ION Geophysical Corporation (NYSE:IO)
Q3 2010 Earnings Call
November 04, 2010 10:00 pm ET
Jack Lascar - IR, DRG&E
Bob Peebler - CEO
Brian Hanson - EVP& CFO
James West - Barclays Capital
Paulo Loureiro - Morgan Stanley
Steven Gengaro - Jefferies & Company
Mark Gaskill - MKG Financial Group
Good day, ladies and gentlemen and thank you for standing by. Welcome to the ION Geophysical third quarter earnings conference call. During today’s presentation all participants will be in a listen-only mode. And following the presentation the conference will be open for questions and instructions will be given at that time. As a reminder today’s conference is being recorded today, Thursday, 4, November, 2010.
And now let me hand the conference over to Jack Lascar. Please go ahead sir.
Thank you Josh and good morning everyone. Welcome to the ION Geophysical Corporation's third quarter earnings conference call. We appreciate you joining us this morning. Your hosts today are Bob Peebler, Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer.
Before I turn the call over to management, I have a few items to cover. If you would like to be on our e-mail distribution list to receive future news releases, please call us at 713-529-6600 and let us know.
If you would like to listen to a replay of today's call, it is available via webcast by going to the investor relations section of the company's website at www.iongeo.com, or via a recorded instant replay until November 18. The information was provided in yesterday's earnings release.
I should also point out that we will be using some telephonic lines to the company for today’s call. They are accessible via the link on the home page of ION’s website at www.iongeo.com.
Information reported on this call speaks only as of today, November 4, 2010, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. Before we begin, let me remind you that certain statements made by management 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 management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company's actual results or performance to differ materially from any future results or performance, expressed or implied by the statements.
These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC, including the net annual report on Form 10-K for the year ended December 31, 2009, and its quarterly reports on Form 10-Q.
Furthermore, as we start this call, please refer to the statement 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 to Bob Peebler.
Thanks Jack and good morning. Third quarter versus first quarter since the financial collapse, we have had good overall financial performance driving positive earnings and highlighted by an exceptionally strong rebound in our multi-client business resulting in a 59 million third quarter compared to 8 million to the second quarter.
It’s also notable that our year-to-date earnings number is now in the black, which makes our goal of being profitable for the entire year including covering any losses from another Geophysical a realistic target if we finish the year as we expect.
Additional highlights for the quarter, include the completion of three new venture projects in the Artic, One Ocean-Bottom Cable Project and two towed streamer projects where our contracted acquisition partners used their state-of-the-art DigiSTREAMER, DigiBIRD and DigiFIN technologies, in addition to our proprietary technology that allows towing streamers below the ice.
We have also seen another strong data processing quarter with sufficient backlog to end with a record year. Our marine command and control software developed by the Concept Systems Group continues to see success in converting vessels to the Orca software platform, our Marine Equipment Group completed large shipment of source and position equipment including DigiFIN, DigiBIRD to BGP for the 12-steamer vessel which will be recognized in the fourth quarter.
The Streamers for this vessel are scheduled to be shipped in the fourth quarter with revenues recognized in 2011. The only real soft spot in the quarter has been the continued softness in our land equipment businesses which are represented by our INOVA Geophysical joint venture and our Sensor geophone business. One highlight we are seeing increased velocity proposals in our Sensor geophone business, which is usually a good proxy for the direction of the land business.
Our macro view of the market includes an overarching belief, that we will see a stronger finish in year end spending that we saw last year, which mainly accrues our data library business, leading to accelerated growth in all our businesses in 2011.
We do have some concerns on the impact of the Gulf of Mexico oil spill and 2011, mainly related to our data processing business, but we also have opportunities developing in other parts of the world such as Mexico and its our belief that we can likely offset any potential slowdown in the Gulf of Mexico with other business that is in our current pipeline of opportunities.
We most recently attended the Society of Exploration Geophysics, SEG endeavor and I came away with the impression that the industry was significantly more optimistic than a year ago, both from the tone of those who presented and also by the number of people and attendants. There was also an emphasis on the importance of geophysics and the rapidly emerging shale plays which many of the technical presentations and supplier displays emphasizing new technology to help improve the productivity of these plays. With the low gas prices significant improvements and productivity whether from drilling fewer wells or for more accurately completing them is needed to make many of the shale plays commercially viable. At ION, we believe that we are at the beginning of a major technology cycle related to the shale plays that includes geophysics, both surface and sub surface that embodies the integration of both passive and active seismic measurements and reservoir completion engineering.
