Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

ION Geophysical Corporation (NYSE:IO)

Q1 2012 Earnings Conference Call

May 3, 2012 11:00 ET

Executives

Karen Abercrombie – Director

Brian Hanson – President and Chief Executive Officer

Greg Heinlein – Senior Vice President and Chief Financial Officer

Analysts

James West – Barclays

George Venturatos – Johnson Rice & Company

Novid Rassouli – Sidoti & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to ION Geophysical First Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, Thursday, May 3, 2012.

I would now like to turn the conference over to Ms. Karen Abercrombie, Director of Corporate Communications for ION. Please go ahead ma'am.

Karen Abercrombie – Director

Thank you, (Camille). Good morning and welcome to ION Geophysical Corporation’s first quarter earnings conference call. We appreciate you joining us today.

As indicated on slide two, 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 management, I have a few items to cover. 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.iongo.com or via a recorded instant replay until March 12, 2012. The information was provided in yesterday's earnings release. I should also point out that we will be using some PowerPoint slides to accompany today's call. They are accessible via a link on the Investor Relations page of ION's website.

Moving on to slide three, information reported on this call speaks only as of today, May 3, 2012, 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 expectation can 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 those statements. These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filing with the SEC, including in its Annual Report on Form 10-K and in 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 those 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. I am pleased to report we are off to a very solid start to the year. Yesterday, we reported first quarter revenues of $112 million, up 23% from the first quarter of 2011 and diluted EPS of $0.05 and net income of $8 million. This represents one of our strongest first quarters in the ION’s history in terms of revenue, operating income, and net income. From our viewpoint, oil companies are increasing exploration spending as expected and we are seeing the results of this being reflected with significant increases in marine activity and widespread interest in our new venture projects around the world.

We saw growth in our all of our business, especially in the marine equipment, data processing, and multi-client. On our two most recent investor calls, we shared our business expectations for 2012. Among them, we said we expect year-over-year growth across all of our businesses and as we've broadened our multi-client portfolio to include land programs, we expect it to more evenly distribute our financial results throughout the year with approximately 25% of our earnings full year in the first half. Our first quarter results demonstrate solid progress against these goals.

In the marine seismic market, we are seeing continued growth in both the towed streamer and seabed segments. On the towed streamer side, there is a tightening of capacity with contractor tender activity, vessel utilization, and backlog picking up, especially in the high-end 3D and 4D segments. Marine contractors have been operating on tight CapEx budgets, but as day rates continued to improve we would expect to see an increase in repair and replacement business towards the latter part of 2012.

Given no new vessel introductions in Q2 this year and the expected pickup in purchase activity in the back half, we would expect the second quarter to be the softest quarter of the year for our marine business with the fourth quarter being the strongest. We are also seeing a rebound in the seabed market. Tender activity is strong with over $300 million of work awarded in the first quarter, driving our backlog to the highest level team in several years.

Fleet utilization of high with most operators booked through 2012 season. Additional capacity in the form of expanded crews has been brought on to meet the increased demand. This bodes well for our OBC business as we enjoyed spare and replacement business in the first quarter as one customer began shooting a large project in Brazil.

In addition, we entered into a large multi year transaction with another customer to re-equip their crew for work in the North Sea and Middle East for which we expect to start recognizing revenue later in the year. All indicators are pointing up for the OBC market and we continue to be optimistic that we will be going additional one or large ticket sales for the end of the year as we launch our next generation OBC system this year.

Internationally, data processing tender activity is extremely robust particularly in Europe, Middle East and Africa. Tender activity is also healthy for multi-component, full-wave processing in area which we have leadership position. In addition, we are seeing Gulf of Mexico activity continue to increase. In the first quarter, we delivered another sequential improvement in the data processing revenues. We're starting business to pre-Macondo levels to the much more diversified international mix of customers and worldwide geographical footprint as compared to be in Gulf of Mexico-centric.

