Ion Geophysical's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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 |  About: Ion Geophysical Corporation (IO)
by: SA Transcripts

Operator

Good day, Ladies and Gentlemen. Thank you for standing by. Welcome to the Ion Geophysical Quarter 2 Earnings Conference Call. During today’s presentation all parties will be in a listen-only-mode. Following our presentation the conference will be opened for questions and instructions will follow at that time. This conference is being recorded today, Wednesday August 8th, 2012.

I would now like to turn the conference over to Karen Abercrombie, Director of Ion Communication, please go ahead Ma’am.

Karen Abercrombie

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

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

Moving on to slide 3. Information reported on this call speaks only as of today August 8th, 2012 and therefore you are advised that the time sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made by Ion during this call may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on our current expectations, and include known and unknown risks, uncertainties and other facts, many of which we are unable to control that may cause the actual results or performance to differ materially from any future results or performance, expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by Ion from time to time in our filing with the SEC, including in our annual report on form 10-K and in our quarterly reports on form 10-Q. Furthermore as we start this call, please refer to the disclosure regarding forward looking statements incorporated into 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 4.

Brian Hanson

Thanks, Karen and good morning everyone. We’re certainly pleased with our Quarter 2 results, with first half revenues up 21% over 2011 and year to date earnings at $0.13, an improvement of $0.11 over last year. As we indicated in our call last December, we expected to shift more profitability into the first half of the year as we diversified our business and so far are more than pleased with the results.

Our data processing business delivered a fifth sequential quarterly revenue improvement as we continued to push into the international market, particularly in Europe, Africa and the Middle East, an area in which we’ve historically not had as large a presence. Pre-Macondo, we had almost two thirds of our business in the Gulf of Mexico. Over the last few years we have had a deliberate strategy to expand this business internationally and reduce our exposure to the Gulf. By the end of the year we would expect the Gulf of Mexico portion to be approximately 25% of the total portfolio. In addition to continued sequential improvement and a better geographic distribution of revenues, we ended the quarter with record backlog which positions the business nicely for continued sequential improvement for the back half of the year.

One of the more significant trends this year in Marine Geophysics has been the introduction and uptake of new broadband technologies for acquisition and processing of seismic data to tackle the problem of ghost notches that have traditionally limited resolution in the marine market. Ghost notches are produced when an upcoming seismic event reflects down from the water surface and interferes with the upcoming signal measured at the hydrophone on the streamer. The effect of the notches is to significantly degrade the sharpness and quality of the sub surface images. Other companies have produced broadband solutions that rely on specialized marine acquisition and processing, such as with the dual hydrophone, geophone sensor and the PGS Geostreamer and a Phalanded  streamer type of acquisition for CGGV's BroadSeis and WesternGeco's ObliQ. These solutions today have not been applicable to conventional flat streamer data despite the fact that the vast majority of data was and still is required with this flat streamer configuration.

To address this challenge, in June, at the European Association of Geoscientists and Engineers show, the EAGE in Copenhagen, we introduced the new data processing technique we call WiBand. WiBand delivers better images, broadband results when processing new data or reprocessing existing data acquired using conventional flat streamers and eliminates the effects of the ghost notch. We believe this new technology has tremendous potential to fulfill an unmet need and is being received very well. In fact we already have more than 20 2D and 3D WiBand projects completed or in progress from 8 clients in 15 different basins around the world.

The marine market continues to strengthen. In the third streamer segment we’re seeing a tightening of the market. Contractor capacity for Q3 is virtually sold out. Q4 capacity appears to be reducing rapidly. Day rates are up an estimated 15% as well as backlogs. As we indicated in last quarter’s call we didn’t expect this uptake to immediately result in activity for our marine business for the second quarter, but do feel our positions well for improvement over the back half of the year.

The first half of the year was also a period of heavy R&D for us in marine as we invested in sea trials of our new seabed system Calypso and continued to invest in the development of our next generation streamer system. As we mentioned in our first quarter call, seabed continues to be strong and is projected to continue to grow through 2013 as several crews are now tied up well into the middle of next year.

Given a few large upcoming tenders, this bodes well for the potential for crew expansion in the OBC market. Prompting this growth is seabed’s unique ability to deliver phenomenal image quality, resolve geophysical challenges other methods cannot and operate in areas difficult to access. Despite its increasing popularity though, seabed still represents a relatively small but growing percentage of the total marine seismic market.

