Geospace Technologies' (GEOS) CEO Walter Wheeler on Q1 2017 Results - Earnings Call Transcript

| About: Geospace Technologies (GEOS)

Geospace Technologies Corporation (NASDAQ:GEOS)

Q1 2017 Earnings Conference Call

February 09, 2017 10:00 A.M. ET

Executives

Walter R. Wheeler - President and CEO

Thomas T. McEntire - VP and CFO

Analysts

William Dezellem - Tieton Capital

Mark Brown - Seaport Securities

Unidentified Analyst -

Operator

Welcome to the Geospace Technologies First Quarter 2017 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Tom McEntire, the Company's Vice President and Chief Financial Officer.

Today's call is being recorded and will be available on the Geospace Technologies' Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Walter R. Wheeler

Good morning, and welcome again to Geospace Technologies conference call for the first quarter of fiscal year 2017 and thanks for listening. I am Rick Wheeler, the Company's President and Chief Executive Officer and I'm here with Tom McEntire, the Company's Vice President and Chief Financial Officer.

I will start the call today with a prepared overview of the quarter, then Tom will follow that with an in-depth review and commentary of our financial performance. I'll then close out the prepared portion of the call with some final remarks and we will open the line for questions. As a convenience mentioned, we will place a replay of this conference call in the Investor Relations section of our website at www.geospace.com.

As a standard caution the information we will discuss this morning is time-sensitive and might not be accurate on the date one listens to the replay. Also, many of the statements we make today can be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. This includes statements about the market for our products, revenue recognition, planned operations, and capital expenditures. Such statements are based on our present knowledge and perceptions while actual outcomes are influenced by uncertainties and other factors that we are unable to control or predict.

Related risks both known and unknown, can lead to undesirable results or cause our performance to materially differ from what we may express or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and Form 10-Q filings.

Yesterday after the market closed the company released its financial results for the first quarter of fiscal year 2017 which ended December 31, 2016. As reported revenue in the first quarter was $15.3 million, this is a decline of 6% sequentially from last quarter although it reflects an increase of 16% over last year's first quarter. The sequential decrease in total revenue was essentially the result of lower seasonal demand for some of our non-seismic products, which was partially offset by an increase in seismic product revenues.

The year-over-year rise in revenue relative to last year's first quarter is primarily the result of the 24% increase in sales and rentals of our seismic products. Although this revenue increase is noteworthy it is not necessarily indicative of an ongoing trend. A significant portion of our first quarter revenue was attributable to a single rental contract which is now winding down plus revenue from our seismic products is well known to be lumpy.

Factory activities remained at minimum levels during the quarter, resulting in unabsorbed factory overhead costs that significantly contributed to our net loss. Other non-cash charges contributing to the loss were rental free depreciation and inventory obsolescence expenses. Our quarterly net loss was compounded by our inability to recognize any deferred tax or other tax benefits in connection with our pretax losses. And while no future tax benefits can be recognized until we return to profitability, these tax loss carry forwards are still available to offset taxes on future taxable income.

And partial offset to these negative factors after setting aside bad debt recoveries our cost reduction activities resulted in a reduction of 8% in our core operating expenses in the first quarter compared to the same period last year. In the first quarter revenue from our traditional seismic products totaled $2.6 million, a decrease of 2.4 million or 48% compared to the same period last year. This lower revenue demonstrates the persistence and reduced consumption and demand for these products. And what they've experienced over the last year are further indication that from now seismic surveying activities had not yet improved markedly from their historic lows.

Buffered by idled equipment in storage most seismic contractors have minimal needs for new replacement gear in the current seismic market. However, as this oversupply of equipment is used up and/or seismic activities pickup in the future, we expect that demand for these products will resume.

Our wireless seismic product revenue increased by 235% to 6.3 million from last year's first quarter. During the quarter we sold almost 6700 channels of our GSX wireless land equipment primarily out of our rental fleet. This match is the number of GSX channels sold in all of fiscal year 2015 and exceeds the channel count sold in all of fiscal year 2016.