We planed to be a major player in this important growing market around the world and have R&D focused on the needed technology. We already have leadership in some of the critical side in processing technology areas led by our GXT member group and we also have some experience we are multi-client group which we planned to rapidly expand over the next several months. We also believe FireFly will be significantly involved in shooting new seismic surveys and areas such as the Marcellus in the Northeast where logistics are difficult and were full ways it can play a significant role.
In summary we are bullish on a relevant geophysics to the shale plays and believe ION will play an important role in helping solve the share imaging challenges for our customers.
I would also like to take this opportunity to discuss two new additions to our board of directors. We've determined that its important to have a stronger mix of the industry professionals on our board of directors and we will be announcing the details of these new board members in the press release to be issued later today.
In addition to our desired we had more senior industry experience, we are also planning to reduce the ION board size to decrease our corporate cost and better master our needs, after the formation of the geophysical which has the separate board for this significant part of our future business.
Reductions will come to a previously planed retirements and resignations later in the year and into 2011.
With the I will turn the call over to Brian.
Thank you Bob. Good morning everyone. I would like to first start assuring a few the financial highlights from the third quarter. Third quarter revenues were up $22 million with year-to-date revenues of $286 million compared to $299 million for the prior period. As expected multi-client revenues improved from $8 million in the second quarter to $59 million in the third quarter primarily due to the new venture activity related throughout our projects.
In addition I am pleased to report our data processing group had another record quarter with revenues of $28 million. For the third quarter, we delivered $0.08 per diluted share on top of the year to date basis delivering $0.01 per diluted share after excluding our first quarter special charges and generated $52 million of EBITDA for the quarter improving year-to-date EBITDA to $84 million.
Finally, we invested $38 million in pre-funded multi-client projects during the third quarter, while remaining at a positive cash position and with no withstanding dollars on our line of credit.
With that overview, I will now discuss our trailing 12 month revenues followed by an in depth discussion of each of our segments. Excluding the impact of our legacy land business, revenues for the trailing 12 months of 2010 decreased $20 million compared with the same period of 2009. System segment revenues were down 31% compared to the prior period primarily due to the continued softness in geophone strength and towed stream of products there. This decrease was partially offset by a 15% increase in software segment revenues driven by converting vessels to the Orca software platform and a 12% increase in solution revenues primarily due to continued demand for our data processing services as well as significant interest in our new venture programs and library.
Our solution segment showed significant improvement on year-to-date basis with increases in both data processing and data library revenues. Our data processing division delivered a record performance in the third quarter which contributed to its 37% increase in revenues for the three quarters of 2010 as compared to the same period prior year. Data library revenues increased 85% year-to-date with sales of data libraries coming from a variety of geographic regions including East Africa, Durham Branch, North America and Northeast Greenland. While new venture revenues increase by only 3% to year-to-date basis there was significant new venture activity in the third quarter of 2010 with revenues increasing 27 million or 115% over the third quarter of 2009, this increase was primarily due to the expansion of our ArcticSPAN program with several key surveys being shot during the third quarter.
As we expected our solutions backlog decreased by 35% down to a more normalized level of 77 million for the third quarter of 2010 compared to a backlog of 118 million for the second quarter. As we mentioned on our last call, the prior quarter’s backlog was a mutually high through depending the eventual work completed in the third quarter.
Specific for the Gulf of Mexico, current backlog for the data processing business is down approximately 20% that’s compared to year end 2009 and bid activity in the third quarter dropped in half. Fortunately, we have significant global pipeline to potentially offset any stained reduction of activity ion the Gulf. We are currently expecting full year CapEx related to our multiplied business to decrease by approximately 15 million from the estimate we gave in the second quarter to arrange of 75 million to 85 million due to one of our new venture project in the Arctic which was not completed during the 2010 shooting season as originally anticipated.
The software segment continues to show consistent growth as year-to-date revenues on accounts darling basis increased 14% compared to the prior period or revenues on the US seller basis increased 15% for the same comparative period. The software segment growth continues to be driven by the conversion of vessels to the ORCA software platform, today we have converted 44 of the estimated 125 vessels in the seismic fleet which represents approximately 35% of total vessels with two of these vessels being converted during this last quarter. As noted in our previous quarters call, initial acceptance with the ORCA software platform was primarily seen in the high and free vessel market although we are beginning to experience success and penetrating down into the mid to low 3-D and 2-D vessel segments.
