ION Geophysical Corporation
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Greetings and welcome to the ION Geophysical Second Quarter Earnings Conference Call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel White, Vice President Corporate Communications. Thank you, Ms White, you may begin.

[Rachel White:]

Thank you, Devin. Good morning and welcome to ION second quarter 2017 earnings conference call. We appreciate your joining us today. As indicated on Slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer; and Steve Bate, Executive Vice President and Chief Financial Officer. Before I turn the call over to them, I have a few items to cover. We will be using slides to accompany today's call. They are accessible via the link on the Investor Relations page of our website, iongeo.com. There you will also find a replay of today's call. Moving on to Slide 3, information reported on this call speaks only as of today, August 3, 2017, and therefore, you are advised that 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 during this call may constitute forward-looking statements, which are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our 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 filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure 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 over to Brian, who will begin on Slide 4.

[Brian Hanson:]

Thanks, Rachel. Good morning, everyone. Over the last 18 months, we have targeted opportunities less dependent on cyclic recovery, such a specific geographic areas and production optimization offerings, and we are starting to see these efforts pay off. Similar to the first quarter, our second quarter revenues improved significantly, up 27%, driven by continued strong sales of our 3D multi-client reimaging programs as well as a 2D new venture program we launched during the quarter. Excluding ocean bottom seismic services, our revenues are up over 50% from the second quarter of last year. We reported a net loss of $10 million in the second quarter, an improvement from our adjusted net loss of $21 million last year, and our adjusted EBITDA for the second quarter was a positive $14 million compared to a negative adjusted EBITDA of $3 million in the second quarter one year ago. This is the first time since 2014 that we reported four consecutive quarters of breakeven or better adjusted EBITDA. Our first half results were in line with our expectations with revenues up 34% compared to the first half of 2016. The second quarter revenues improved on the first quarter by 41%. We see the third quarter stronger than the second and the fourth quarter being stronger than the third, with each quarter EBITDA improving over the one before it for 2017, partially driven by the significant backlog we built. We ended the quarter with $48 million in backlog compared to $25 million sequentially and $30 million one year ago. Multi-client backlog is the highest it's been since the third quarter of 2013. Since the end of the quarter, momentum has continued to build throughout July, and our backlog is now at over $62 million. First half revenues of $79 million and $62 million of backlog is setting up what we believe will be a very nice second half. As a reminder, our E&P Technology & Services segment is comprised of three synergistic verticals

[Steve Bate:]

Thanks, Brian. Good morning, everyone. Our total second quarter revenues were up 27% from the second quarter of 2016. Revenue in our E&P Technology & Services segment increased by over 80% and revenues in our E&P Operations Optimization segment increased by 9%. Our OBS Services segment had no revenues in the second quarter of 2017 as our operations remained idle during the quarter. The second quarter of last year reflected $6 million of revenues related to the Nigeria project that began in late June and finished in the third quarter of 2016. Within our E&P Technology and Services segment, our new ventures revenues were $20 million, an increase of over 300%, and our data library revenues were $10 million, an increase of 55% over the second quarter of 2016. Our imaging services revenues were $4 million, a 46% decrease. The increase in new ventures revenues was the result of continued revenue from our 3D multi-client reimaging programs in addition to the new venture program that Brian described earlier. The increase in our data library sales spanned the breadth of our diverse global portfolio without concentration in a particular geographic region. The decrease in imaging services revenues reflects the shifts we made to allocate resources to higher-return multi-client programs. The imaging revenues from multi-client programs are reflected as part of new ventures revenues, whereas revenues from proprietary imaging programs are reflected as part of imaging services. The imaging services group is fully utilized with a large portion of our capacity dedicated to these higher-return potential programs. In our E&P Operations Optimization segment, our devices revenues increased by 16% and our optimization software and services revenues were flat compared to the second quarter of 2016. Our E&P operations optimization segment continues to be impacted by reduced seismic contractor activities, but as Brian mentioned, the increase in devices revenues is related to sales to non-traditional customers and from new products we commercialize this year. Our loss from operations was $4 million during the quarter of 2017 compared to an adjusted operating loss of $15 million in the second quarter of 2016. Adjusted EBITDA, which we believe better reflects our financial performance given the substantial amount of straight-line amortization related to our historical data library investments, was $14 million in the second quarter of 2017 compared to a negative $3 million in the second quarter of 2016. The second quarter of 2017 represents our fourth consecutive quarter with a breakeven or better adjusted EBITDA. The year-over-year improvement in our operating loss and adjusted EBITDA was the result of higher margin revenue mix along with savings from prior cost-cutting initiatives we implemented over the last 2.5 years. As previously mentioned, we expect our back half of the year to be significantly stronger than the first half with adjusted EBITDA growing sequentially. We generated net cash flows from operations of $2 million during the second quarter of 2017, a significant improvement compared to the net cash use from operations of $15 million 1 year ago. Including both investing and financing activities, we consume total net cash flows of $6 million in the second quarter of 2017 compared to a consumption of $24 million in the second quarter of last year. Our cash balance, excluding borrowings under our credit facility, was $33 million at June 30. We had outstanding borrowings of $10 million and another $12 million remaining availability on our $40 million credit facility at quarter-end. Our borrowing base continues to be reduced because a significant portion of our receivables for the Campeche reimaging program are effectively purchased by E&P companies through our Mexican entity and are excluded from the borrowing base calculation. We continue to evaluate options under our existing credit facility or other financing options that would include these receivables in the borrowing base. Combining our cash balances and availability under our current revolver, our liquidity was $55 million at June 30, 2017. Overall, we expect to generate cash in the back half of the year and with our expected increase in revenues, we also expect the availability under our current revolver to increase as the year unfolds. This should lead to a meaningful increase in our liquidity in the back half of the year. We recently received a notice from the New York Stock Exchange that we are not in compliance with their continued listing standards as our average market capitalization was less than $50 million over a 30-trading-day period and the stockholders' equity was below $50 million. There is no immediate impact on our stock, and we have already begun preparation on our plan to restore compliance as our business continues to improve, and we will work cooperatively with the New York Stock Exchange to return to compliance. With that, I'll turn the call back to Brian.