We are running back at full capacity with all seats in the plane filled driving significantly improved operating income levels as compared to the same quarter last year. In short, our strategy last year to hold on to our processing capacity and a diversified more international data. The business (Technical Difficulty) we are investing again to meet rising demand. Based on our current backlog, we expect to continue solid growth in this business throughout the year. On the multi-client front, we are seeing a rise in global exploration activities heating up offshore of the East and West Coast of Africa, the Arctic and South America.

We are well-positioned with portfolio of ResSCANS programs with upcoming 2012 and 2013 lease bonds to anticipate for Australia, Brazil, Greenland, and South Africa. Regards to Greenland in particular, we are seeing strong demand for current offerings and our launch in new 3D gravity gradiometry projects to compliments nearly 18,000 kilometers of Greenland data that we have acquired over the last three years. We should be ready for customers in advance of the upcoming lease around.

As we previously mentioned in the first quarter, we have commenced the large 2D land survey in Poland and are currently issuing the first phase multiphase program. Once again, we are working on putting together another Arctic program for 2012 shooting season utilizing ION's unique talents and patent approach for shooting seismic under the ice.

On the domestic land front, last year we introduced our ResSCAN programs to meet the demand of major oil companies who have entered the shale plays and are using seismic including reservoir characterization to optimize the drilling project.

This year, we have changed our ResSCAN focused from purely gas shale plays to liquid and mix plays. We currently have four ResSCAN programs in fastest in North America with the ResSCAN portfolio diversified in gas, liquid and mix shale plays in the Marcellus and other regions. With our broad global multi-client portfolio and our strong backlog of underwritten projects, we have a little near-term exposure to any softness in the North American gas shale market.

As Greg will explain further, INOVA started strong in 2012, with another profitable quarter and we will now deliver two sequential profitable quarters. This financial performance in addition to the market perception of the new product lines including G3i and Hawk, positions to them very well for break even year of better to 2012. During the first quarter, INOVA sold (Technical Difficulty) to BGP for deployment in the Middle East and we are excited about the prospect of the using G3i in that market as well.

We are encouraged about the progress that INOVA is making in the marketplace. The G3i cable system offers new analog digital chipset capable of delivering exceptional and geophysical performance. It has the high channel count of the 100,000 channels for baseline with the lowest measured power per channel in the industry, which reduced that the number of batteries on the crew and its packaged in the toughest housing in the industry.

It's built to last. We expect this product itself very well as demonstrated in Q1. Needless to say, we are very pleased with INOVA's momentum. In short, the industry is strong our data processing business is back. INOVA is having another great quarter making a two in a row with the expansion of a multi-client projects to land as well as marine. We have the potential for record year in solution business. With all that, we are excited about 2012.

I'll now turn the call over to Greg who will cover our Q1 financials in detail.

Greg Heinlein – Senior Vice President and Chief Financial Officer

Thank you, Brian. Good morning everyone. Overall, our first quarter revenues were up 23% year-over-year. Our system segment revenue of 37% improved 53% over the prior year period. Our solutions segment delivered first quarter revenues of $66 million, up 14% from the same period a year ago. And our software segment sales increased to $9 million, up 4% in local currency from first quarter 2011.

With that overview, let's take a closer look at our Q1 performance on slide 10. Our system segment revenues increase was due to improved ocean bottom products and continued healthy demand for our other marine product as well as improved sales of our land sensor equipment. In the OBC market we are working with key customers to win tender activity and to expand their OBC footprints.

As Brian mentioned, we facilitated a sales arrangement with a company to begin work with several major acquisitions over the next several years. We will recognize revenue on this arrangement over the next three years. Our systems segment is ramping up R&D spend as we invest in the next generation seabed and towed streamer technologies.

Turning to slide 11, our solution segment revenue increase was attributable to improve data processing revenues driven by our international expansion as well as strengthening in the Gulf of Mexico. After several quarters of sequential improvement, our data processing business is back and strong. Additionally, multi-client revenues increased 4% and several new venture projects in the North American shale, the Arctic, offshore Africa, and Brazil continued to progress.