However, as in past quarters it was the rental of our OBX marine equipment that represented the largest revenue contributor for this product segment. The bulk of the quarter's rental revenue totaling 4.3 million was realized from a single OBX rental agreement that is expected to end soon. Industry interest in our OBX products has remained a bright spot in an otherwise depressed seismic marketplace, and the number of customers with interest in our OBX products continues to grow. While we are encouraged by past success and industry adoption of our OBX products, our outlook remains cautious given the continued pressure on oil company exploration budgets.

Revenue from our reservoir seismic products in the first quarter was $0.5 million, a decline of 26% from last year's first quarter. For the most part revenue from this segment is being driven by limited product sales, rentals and repairs of our downhole tools and related boreholes system products. We continue to believe that this segment will not contribute significantly to total revenue unless and until we are engaged in a contract for the delivery of a permanent reservoir monitoring or PRM system. Despite ongoing discussions regarding such projects there are presently no PRM contracts in the pipeline for fiscal year 2017.

Non-seismic products generated revenue of 5.7 million in the first quarter reflecting an increase of 6% over the same period a year ago. Although we tend to experience a seasonal decline in demand for certain of our industrial products during the first and second fiscal quarters, we are particularly pleased with the 13% year-over-year growth in revenue from these products.

I’ll now turn the call over to our CFO Tom McEntire to provide you with additional detailed commentary and insight on the company's first quarter financial performance.

Thomas T. McEntire

Thanks Rick and good morning everyone. Before I begin I would like to remind everyone that we will not be providing any specific revenue or earnings guidance during this call. In yesterday's press release our first quarter -- for our first quarter ended December 31, 2016 we reported revenue of $15 million compared to last year's revenue of $13 million. Our net loss for the quarter was 11.7 million or $0.89 per diluted share compared to last year's net loss of $11 million or $0.85 per diluted share.

We were unable to recognize any tax benefits related to our first quarter of pretax loss which somewhat distorts the comparison to last year's results. A breakdown of our seismic product revenue is as follows; traditional product revenue for the first quarter was 2.6 million, a decrease of 48% compared to revenue of $5 million last year. The revenue decline reflects ongoing subdued levels of seismic exploration activities suppressing the need of replacement equipment.

Our GSX and OBX wireless product revenue for the quarter was 6.3 million, an increase of 235% compared to revenue of 1.9 million last year. The increase primarily resulted from a large OBX rental contract which began in February of last year which generated rental revenue of $4.3 million for the first quarter. As this contract comes to an end and in the absence of any execution of any new contracts we expect lower revenues of wireless product rental income in future quarters.

Reservoir product revenue for the first quarter was 513,000, a decline of 26% compared to revenue of 697,000 last year. The revenue decline resulted from lower product rentals reflecting moderated seismic borehole activities in the marketplace. We believe for seismic reservoir products on this segment will continue to contribute insignificant levels of revenue until we are engaged in a contract for the delivery of the PRM system.

Moving on to our non-seismic products, a write down of revenue was as follows. Our industrial product revenue for the first quarter was 3.1 million, an increase of 13% compared to revenue of $2.7 million last year. The revenue increase is primarily attributable to higher demand and market acceptance for our water meter products. Imaging product revenue for the first quarter was 2.7 million and was essentially flat with last year's first quarter revenues.

Our consolidated gross profit margins continued to be under significant pressure due to several factors involving our seismic business segment including unabsorbed fixed manufacturing costs due to lower factory utilization, inventory obsolescence expenses, and depreciation expenses on underutilized rental equipment. Until we see significantly improving seismic product demand, we expect our seismic product gross profit margins to be challenged throughout fiscal year 2017.

Setting aside bad debt recoveries, our first quarter operating expenses declined 8% from last year reflecting savings we realized from our cost reduction program implemented back in the second quarter of fiscal year 2016. Cash investments into our property, plant, and equipment for the first quarter were $106,000. We expect our total fiscal year 2017 cash investments and capital equipment to be approximately 3.5 million with very limited amounts allocated toward new seismic rental equipment and less precipitated by increased customer demand for our OBX equipment.

If the OBX rental orders do occur we would expect the majority of any rental equipment additions to be of a non-cash nature, since they would likely be derived from our existing inventory stocks. Our inventory balance now stands at 102 million and we expect further inventory reductions throughout fiscal year 2017 as we seek to work our excessive levels of seismic inventories. These reductions could be partially offset by increases to our non-seismic inventories should this segment continue its rapid growth.