[Brian Hanson:]

Thanks, Steve. You've heard me mention that we maintain our core competencies in key R&D programs with the downturn. These programs were key to positioning us for the recovery we're beginning to see in our business. I'd like to touch on just a couple of the programs we've been working on to give you a sense of the innovation on the horizon. ION has a long history of providing cutting edge instrumentation and services to better understand subsurface geology. We got our start developing and manufacturing land seismic equipment and sensors almost 50 years ago. We launched our first OBS system in 2004, and from 2004 to 2014, we provided Oean Bttom Seismic technology to seismic contractors. However, with the acquisition of GeoRXT in late 2014, we transitioned to becoming a solutions provider to E&P companies, leveraging our technology as a competitive differentiator to access a bigger market with a higher potential return on our technology. OBS activity and market share has continued to grow as the share of offshore seismic activity from just 4% in 2006 to approximately 15% today. OBS data provides superior production quality images of reservoirs and works in obstructed areas where Tube Screamer technology cannot. As a result, OBS has become an increasingly important tool for reservoir management. This increase in OBS adoption has been made possible by generations of new technology delivering step changes and efficiency. We believe there are several technology cycles to come that will further increase efficiency and improve the economics, enabling a much broader application of OBS on more fields. Our newest OBS technology foresee an integrated nodal system designed to increase the value of OBS data to E&P companies by providing a step change in image quality, safety and efficiency. As a result, the increased efficiency will reduce costs and improve the economics so it can be commercially viable in more fields. The faster turnaround time will also deliver data more rapidly in the E&P company workflows and increase the value to them by impacting more of their critical business decisions. In addition, we have an acquisition and geophysical roadmap of enhancements to keep the system at the forefront, such as completely automated back-deck and the next generation sensor technology. Next, you may recall that we acquired Global Dynamics' assets and intellectual property in March 2016 to gain access to the proprietary SailWing technology. SailWing is an innovative foil based alternative to conventional bulky marine diverters that maintains streamer or source umbilical positioning towed behind vessels. SailWing configurations can be employed to optimize source arrays and augment towed streamer deployment systems yielding significantly less drag, faster towing, improved fuel efficiency and safer operations through their flexible and smaller footprint. As a result, service can be acquired faster and at lower cost. While SailWing is still in development, we are well down the path to commercialization, and it's already received a lot of client interest from multiple industry segments. We believe it's going to be a good incremental business with the potential to yield significant revenues. We are targeting commercialization in the first half of 2018. These are just a couple of examples of how we've been transitioning our business over the last 18 months. We have targeted opportunities less dependent on cycle recovery, such as selecting specific geographic areas and production optimization offerings and commercialization of unique and differentiated technologies, and we are starting to see these efforts pay off. We're in each business and a large market and are surgically targeting areas that are attractive, which is supporting the recovery of our business. With that, I'll turnover it over to the operator for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of [Indiscernible] with DLS Capital. Please proceed with your question.