While the impact of foreign exchange rates was minimal on year-to-date basis, we experienced a non-cash foreign exchange loss of approximately 3.5 million associated with inter company balances held by our United Kingdom operations. However these loses were offset by third quarter benefit of 3.9 million related to US tax refund.
Now lets look at our system segment with a comparison of revenues for year-to-date 2010 versus year-to-date 2009. As you can see system segment revenues are down 24% from 95 million for the nine months ended September 30, 2009, compared to 72 million for the same period of 2010. This decrease was primarily due to continued softness in our geophone streamer and towed streamer product sales.
In addition, our OBC business continues to be very soft.
On a positive note, we have successfully completed the shipment of a large order of marine source and positioning equipment from BGP’s new 12 streamer vessel. Into the strong book of marine business for the fourth quarter, we would expect to close the gap on this 23 million third quarter short fall in the systems segment versus prior year. By the end of the year by as much as 50%. Although we will recognize the revenue for the source and positioning equipment in the fourth quarter, the revenue associated with the 12 streamer sold to BGP will not be recognized until 2011.
This next slide is marketative that is commonly requested of us as investors try to quantify the size of the marine market place. It essentially is vessel count segment by size, and the total kilometers the streamers operating in the market today. We find this data especially streamer line and the valuable tool to use as we forecast our business.
As you can see vessel count increased from 83 vessels in 2005 to a 128 vessels in 2010 with the strongest growth occurring in high resolution 3D vessel segment which shows 10 plus streamers. Streamer lining which is defined as aggregate kilometers of streamers measured from the vessel connectors to the end of the streamer almost doubled over the same period and increased approximately 30% in the last year alone.
As new vessels enter the market and existing vessels require replacements and spare parts we expect to see increased capital spending for our customers outfit and upgrading the vessels fleets with our latest streamer products including Digi 10 MGT streamer. And as the demand for complex 3D and wide as the surveys increase we believe our investment numbering technologies will help position us to serve the growing high end 3D vessel segment.
Now let us move to the results of operations to review of our balance sheet put it is cash flow. The asset side of our balance sheet illustrates our asset like strategy with the trust of our investment and working capital and all company funded multi-client projects which are resulted in the data library of the net book value of a 139 million.
At the end of the third quarter our balance sheet was much improved from year in 2009 with greatly reduced leverage and dept capitalization ratio of 0.2. We had 116 million of liquidity comprise of 16 million of cash and a 100 million of un-drawn on our revolving credit facility.
The primary component of our long term debt is 100 million of outstanding (inaudible) also a revolver and a thermal and have long term maturities at March 2015. Taken now to cash flow for the nine months ended September 30, 2010 operating cash flows including cash flows from working capital increased 9% compared to the prior period, while we continued to make significant investments in our pre-funded multi-client data libraries we are able to maintain a positive cash position and we have no outstanding balance on our revolving credit facility.
Now let me give you an update on the progress of our joint venture and on the Geophysical. Our land business continues to struggle but we believe this business is slowly improving and will continue to improve during 2011. For the three months ended September 30, 2010 we have recorded a loss of approximately 8 million representing a 49% share of INOVA Geophysical's losses with our second quarter period.
We estimate third quarter revenues to be in the range of approximately 27 million to 29 million with an operating loss of approximately 9 million to 11 million at a net loss of approximately 10 million to 12 million. As in our third quarter filings we would expect to book 49% of this estimated net loss in our fourth quarter filings. Similar to last quarter’s estimates these are not final, audited numbers however we feel that providing these estimates help include transparency into our impact for joint venture could have on ION’s results of operations in the fourth quarter.
Finally, I’d like you to visit our investor education center which can be found on ION’s website at www.iongeo.com. The investor education center or IEC has another step in our efforts provide increased visibility into our business. At the IEC you will find presentations developed, provide our investors and analysts with an overview of ION including our key technologies and services.
Each presentation runs approximately 10 to 15 minutes and contains a video message as well as links to additional information. We hope you will find the IEC a valuable resource as you seek to gain a deeper understanding of our business.
With that we will open up the call for questions.
Thank you, sir. (Operator Instructions). Our first question comes from the line of James West with Barclays Capital. Please go ahead.