At December 31, 2016 our balance sheet reflected over $37 million of cash in short term investments. We had no long-term debt outstanding and borrowing availability under our credit agreement was almost $30 million resulting in $67 million of total liquidity. While cash flows are expected to be lumpy throughout fiscal year 2017 and revenue visibility remains limited, we believe our total cash flows for fiscal year 2017 could be around breakeven primarily due to a $13 million income tax refund we expect to receive late in our second quarter. We remain committed to cash preservation while we endure this market downturn. That concludes my prepared remarks and I’ll turn the call back over the Rick.

Walter R. Wheeler

Thanks Tom. During our first quarter ended December 31, 2016 we were certainly encouraged by the agreement among OPEC and other producing nations to reduce oil production. This has helped stabilize crude oil prices in recent weeks above $50. However large amounts of crude oil remain in storage worldwide and this overhang is predicted by some to persist for a year or longer. This excess crude storage and other factors could further suppress any meaningful increases in crude oil prices.

Oil company exploration expenditures have dropped precipitously in recent years. And while some have raised capital spending forecasts for 2017 many others have announced further cost reductions. So long as seismic exploration activity stay sluggish and permanent reservoir imaging projects are deferred, demand for our seismic equipment will remain depressed, and revenue growth from these products will remain challenged.

However, in order to sustain viable global energy market the eventual resumption of these activities is inevitable even though the timing is unpredictable and seemingly gradual. In the interim we will continue to conservatively manage cost and improve our operations while simultaneously delivering best in class services and product technologies to our customers. As a demonstration of our efforts our balance sheet as Tom said remains debt free with 37.5 million of cash in short-term investments. And in conjunction with a $30 million credit line our total liquidity is greater than 67 million. This places us in an enviably strong position to endure the current market conditions and emerge as an undiminished industry leader in its recovery.

This now concludes our prepared remarks and I'll turn the call back over to Tanisha for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Thank you. And we'll take our first question comes from Bill Dezellem with Tieton Capital. Please go ahead, your line is open.

William Dezellem

Thank you. A couple of questions, first of all could you provide a little more detail behind your comment that the number of customers interested in OBX continues to grow? And then secondarily inventory obsolescence was roughly flat in the Q1 versus the September quarter a little over a $4 million. Is that now what you feel is a go forward rate at your current sales level or should we expect that to change somewhat dramatically one way or another?

Walter R. Wheeler

Hi Bill. Well I can answer the first question. I mean it's actually very simple, if you count on your hands the number of customers that have rented or are planning to rent OBX equipment it continues to grow and there are new companies out there that we've done business with in other regards that are using some of our OBX products that haven’t before. So the list is a composite of existing customers and new customers or customers of other products that are getting into that market. I'll let Tom answer the second question.

Thomas T. McEntire

Yeah, hi Bill. As we've discussed before, this calculation for inventory obsolescence is very dynamic and is constantly moving based upon our movements in our inventories. And as we see new quotes come in for products that creates a demand or as we move products in our factory into work orders and sell them, all that changes. So it's very hard for me to predict what it's going to be in future quarters. Until I know all that other information and we typically don't finalize that adjustment till after the quarter ends.

William Dezellem

Okay, thanks and Rick I'm going to come back to the count on one -- on your hand, the number that was -- let me try to get you to provide a little more detail behind the commentary which you're having with those conversations in parallel that would be somewhere different?

Walter R. Wheeler

Well you will need more than one hand if you're counting but no, I really can't reveal the customers. I mean many of them would prefer it that way and there's -- it's not a large industry. The ocean-bottom market, but nonetheless those that are playing in that market that don't already have their needs filled are coming to us for utilizing these products. And we are seeing new customers that are using the OBX in situations where the channel -- the station counts may not be the 5000 that were recently rented. But in smaller quantities they're also using these products of course in some cases non-exploratory services that they're providing.

William Dezellem

Okay, thank you. And then let's circle back to GSX where you actually had an okay showing this quarter. Would you talk a little around what you're seeing on that front with the rig count going up a little bit and oil prices up a little bit and just generally a little better feeling in the industry as to whether just to talk around that if you could?