Historically, seabed acquisition costs have been high and cycle times long relative to Towed streamer acquisition. To narrow the gap at the EAGE show in June we launched Calypso, our next generation seabed acquisition system. Calypso leverages our industry leading vector seis-ocean sensor to deliver superior images while significantly reducing costs and cycle time and also increasing operating depths to work in a range of 5 meters to 2000 meters of water, which opens up markets like deeper water areas of Brazil. It was extremely well received by our customers and we expect to receive commercial orders for Calypso by the end of the year.

Our software division continues to experience steady growth. We strengthen our leadership position in the high-end command and control software segment in the second quarter, installing Orca on two additional vessels. In addition, we’re seeing an emerging requirement by oil companies for our acquisition optimization services. Our concept system specialists provide survey planning and design services and work with clients on board vessels to dynamically optimize their towed streamer or seabed acquisition at every step of the survey. Although still relatively small, this business grew almost 70% in the first half of the year compared to the first half of last year and provides us with another strategic entry point into oil and gas companies.

Moving on to the multi client side of the business on slide 7, this map depicts our multi client revenue hotspots around the world in the first half of the year. As you can see from the size of the circles, we continue to enjoy heavy demand for our multi client programs, offshore both coasts of Africa, Latin America, Australia and North East Greenland. Our Geometries’ division had an outstanding quarter in terms of revenues and operating profits. We have solid revenue growth in both our data library and new venture businesses, ending the quarter with a robust record backlog.

Our SPAN data is increasingly being used by oil and gas companies and national governments to support upcoming leasing ramps. For example, we recently completed a new 3D gravity Gradiometry program in Greenland which we plan to integrate into our 2D data set to give oil companies a 3D structural interpretation over a 30,000 square kilometer area coincident with the areas coming up for the 2012 and 2013 lease rounds off north east Greenland.

It is in complex challenging environments such as these that we excel, installing some of the industry’s toughest challenges. This area in particular with its ice covered waters would be extremely difficult to shoot today’s 3D conventional seismic. We have also been engaged by the Tanzania Petroleum Development Corporation to manage the upcoming offshore licensing round to be launched in September off the coast of Tanzania and are well positioned with basin SPAN data to support the ramp.

On land, we commenced acquisition on an additional ResSCAN program in West Virginia and now have 4 3D programs underway encompassing over 600 square miles across the Marcellus shale and Niobrara shale plays. Through these programs, we’re proving the value of multi component data for understanding rock properties to help operators in these plays becoming more efficient at well location and maximize our highest priority wells, which is essential in today’s oil and gas environment.

We’re also proving our strategy of using these programs to pull through sales of seismic acquisition equipment. In the second quarter, our ResSCAN program stimulated sales of 10,000 stations or 30,000 channels of INOVA's new Hawk Cableless Recording system to one of our primary acquisition contractors.

In general activities were robust, despite tension caused by European and Middle East issues. As a result of expected growth and international activity, renewed activity in the Gulf of Mexico as well as increasing activity in new frontiers such as the Arctic, industry analysts are predicting seismic demand to grow by 20% this year and we’re well positioned to grow these rates. This international expiration is front and center for us. Our Geo ventures and data processing businesses are more global than ever. We continue to drive technology innovation in the industry and we’re taking full advantage of pull through opportunities to benefit our marine and land equipment units.

I’ll now turn the call over the call to Greg who’ll cover our Q2 financials in more detail.

Greg Heinlein

Thank you, Brian. Good morning everyone. Overall our second quarter revenues were up 19% year over year. Our solutions segment revenues of $72 million improved 47% over the prior year period. Compared to second quarter 2011, our software segment sales increased to $10 million, up 6% in local currency while our system segment revenues decreased by 23% to $23 million.

With that overview let’s take a closer look at our Q2 performance starting on slide 10. Our solution segment revenue increase was attributable to increased performance in both our data processing and multi client businesses. Our data processing revenues increased by 37%, driven by international expansion as well as continued strengthening in the Gulf of Mexico.

Our Geo Ventures multi client revenues, which include new ventures and data library, increased by 55% driven by more than doubling of revenues from our new venture programs as we commenced acquisition on an additional land program in the Marcellus Shale, continued the acquisition on our 2D land survey in Poland, completed acquisition on our 3D gravity gradiometry project offshore Greenland and continued acquisition on several new programs off shore Africa and Brazil. In addition, we experienced the 20% year over year increase in data library sales from across our broad portfolio. The mix of data library sales was extremely profitable for us this quarter. Our solutions backlog ended the quarter at 153 million, up 31% from the same quarter last year. Backlog levels for our solutions business provide an indication of the strength of future sale and will positively impact our solutions revenues for the remainder of 2012.