James West - Barclays Capital
Bob, when you talk with your major oil company customers, so in your solutions business when you're actually touching the EMPs and the oil companies and they talk about CapEx plans for 2011, what's your sense of the magnitude of the increase in exploration type spending, and do you think that exploration will outperform underlying growth and CapEx?
I think the question almost has to be answered in two parts one is sort of your international part and then the second is the North America. On the North America side then you ask me what are you going to categorize is exploration. For example, do you categorize shale play in some of the new areas as exploration or is that more of a development in my mind in many of the areas that gone into in shale play its still almost in the exploration category and that there is still a lot of risk involved in the capital deployed, but you can argue that its exploration, late exploration because the structures are reasonably defined. Second area our sense is the obviously as you know the natural gas prices are down significantly yet people still have significant investments and whether they are drilling hole for production or they are going into newly acquired area so I think in that area we’ll continue our feeling is that stand will continue to increase in some targeted areas whether it is liquid areas or places that are more productive like the Marcellus. We see a lot of interest and activity and willingness to underwrite in many of those areas.
Internationally what we are seeing just pretty much across the board is increased as an exploration both in places like Russia which was really down and out a year or two ago, middle east we are seeing a lot of very large projects that will fall into next year and bid out, particularly on land as well we are seeing a lot of the velocities and increases in bidding and talk of large projects. Places like China which had slowed way down we are seeing some increase, so what appears to be sustainable higher oil prices are going to drive exploration up so it sort of that over arching feeling that makes us feel that all the 11 [comparative 10s] is going to continue to strengthen.
James West - Barclays Capital
Okay. And then on your new venture programs which have been highly successful offshore, I believe you mentioned doing some more work on land and using the FireFly to do that. Can you maybe comment on how you think about the mix between that business going forward between land and offshore?
Yeah, we've been quite successful offshore because we've carefully picked areas that we feel like we have a technical advantage, and our model which is mainly a 100% underwritten, really lends itself to those kinds of projects where we work very closely with the oil companies.
We've been cautious to move on land. We have not wanted to get into the more commodity end of just putting together shoots on land, so we've been looking for sort of the sweet spot for us to enter and we do believe we now have enough understanding of the shale play, and we think that there is enough opportunity or technology, both processing and converted waves. I think we've been working on for a while that it’s a good time for us to move in and it’s a great model for multi-client business. So, and then FireFly, if you look at areas like the Marcellus Shale many of these areas are quite challenging logistics. So you put all that together there is a real sweet spot for us now to get involved and so we’d like to have a reasonable portfolio on land because this helps balance our portfolio. And so I can’t tell you what percent because we are also going to do the projects that fit our model, but I think there is a lot of runway for us now to put together some significant programs on land. I would be personal, I would be quite happy if we were someday sort of 50-50.
James West - Barclays Capital
And you had the same discipline on land as we do offshore, where I think offshore you are 100% pre-funded same type by the on land?
Yes. I think it's pretty much the same. The one difference in land compared to offshore is that you typically had a lot more players and a lot more opportunities to underwrite and you often have many in different stages, so at the exact moment you kick off may be a little bit different than offshore, but our goal is still pretty much at a portfolio to have it uncovered.
Thank you. (Operator Instructions). And our next question comes from the line of Paulo Loureiro with Morgan Stanley. Please go ahead.
Paulo Loureiro - Morgan Stanley
It was a very impressive. This $59 million in multi-client sales in the quarter its very impressive. I know it's very choppy. It's very hard to that you quantify and for you to give any guidance, but first who are your clients in those arctic ventures? Are we talking about Big Oil, and do you see this level of interest sustained going forward?
First the clients that you’d imagine are typically the big player, so when you are up in the arctic you have to look at the guys that are got the balance sheets in the long term stay in power to play there, kind of production is quite long, so you have the usual cast of characters, the ExxonMobils, the BPs, the [Totals], the large exploration companies. I think it's driven that you just step back and look at the arctic today, the current estimates at 20 - 25% of the remaining reserves could very well be in the arctic and obviously if you look at the shore line, it goes all the way across Canada, Greenland, all way up to Russia and of course the US so there is and if you look at the data that’s available there, its pretty limited in data sets, a lot of that is because of the difficulty of the shooting, its difficult, it’s a very short shooting season and so what we have done again to really support our strategy looking at the portfolio of ION technology and where we can differentiate ourselves, so in this case it really took the whole of ION to build an operating debt actually gives us an advantage and that includes our marine group, our processing group our software group, we all came together, and how we actually expand the shooting seasons substantially and also how do we improve the quality of the data we are not going to move around and have to deal with the ice as much as you normally do if you are telling the steamer on the surface. This is our second year into it, but first year was more of a experimental year, year ago we had quite a successful shoot and then we just build off that success. So I think we really managed to identify ourselves through our practice into our success, have been the leader in the Arctic and there is a lot of data to be shot at there overtime.