Walter R. Wheeler

Sure, well I mean in general we see through the eyes of our customers in that regard. And so long as rig counts go up unless that translates to more seismic imaging that they need performed and those services are solicited then we're not going to see new demands on our equipment. The contractors have had to tighten their belts significantly because they're just not been in the amount of seismic survey projects out there that there have been. And they in many cases just have more than enough equipment to take care of those projects that they can get their hands on. As that changes there maybe pockets of need and that certainly was the case here. There's no way to predict exactly what that is going to look like going forward as a function of rig count or those sorts of things

William Dezellem

And maybe one last one in that same regard before I turn it back. At this stage in the cycle, how would you characterize the interest in additional seismic shoots relative to prior cycles?

Walter R. Wheeler

I’m not quite sure I understand what you're really asking. I mean there is clearly some additional shooting that goes on or has gone on. It's enough to where that some of these additional channels were required. But I can't give you a trend on where that's going or anything.

William Dezellem

Great, thank you both.

Operator

Thank you. [Operator Instructions]. Our next question comes from Mark Brown with Seaport Global. Please go ahead, your line is open.

Mark Brown

Hi, I just wanted to ask about the OBX marine equipment contract, when is that expected to be completed, you referenced that in the press release I just wanted to clarify?

Walter R. Wheeler

Yeah the large contract that you're referring to should be wrapping up this quarter.

Mark Brown

Okay, got it and also interested on the GSX sold a nice number of channels in the quarter. I'm just curious what type of customers are buying those and maybe in what geographies you're seeing some of this activity?

Walter R. Wheeler

What type of customers, well these are land surveys that use that equipment. It's -– we’re seeing the GSX used both internationally and in North America. So we sell across the Board but I'm not going to reveal enough to where you can determine who those customers might be.

Mark Brown

Okay, got it. And I’m curious just we're hearing from many of the oilfield service companies the use of data analytics and looking at even potentially artificial intelligence, are those technologies in any way beneficial to you in terms of prompting them perhaps to reimage certain acreage or use seismic as part of a solution that involves the data analytics?

Walter R. Wheeler

Well I think seismic always provides valuable information about what's going on in a reservoir. I mean, data analytics get better every year. So to what extent seismic data is reshot that's exactly why you see it reshot often times because, the technical parameters that were used to shoot it before either the targeted depths and/or the special sampling and time sampling might be inadequate for some of the data analytics algorithms to use. So certainly if there are improvements in that regard there is the likelihood that there will be some seismic data that needs to be reshot. Although you can’t preprocess or reprocess certain older seismic data to gain some improvements.

Mark Brown

Alright, well thanks guys appreciate it.

Operator

Thank you. [Operator Instructions]. Our next question comes from David [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst

Good morning guys. Wanted to note that on a modest $300,000 increase in quarterly revenues in the non-seismic segment of your business you nonetheless managed to improve operating income by 500,000, you almost doubled it. Any comment that you could share with us about how you did that?

Thomas T. McEntire

Yes, David good point. We didn't make too much about that in the press release because it's kind of smothered by the rest of the losses from our seismic segment. But you're absolutely right, it’s gross margin improvement and its cost kind of containment if you will. And so we're starting to leverage off of the additional volume in a good way.

Unidentified Analyst

Well, that was nice work. Thank you and congratulations. Also good to hear that pretty soon you'll be getting that $13 million tax refund that you envisioned even in an environment where it's impossible to forecast when the core business will come back. You nonetheless are maintaining a very strong balance sheet and living to see in other day and to experience another rebound.

Walter R. Wheeler

Well we appreciate that. Thank you David.

Unidentified Analyst

Thank you, guys.

Operator

Thank you. [Operator Instructions]. And it does appear we have no further questions at this time. I will now hand the floor back over to Rick Wheeler for any additional or closing remarks.

Walter R. Wheeler

Alright, well thank you Tanisha. And we would like to thank everyone for joining us on our call today. We look forward to speaking with you during our second quarter conference call sometime in May. Thanks and goodbye.

Operator

Thank you all. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.

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