Our data library revenues were down year-over-year, primarily as a result of one large sale of northeast Greenland data to a consortium in Japan in the same period last year. Typically the first quarter is a very soft quarter for data leverage sales, as customers have heightened levels of purchase activity at the end of the fourth quarter as they spend excess budgets.

Our new venture revenue was quite robust up to 29% from last year as we smooth out the complexion of this business shooting land projects through the winter months. Our solutions backlog ended the quarter at $129 million, up 22% from the same quarter last year. Backlog levels for our solutions business provide an indication of the strength of our sales pipeline and will positively impact our solutions revenues for the remainder of 2012. We know there is a lag one to two quarters from the time our backlog gets booked when we start to recognize revenues. We are clearly seeing that again in 2012.

Moving to the next slide, software segment first quarter revenues increased 4% in local currency and 2% in U.S. dollars compared to first quarter of 2011, a steady subscription sales of Orca and Gator software continue to demonstrate consistent demand for concept systems, demand, and control software platforms. The number of Orca installations declined slightly due to one vessel being retired and one vessel converted from our 3D Orca system to our 3D Spectra.

Orca retains a strong competitive advantage in the market and we expect more conversions to Orca as the marine market continues to improve. As new vessels are – new 3D vessels are added and as additional vessels convert from Spectra over time. Our software segment is a great business for us and a very good free cash flow.

Turning to slide 13, INOVA's first quarter revenues have been approximately 70% over the prior year period with excellent sales of the new G3i patents, vibrator sales and the first unit (Technical Difficulty) units. INOVA estimates first quarter revenues to be in the range of approximately $0.53 to $0.57 with operating income approximately $750 million. With the positive momentum in the fourth quarter and the recent launches of these clients including lower cost (Technical Difficulty) system, we are confident in INOVA's ability to breakeven or better in 2012.

Similar to last quarter, we were at 49% of a total estimates in the first-quarter of net income in our second-quarter results. INOVA's first-quarter numbers are estimates, which we believe offers some visibility into the impact we expect the joint venture to have on our financial results. However, these are not final audited numbers. Slide 14, we generated strong cash flow again this quarter further building our cash balance. Ultimately, this is a sign of a healthy business especially with investments in key client libraries half of the same period last year.

Moving on to the balance sheet on slide 15, the asset side of our balance still demonstrate asset-like strategy with our most significant investments in working capital and oil company funded multi-client projects resulting in the data library (Technical Difficulty) of $177 million.

Total cash on hand was approximately $87 million, which was $80 million less than our total debt outstanding balance of $105 million. End of the first quarter, we had $137 million of available liquidity comprised of $87 million of cash and $100 million of undrawn credits on our revolving credit facility.

Now, turning to our last slide. To wrap up, we enjoyed a strong start for 2012 with growth in all businesses, continued to expect solid year-over-year growth, higher recovery in our (whole) data processing business. Expanding land and marine offerings in GeoVentures, a very robust OBC market, and clear improvements in the land equipment market supported by INOVA’s exciting new product offerings.

We expect our 2012 investment in multi-client libraries in the upper end of the range of $130 million to $150 million. The acquisition activities spread more evenly throughout the year. The seabed and towed streamer markets are steadily improving with a number of large projects awarded in the first quarter. We continue to anticipate selling in a very large system this year either OBC or towed streamer, most likely one of our next generation systems. Based on our market outlook and robust pipeline of work activity, we are confidently investing in each of our businesses and we are being positioned to achieve year-over-year quarterly improvements for the remainder of 2012.

Finally, we'd like to thank our customers for their continued faith in us and our employees who give us competitive advantage everyday.

With that, we’ll turn it back to the operator for question-and-answer session.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of James West with Barclays. Please go ahead.

James West – Barclays

Hey, good morning, Brian. Good morning, Greg.

Brian Hanson

Hi, James.

Greg Heinlein

Hi James.

James West – Barclays

With your processing business now kind of back and running almost at full capacity or at full capacity at this point, what are your thoughts on adding additional capacity to that business and how much do you think you could add over the course of 2012?