Paulo Loureiro - Morgan Stanley
Do you have any significant competitors there? Because, I mean, you have been more vocal than any of the other or the companies out there. Do you see a lot of competitors trying also to do the same?
They tend to turn back, we have had a few attempts but the problem they have is they don’t have our capability and so we have gone further North than anyone has gone, we have had straighter lines than anyone has been able to do. And so there is people up there and they have been in some of the lower parts, but there is no one has been able to compete with us at the scale that we are doing now.
Paulo Loureiro - Morgan Stanley
So I guess you have this first mover advantage there.
Paulo Loureiro - Morgan Stanley
And sustained into next year. And another question totally unrelated to this one. It's about INOVA, and so you had $8 million in negative contribution this quarter, with just one quarter lag effect. How shall we think about the contribution from a JV to your income statement into 2011? I mean, I would expect INOVA to be accretive. Is it, am I wrong here?
No INOVA as we have pointed out when we did the venture, one is that we saw this as a, back last March when we closed the time that 2010 was going to be the year of just getting the venture up and running to get clear on R&D programs with a lot of feedback from BGP. Much of the activity that we have not been able to participate in historically over the last few years has been, some of the hottest activity has been, and that's in a place like the Middle East. And that’s because we just not been in that market enough we didn’t get the feedback, nor the presence nor that we have a large player to take us into that market. So one of the, one thing is quite important to us is we are working on technology that will like to be still tested second half of next year with BGP cruise that we think will make us quite a viable player in that part of the world and obviously we have a partner that can take us in there which is really been our handicap.
So I think that in our own minds the real strength in the market will sort of come in phases where, we are going to see I think next year just the base business for our (inaudible) product line Scorpion product line, where we have already had some presence should start coming back some next year, if the activity increases like we thought. And then followed by that will be I think penetration into markets we have not had just because we have new offering that’s been basically help them bake with our partner.
So we haven’t given any people real detail on next year. I think notionally though we would expect it to be better than this year and then roll it into the next year, it should really be where we have done all the cylinders running with the new technology and the other things will work on. But we are still feel very good about the venture. We got a partner that we never had them in past which means we have very large wire.
By the way their business has not been as strong like everyone in land acquisition, so I suspect their capital spend in 2010, despite in the lowest they’ve had since they started up. And an up-come on the land side. And agent focus someone one the marine side so I think just our partners normal spend should also increase. We actually have strengthened some areas for example; we are starting to see some velocity in the buy business and which was completely dead last year and the first part of this year. So the market is starting to move. It’s a little hard for us to predict exactly what rate or exactly what is going to happen. But I think the trend is clear to us.
Paulo Loureiro - Morgan Stanley
But it sounds like a 2012 story the way you describe it.
I would say, there is a step between now and 2012. Well I think we will see improvement. So whatever it’s doing today it should be better next year and I think ‘12 is where we will see the full benefit of the venture.
Thank you. (Operator Instructions). Our next question comes from the line of Steven Gengaro with Jefferies. Please go ahead.
Steven Gengaro - Jefferies & Company
When we think about the INOVA side, I know you talked a little bit about this but, can you share with us a little bit more on sort of what percentage of the business is BGP buying? And I know they also had that nice marine order recently, and just sort of maybe talk a little bit about your relationship there and how you think that plays out.
When you look at the results of INOVA that we gave some sort of range guidance on for the third quarter that’s going to be in our fourth quarter, that was very minimum BGP volume in that number. So as Bob said earlier BGP’s CapEx has been pretty low this year, so the first couple of quarters of INOVA's existence didn't really reflect a lot BGP transaction, quite frankly they’ve been spending more time as Bob said scoping out R&D plans and getting the teams up and running and sort of establishing infrastructure so from a historical perspective I can answer the question and its not a lot of (inaudible)
I think on the total, the think I can't tell you is that the likelihood of us getting all of the BGP marine business before the joint venture would have been nearly zero and so it really allowed us to end up with a much bigger total having the total offering and that's clearly was helped by the relationship now, at same time they have a business to run and they are not going to buy product its not that they don’t believe is viable in the market, but that being said they clearly have a preference for a product line if the product line meets their operational needs.