[Unidentified Analyst:]

You guys did a spectacular job getting this company turned around so far. [technical difficulty] I have a question your EBITDA margin, it looks like, was around 29% for the quarter roughly or whatever. And I know it was about that or higher in past quarters when the business was running. If you [indiscernible] would just expect as we go forward with each sales dollar, as you said incrementally, you're going to have increased EBITDA for quarter. So that is like first question. Second question is on the backlog. What is that backlog timing wise? Is that a backlog for one quarter, two quarters going forward and how does that work? Generally, I think it's great that you've given the number out. And [indiscernible] could you start with those first two questions?

[Brian Hanson:]

Yes, sure. First on your EBITDA question. You're precisely right. I mean we have a base level of expense in the business and then as we generate incremental revenues, it really translates nicely into positive EBITDA generation. So I think it's fair to say that as revenues increase over Q2 levels, that the EBITDA percentage as a percentage of revenue will increase as well. The second comment to your backlog is the majority of that backlog, really we see working through that in 2017. So it's pretty near-term stuff.

[Unidentified Analyst:]

Okay. But I think it's [indiscernible], you've brought the backlog back as a number. It's a great reference, you should keep up. This was the comment. And then on the OBS business, I mean, obviously it's a zero. You used to term near-term, was near-term like one quarter, two quarters, one year or you're just going out by a your arms around in it at the moment?

[Brian Hanson:]

It's really difficult because of the sort of the political disarray with in the areas that we're really well positioned, there is quite a bit of a political turmoil that really has been driven by the low commodity price for an extended period of time, and I'm -- disproportionately, unbalanced budgets of those countries, and I'm sure you can get a feel for that. So they're having hard time meeting their their current obligations. So they're struggling to find ways to fund those surveys. I don't see that correcting in the next year. So I think our next best opportunity, and I could be wrong, I'm not totally closing the door, but I think it's much more above a higher probability that the next survey we go shoot is probably with our next generation technology in late '18, and it is with the current technology [indiscernible]. However, I could be wrong and they could get their act together and they could get things straight with their partners and they could get a survey going by early '18. So I haven't got an exact answer for you.

[Unidentified Analyst:]

Okay. Next one. Last quarter, you guys turned the corner and you got to be recovering in '18. Obviously, your businesses is improving. You guys are still under the same sense that the general industry is going to have?

[Brian Hanson:]

Recovery for 2018 or a better looking year going forward. That's still where you're at.

[Steven Bate:]

Yes. I'm not sure I would make a comment as brought as the general industries. A nice thing about our business is we really repositioned it sort of [indiscernible] very -- we're trying to go where the capital is flowing, and we can do that and we can -- we're nimble enough to change course where I think there's many in our peer group, especially the ones that asset heavy, that I think they're going have a lot tougher time. Certainly, they're going to struggle a little bit in '17. I'm not sure their businesses will come back as much in '18. Certainly, our business seems to sort of decoupled from the whole commodity price and is healing just based on the merits of our offerings.

[Unidentified Analyst:]

Got it. Just two comments. Number one, like I said, you've done a great job this [inaudible]. It's going to turn. It should be a very good performer. I would -- it's just a suggestion, if you have a limited research coverage anytime inside of ION could be another great signal if this company started arriving last insiders fly in December and also inaudible for us over the last couple years, but it's just something I want to leave in your thoughts, how I identify this [indiscernible] oil and gas specialists. That's the comment for you.

[Steven Bate:]

I appreciate your comments. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Scott Smallman with Wedbush Securities. Please proceed with your question.

[Scott Smallman:]

You guys have done a good job in cleaning up balance sheet-related issues, but you've still got that bit of debt due next May. Is there a specific plan to issue something new to use to redeem that? Would you do it out of cash or what's your current thinking on that?

[Steve Bate:]

I think if you look at the way our liquidity is building and the way our EBITDA is performing, I think our liquidity position will allow us to handle that maturity just out of the organic growth in the company over the back half of the year and in the '18.

[Operator:]

Thank you. [Operator Instructions] It appears there's no further questions at this time. I'd like to turn the floor back over to management for closing comments.

[Brian Hanson:]

Thank you for taking the time to attend our conference call. We look forward to talking to you again on the third quarter.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.