Turning to slide 11, software segment second quarter revenues increased 6% in local currency and 3% in US Dollars compared to the second quarter of 2011, as steady subscription sales of Orca and Gator software continues to demonstrate consistent demand for concepts systems command and control software platforms. We added two Orca installations during the quarter, further solidifying our leadership position in the high end market. As Brian mentioned, we’re also seeing increasing demand for our acquisition optimization services, through which we provide on board services to others’ acquisitions. We are seeing good opportunities to significantly reduce customers’ acquisition costs with this offering.

Moving to slide 12. As we expected, we experienced a soft quarter in our system segment with revenues declining 23%. While this business continues to benefit from marine repair and replacement sales, we experienced a slowdown of positioning sales in the second quarter, attributable to the lack of new vessels introduced into the market and a continued softness of contractor spend activities. During the quarter we delivered an ocean bottom cable system, but as previously mentioned, this revenue will be recognized over a three year period. The typical revenue range for these complete systems is around $25 to $35 million plus. We continue to ramp our R&D spend as we invest heavily in our next generation Seabed and Towed streamer technologies. This helps explain our increase in operating expenses during the quarter.

Turning to slide 13 as we indicated in our first quarter call, INOVA had a fantastic Q1 which contributed to our Q2 results. Their first quarter revenues were $56.8 million, up 75% over the first quarter of 2011. Due to excellent sales of the new G3I cable based record system and vibrators, including three of the new UniVib peak force small vibrators. INOVA’s first quarter operating income was $8.9 million, up from a loss of $6.6 million in Q1 of 2011. INOVA estimates second quarter revenues to be in the range of approximately $45 to $49 million with an operating loss of approximately $3 million to $4 million, compared to an operating loss of $10 million one year ago. Their second quarter revenue improvement expected from sales of an additional 9,000 channels of G3i. A major milestone for INOVA during the quarter was the sale of 10,000 stations of their new wireless Hawk acquisition system as Brian previously mentioned.

Typically Nova’s strongest quarters are its first and fourth quarters due to increased rental activities during the winter season. With the positive momentum from INOVA’s past two quarters, we are confident in INOVA’s ability to be modestly profitable in 2012. Similar to last quarter, we will expect to book 49% of INOVA’s estimated second quarter’s financial results in our third quarter. INOVA’s second quarter numbers are estimates which we believe offer some visibility into the impact we expect the joint venture to have on our financial results. However these are not final audited numbers.

Turning to the next slide, our cash balances have remained strong again this quarter, even as we continue to invest in our multi client libraries and have ramped up our R&D spend on our next generation marine products.

Moving on to the balance sheet, slide 15, the asset side of our balance sheet continues to demonstrate our asset light strategy, with our most significant investments in multi client projects, resulting in a data library with a net book value of $187 million.

Total cash on hand was approximately $83 million. In May we amended our credit stability which had been comprised of a combination of a revolver and term loan facility. As part of the amendment, our then outstanding term loan of $98 million was converted over to revolver with $175 million of total capacity.

Turning to our last slide. To wrap up, we’ve enjoyed a strong first half of 2012. We continue to expect solid year over year growth led by a recovery our global data processing business. Expanding Geo ventures marine and land offerings, a robust OBC market and continued year over year improvements in the land equipment market supported by INOVA’s exciting new product offerings. Our margins, excluding the system segment were strong this quarter. We expect gross margins to remain consistent in Q3 and drop slightly in Q4 depending on the mix of library sales and commercial timing of our Calypso systems. We continue to expect 2012 investment in multi client data libraries to be in the upper end of the range of 130 to 150 million, with acquisition activity to grow in back half. Based on our market outlook and robust pipeline of order activity, we’re constantly investing in each of our businesses and remain positioned to achieve year over year improvement for the remainder of 2012.

We would like to remind investors that we are scheduled to present on September 5th at the Barclays Capital CEO Energy Conference in New York and also on October third at the Johnson Rice Energy Conference in New Orleans. Please watch our website for more information. Finally, we’d like to thank our customers for their continued faith in us and our employees who give us a competitive advantage every day.

With that we’ll turn the call back to the operator for questions and answers.

