have the AUTOSEIS nodal technology on them and we are still actively trying to sell off our legacy cabled systems and we think we are actually ahead of the industry in that regard. I think the industry is going to go through a significant change from cabled systems to nodal systems in the coming months and year. And I think we're actually ahead of the industry in that regard.

Travis Z. Bartlett - Simmons & Company International, Research Division

Right. And can you remind us how many of the cabled systems are available for sale at this point?

Richard C. White

That we have available?

Travis Z. Bartlett - Simmons & Company International, Research Division

Yes.

Richard C. White

We have about 40,000 channels that are available.

Operator

And I'm showing no further questions at this time. I'd like to hand it back over to management for any closing remarks.

Prakash Mathew Verghese

Thank you, everybody, for joining us on our call. We look forward to giving you an update on our progress on these various initiatives with our next quarter's earnings release. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may all disconnect and have a wonderful day.

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