Steven Gengaro - Jefferies & Company
That’s helpful. And then when you think about, I just had a question on the Orca side. You give a slide, but the software, when you say software, that's the sale and then the service is sort of the ongoing sort of annuity from that sale? Is that the best way to think about it?
No, actually its not, no the services revenue is associated with people that we have on those vessels we are doing that out on a daily rate basis, that actually supporting the surveys. The software when you went into the concept business that you'd find is the legacy software like the Spectra products and the Gator products, that we sold up to Orca, we are sold on a one time sale basis and then there was a maintenance charge annually to support those software’s. We flipped that revenue model when we launched Orca, and Orca now, it’s a straight subscription model meaning our customers are paying us on a monthly or quarterly basis, on an ongoing recurring revenue stream for that product. So as we convert from the Orca platforms or from the SPECTRA platform to the Orca platform in that software revenue segment, we are moving from a one-time sale to more of the recurring revenue base.
Thank you. And our next question comes from the line of Mark Gaskill with MKG Financial Group. Please go ahead.
Mark Gaskill - MKG Financial Group
And I just have a couple of quick questions on the FireFly. We understand, I mean, there has been a lot of delays and a lot of slowness on the land drilling side, but as we go forward doesn't the fact that the cableless system obviously saves a lot of money. Do you anticipate a progression moving towards replacement of equipment just for that reason alone to help bring down the cost of land drilling? On exploration, but the other question is, is that it used to be when FireFly was being developed I think there was a competition out there that was running couple years behind IO or ION on developing a cableless system also. Are you seeing the potential of other competition coming on, on the cableless system as well, and is that pretty much something we should expect going forward? Thank you.
Yes, let me answer the competitions first and then go back to your original question. Now the competition side, what's happened is the market is segmenting now into different applications. So for example, there is one market where people are using their cable systems that are combine it with what's called nodes which are just basically recording devices without any intelligence if you want to take that them you put them out they typically have some kind of GPS for timing and they sit there and they just sit there and record the data. You have no way of monitoring, you don’t know anything about it until you pick it up and download it.
There is some application for that, its often keeping to put these things out and so what we are seeing as people might have mainly a cable job which is a little patch for example that they can't access very easily and they put those out or sometimes if you go to higher density shooting out put those out within the cable themselves just to increase, so we have the cable system for quality control and sort of back up and then recording. We think there is a market for that particularly in some of your very broad exploration areas and you know its one that’s not that hard to do. So I think that we can if no one wants to get in there pretty quickly just see that how that market goes but at the same time we don’t think that really replaces your full high density shooting that we see going on and then it replaces or if you are in logistically been at core areas then been able to know who are they, the centers are and we have record them and accurately know what's going on with the centers is important.
So, and in that world we still think we have quite an advantage just the experience with the INOVA with the FireFly has given us that advantage, what’s been hard is it we come to this really down about the time we were bringing the technology in the market, the whole market went into the tank, and so the target people that we have been thinking about buying capital is not working so you probably know we went into the rental model, well we are coming against actually the interest and I think the activity in the rental model is increasing to the point that some of the people renting quickly it concludes they want to purchase. What's happened is that the current system, even the rental systems our guys have been obviously given a lot of feedback and they are working on sort of round two, of FireFly which will drive cost out we’ll have lower power consumption.
And so one of the challenges we have is to transition into that for, future sales but we are going to have to crank up and start manufacturing again, does that to pick or we are going to manufacture so it’s a little bit that going on could we build more of the current system for the rental and where we going to sell so I think we are going to a little bit of a product transition with the oil positives, it was all being driven by feedback from our own experience. No question our mines is cost to capital the systems come down, reliability continues to increase, battery power, energy drivers continues to come down. There is a tipping point out there and it doesn’t make sense in many places to use cables if you have a competitive cable system. So, and I think that we still have a lead I don’t really see anyone encroaching on the full bone system, actually you have to notes which is a different market and then you have the full cable system which FireFly is still legal.
Thank you. And management I have no further questions in the queue. I'll hand it back for any further remarks.
We like to thank you for taking the time to attend the conference call and we look forward to talking to you during our fourth quarter call in the New Year. Thank you.
Ladies and gentlemen, that concludes the ION Geophysical third quarter earnings conference call. Thank you for your participation. You may now disconnect.
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