Brian Hanson

Hey James, we’re back – we’re back where we were a couple of years ago. And as you know from the period of 2006 to 2010, the challenge in growing that business has really been about improving the data processing talent. And so we've really been gated by that over the years and we’re back aggressively recruiting again this year. So, I would expect that you would see that we would grow at levels that we are comparable to that timeframe for most likely through 2010?

James West – Barclays

Okay, that’s very helpful. And then on the ocean bottom cable side of the business, last quarter you were optimistic about this quarter, it sounds like you guys are even more optimistic and given the level of demand for ocean bottom crews out there in the marketplace that it all makes sense. Is the gaining item on you just teeing up a sale here your – the launch of your next generation system?

Brian Hanson

Yeah, that’s right. Where we are at right now is we are right in between what is our current VectorSeis ocean technology and launching our next generation of it. And with the product sales done in the first quarter and with this multi-year transaction that we just referenced in the script here, we are pretty much depleted on our VectorSeis ocean inventory that there won’t be (Technical Difficulty)….

James West – Barclays

Okay.

Brian Hanson

We’re building the next generation system now, so we would expect that will be launched and available for purchase towards the back end of the year.

James West – Barclays

Okay, good to hear. Thanks guys.

Brian Hanson

Thanks.

Operator

Thank you. (Operator Instructions) Our next question is from the line of George Venturatos with Johnson Rice & Company. Please go ahead.

George Venturatos – Johnson Rice & Company

Good morning guys

Brian Hanson

Hi George.

Greg Heinlein

Hi George.

George Venturatos – Johnson Rice & Company

Just curious on the multi-client side, it sounds like – looks like it was a good opportunity set out there obviously looking to spend towards that upper range of the $130 million to $150 million. I was hoping maybe you could talk about where some of that incremental spend is likely headed and how you see the opportunities that evolving over the next 6, 12 months?

Brian Hanson

Sure, George. I would characterize our multi-client business today is truly a broad global portfolio. So, if you look at the regions in the world that we’re working, we’re consistently launching additional programs in those areas. So if I took them geographically on land as I mentioned we have four active programs in North American shale plays, we would expect to continue to add to that. We’ve launched the 2D program in the Poland it’s a very large program. We’ll be shooting for the majority of 2012. In Poland we’ve got a couple of active crews going there. In the marine side of the house, we have and continued actively shoot projects in Brazil and areas of Africa. And then I would expect also that we’ll – we’re going to launch another program in the Arctic this year and it will probably be comprised of a couple of different locations. So, a lot of activity on the multi-client side.

George Venturatos – Johnson Rice & Company

Okay great and just to dig a little deeper on the domestic side, maybe if you could just talk about how the learnings may be from the ClearfieldSCAN has helped you move into the Niobrara and may be made you a little more efficient there. And then may be how much running room you had in those two plays before may be looking for some other basins to explore?

Brian Hanson

Sure, there is a – to answer the latter question first the running room, there is a – we have a significant pipeline of activity that we’re working. And we believe that our offering is fairly differentiated, so we would expect that we’ll certainly be moving out of the Niobrara. I don’t want to get too specific given the nature of business. But some of the learnings I would say the learnings are really more operationally focused, George. What we – the first project obviously that we did it was our first time doing it and we had a lot of learnings around the complexity of permitting the job around using the FireFly system to shoot the job and so we have weather issues and so we’ve learned a lot about shooting programs and land seismic during that first job. And then when we moved into the second job in Lakeview we got better at. And the third job that we worked on we actually were quite efficient. So, I think the heavy lifting relative to learnings is behind us and I think now we’re positioned to operate extremely efficiently. Also I would add that it’s our expectation in the near future that we’ll also be utilizing INOVA's Hawk technology to continue to shoot projects. So we would expect incremental operational efficiencies picked up from using that equipment.

George Venturatos – Johnson Rice & Company

Great I appreciate the answer Brian.

Brian Hanson

Welcome.

Operator

(Operator Instructions) Our next question is from the line of Novid Rassouli with Sidoti & Company. Please go ahead.