Question- and- Answer session

Operator

Thank you Sir, Ladies and Gentlemen (operator instructions). Our first question is from the line of George Venturatos with Johnson Rice and Company. Please go ahead.

George Venturatos – Johnson Rice & Company

Good morning, Brian. Good morning, Greg

Brian Hanson and Greg Heinlein

Good morning George.

George Venturatos – Johnson Rice & Company

I just wanted to touch on the data processing side. Obviously your strategic expansion efforts in international markets has clearly started to pay dividends. You did speak of kind of a recovering Gulf of Mexico. I know that’s the smaller piece going forward, but can you just give a little more color on kind of where we stand in that recovery?

Brian Hanson

Yes, sure George, this is Brian. You know there’s a couple of things. Obviously this last lease round was a fairly successful lease round. Really the activities that led up to that lease round didn’t really benefit us because a lot of what we’d done in data processing in the Gulf was quite a while ago. But we would expect that as a result of that much activity in this lease round, the success of it, that activity levels will in general start picking up in the Gulf. We’re also starting to see that in bid activity. In addition to that, we’re seeing some of our customers that participated in the Gulf historically, that exited the Gulf over the last couple of years are returning to the Gulf. So people we have a history with are coming back down and presenting project opportunities for us.

George Venturatos – Johnson Rice & Company

Okay, great. And I know we had talked about potential capacity expansion efforts in that business as well. Just wanted to know how that recruitment of talent and that progress was to date?

Brian Hanson

Yeah, we continue to – we’ve been running – as we indicated in prior calls, we’ve been running the plane pretty much at full capacity now for the last three to five months. We’ve been very aggressively building up both computing infrastructure and recruiting and actually the second quarter of the year is probably the second strongest recruiting quarter that I’ve seen in many years here for data processing. So we’re having some very good results there.

George Venturatos – Johnson Rice & Company

Great. And then lastly, we’ve obviously we’ve seen some R&D efforts, significant interest in Calypso. Do you have kind of a sense of when that Next Gen streamer might be available? Is it kind of an early ‘13 maybe delivery?

Brian Hanson

That’s a good question, George. I mean, I’d say our roadmap right now calls for the availability of a portion of that system to be available late 2012. But it is R&D and so practically speaking there is a potential that it slips into the early part of 2013. But it’s certainly around that time frame.

George Venturatos – Johnson Rice & Company

Great. I appreciate the answers ,Brian

Operator

Thank you. (Operator instructions). The next question is from the line of Nathaniel Pulsifer with Pulsifer & Associates. Please go ahead.

Nathaniel Pulsifer - Pulsifer & Associates

Good morning, Brian. Nathaniel Pulsifer.

Brian Hanson

Good morning.

Nathaniel Pulsifer - Pulsifer & Associates

Do I understand that they have a different fiscal year from ION or it is just because of the – there is accounting requirements that you are given estimated revenue and an estimated income?

Brian Hanson

Yeah. INOVA reports on a one quarter leg through us through a number of reasons.

Nathaniel Pulsifer - Pulsifer & Associates

I remember that. Now, can you give me some more color on the Tanzania licensing issue? Did I understand you to say that you were an agent of Tanzania for the forthcoming licensing round?

Brian Hanson

Yeah. We are actually managing a licensing round for Tanzania. That’s correct.

Nathaniel Pulsifer - Pulsifer & Associates

And what does that involve? Administratively, what does that involve?

Brian Hanson

Well, I’m not sure that I can get into the specifics of exactly what our role is in there, but I can tell you that we’re working very closely with them to coordinate the round and in addition to that we’ve worked very closely with them to provide – to shoot the basin SPANS and do some other work there so that we have data available to potential participants who want to participate in that round.

Nathaniel Pulsifer - Pulsifer & Associates

I see, that‘s very good and recognizes the competence of you and your team. Final question, although you were very busy with oil and natural gas discoveries, has there any thought been given to using the Ion technologies in this world wide search for water?

Brian Hanson

We obviously recognize that there opportunities to use our technology broader than oil and gas and in mining, in water etc. But quite frankly we’re very much focused on the oil and gas market. That is our bread and butter.

Nathaniel Pulsifer - Pulsifer & Associates

Thank you.

Operator

Thank you. There are no further questions at this time I will turn it back over to management for any closing remarks.

Greg Heinlein

Great. Well, thank you everyone for taking the time to attend our conference call. We look forward to speaking more after the third quarter.

Operator

Ladies and Gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.

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