Novid Rassouli – Sidoti & Company

Congratulations on the strong quarter guys.

Brian Hanson

Thanks Novid.

Greg Heinlein

Thanks Novid.

Novid Rassouli – Sidoti & Company

So, the strong gross margin in the first quarter I just want to see if I could get a little more color there, was that just incremental data processing revenue or was that more being driven by the systems side with the OBC, just if you can give us some more details there?

Greg Heinlein

Yeah it was primarily data processing as Brian mentioned it has a fixed capacity structure. We will look to add to it throughout the year and then the next year, but for the most part larger jobs, more jobs coming in so it’s just a fixed capacity gain.

Novid Rassouli – Sidoti & Company

Great. Are you guys expecting to see this kind of serve as a base the way it has in historically and just to see that margins incrementally kick up moving into the back half of the year?

Brian Hanson

I would expect that from a growth perspective that we will see that business grow comparably to the 2006-2010 timeframe. From a margin perspective, I would say that the margins are probably going to be more reflective of Q1 margins. We won’t see too much incremental improvement because we are now running back-half capacity, so we are having to invest and add to our cost structure in order to execute the growth on the top line.

Novid Rassouli – Sidoti & Company

Okay, that’s fair. And then one other question from the CGG transcript in fiscal ’11, they had mentioned that Sercel was capturing 100% of the equipment sold to Chinese crews in the Middle East namely Saudi Arabia. I just wasn’t sure – I just want to see if you can give some color as to I guess what’s going on in the Middle East. I always thought the story was that you guys were going to be taking market share there and I didn’t think that they had 100% market share. So, I just wondering if you could just help me kind of understand what's going on there and where you see it going?

Brian Hanson

Sure. Let me start first with who is playing in the Middle East and that market is primarily been dominated by three large contractors obviously CGG, WesternGeco, and BGP. Over the course of the last several months – the last four large tenders that went out in Saudi – three of them, I believe, were in Saudi, one was in Oman – BGP won them all. And so what you see is BGP is really dominated that market. Historically, our cable system, the offering was not compatible with systems that were endorsed for the Middle East. And that's why we want somewhat our new project growth G3i. So, when they are awarded those large awards, they were required to buy a kit and so we didn’t have an approved system at the time so they the Sercel system because that was proved in pretty much Sercel with the entrenched player in the market at that time.

I can tell you though that period they bought all their vibes from month. So, Sercel was enjoying all the cable system sales. We are enjoying all the high level of vibrator sales activity. My guess is probably over a 105, it was a pretty good number. But as you also could tell during this quarter, we have launched G3i. BGP has actually purchased 15,000 channels to that system and so, we would expect that the first step to BGP taking not only our vibes into the Middle East, but taking the cable system too. So, we believe this is certainly a good time relative to shifting that purchase share over to INOVA.

Novid Rassouli – Sidoti & Company

Great, that clears it up. And do you have any goals as to or ideas of what you could capture year-end '12 or '13 moving for kind of the build out of your G3i's in the Middle East.

Brian Hanson

Not that specifically, George because its little bit fluid relative to project and when they are going be awarded. I don’t have perfect visibility into that. But we certainly do have stated goals as to what we're trying to convert at the INOVA board level, how much of BGP's purchased volume we're trying to convert from Sercel to INOVA. And I would remind you that the INOVA Board is comprised of both the senior leadership of BGP and the senior leadership of ION. So, we believe we are very well aligned with BGP, I mean intensive certainly to drive the majority of the purchasing volume through INOVA. So, that's why we are so excited about G3i, it gives BGP the vehicle to drive that volume.

Novid Rassouli – Sidoti & Company

Great, thanks very much.

Operator

Thank you. And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Brian Hanson – President and Chief Executive Officer

Well, thank you for taking the time to attend our conference call. We look forward to talking to you during our second quarter call.

Operator

Ladies and gentlemen, this concludes ION Geophysical's first quarter earnings conference call. You may now disconnect. Thank you for using ACT conferencing.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ION Geophysical's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts