ION Geophysical Corporation
Q4 2007 Earnings Call Transcript

Published: 21 Feb 2008

[Jack Lascar:]

Robert P. Peebler – Chief Executive Officer, President Brian Hansen – Chief Financial Officer, Executive Vice President

[Analysts:]

James West Cherry Savion Cindy Du - Jefferies & Co Michael Marina - Johnson Ranks Andrea Moore - Talent Asset Management Analyst - Greenwood Investment

[Operator:]

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Ion Geophysical’s Fourth Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Jack Lascar, go ahead sir.

[Jack Lascar:]

Thank you Mitch and good morning everyone and welcome to Ion Geophysical Corporation, Fourth Quarter Earnings Conference Call. We appreciate your joining us today. Your hosts today are Bob Peebler, President and Chief Executive Officer and Brian Hanson Executive Vice President and Chief Financial Officer. Before I turn the call over to the management I have a few items to cover, if you would like to be on an e-mail distribution list to receive future news releases or experience a problem you didn’t your new receive your news release yesterday please call us and provide us with that information, the number is 713-529-6600. If you would like to listen to a reply of today’s call it is available via webcast by going to the investor relations section of the companies website at www.iongeo.com or via a recorded instant replay until March 06th. The information was provided in yesterday’s earnings release. Information recorded on this call speaks all the as of today February 21, 2008 and therefore your advised that time for this information may no longer be active 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 statement within the meaning of the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectation and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the companies actual results or performance to differ materially from any future results or performance expressed or implied by these statements. This risk and uncertainties include the risk factor disclosed by the company from time to time in its filings of the SEC including any annul report on Form 10-K for the year ended December 31, 2006. Furthermore as we start this call please also refer to the statement regarding forward looking statements incorporated in our press release issued yesterday and please note that the contents of our conference call this morning are covered by these statements. I would like to turn the call over now to Bob Peebler.

[Bob Peebler:]

Good morning everyone and thank you for joining us. Before Brian gets into the details or financial results I would like to speak about the highlights of the quarter and the year in general. We had a record quarter for the company and every business segment had taller results including several strategic successes. Contrasted to many oil field service companies who are experience earnings deceleration due to margin and cost pressures, we are enjoying an acceleration of earnings and profitability, this is mainly due to our strong investments in R&D and international infrastructure over the last five years which is now benefit, we expect to continue average in these investments into 2008 and beyond. There were several important events in Q4 that are inevitable for the short term results as well as their strategic implications for Ion. First we ship the fourth VSO system on schedule to our partner RXT, this is important because it reflects increasing demand for demand for VectorSeis Ocean, this demand is further driven by the growing industry of recognition of VectorSeis high quality measurements both the sea bed and in the productivity of the system. Additionally we are delighting to see RXT starting to be awarded large scale programs by super majors such as a [00

[Brian Hanson:]

Thank you Bob, god morning everyone as Bob mentioned we generated another record quarter in the fourth quarter of 2007 with a revenues up $209 million a 26 percent increase over the same period in 2006. For the full year of 2007 revenues totaled $713 million a 42 percent increase from 2006 revenues up $504 million. Our gross margin in the fourth quarter of 2007 increased two points to 32% compared to 30% in 2006, this increase is the result of product mix across all of our lines including increased systems sales and Land Imaging System, increased VSO sales related to fourth VSO system delivery and Marine Imaging Systems and increased multi client sales and beat the processing revenues in our Ion solution division. In our Land Imaging Systems segment revenues increased 10% in the fourth quarter to $82 million as compared to $75 million in the fourth quarter of last year. For 2007 revenues increased 58% to $325 million from $206 million in 2006. Excluding the sale of the first pipeline system in the first quarter of 2007 approximately half of our growth came from sporting in VectorSeis system sales demonstrating the continued marketing acceptance of our full-wave technology. The other half came from our lower margin vibroseis trucks, as I mentioned before although the margin on these truck sales have a negative impact on a consolidated gross margins this product is strong from an operating margin perspective because it requires little R&D and overall SG&A to support it. Gross margins in our land business slightly deteriorated for 2007 to 18% compared to 19% in 2006 primarily as a result of the first pipeline system sale in the first quarter which has limited margin as discussed in that quarters earnings call. Operating income for the land imaging system segment grows a 113% in 2007 to $28.07 million. Marine Imaging Systems revenues finished year with a strongest quarter at approximately $61 million, which represented a 60% increase over the 38 million in revenues in the fourth quarter of 2006, for 2007 marine revenues increased 39% to a $178 million from a $128 million for 2006, it seems throughout the year the increased demand for a positioning systems which include the commercialization of the DigiFin continues to drive the record revenue growth. Gross margin in the marine group was 31% in the fourth quarter of 2007 last compared to 34% in the fourth quarter of 2006. the change in margin rate is primarily due to product mix and some foreign currency exchange effects related to the fourth VSO system delivered to RXT at the end of the quarter. For 2007 gross margin was 38% compared to 37% in 2006 for the reflection of strong DigiCourse positioning sales and an improvement in margins on increased VSO sales. Operating income in the Marine Imaging Systems segment grows 48% in 2007 to $44.7 million. Our concept systems data management solutions segment revenues increased 49% to $9.6 million in the fourth quarter of 2007 from $6.4 million in the fourth quarter of 2006 for the full year data management solutions revenues increased 62% to $38 million from $23 million in 2006. The increase reflects strong industry demand for marine side network and for our gaiter and newly launched Orca product line to stream a navigation and data management applications. Operating income in the data management solutions segments rose a 132% in 2007 to $17.3 million. In our Ion Solutions division net revenues increased 21% to $57 million in the fourth quarter of 2007, primarily driven by the typical year-end sales activity and multi client data library sales. For 2007 Ion Solutions revenues increased 18% to a $173 million from $147 million in 2006. The growth was driven by strong results from both data processing and multi client revenues. Operating income for the segment in 2007 totaled $21.6 million, while the fourth on a consolidated basis are stronger margins we still served full year margin deterioration due to one-time nonrecurring items. For 2007 full year gross margin up 28% showed a three point decrease from 2006 is 31%. Our 2007 results include three unique one time low margin transaction we spoke to our [00

[Bob Peebler:]

Thanks Brian, I would now like to make a few comments on the prospects for a business in 2008 and beyond and how I believe we are well positioned for continuing strong growth and increasing profitability over the next several years. During our December guidance call I spoke to my belief that we are in a long activity up cycle for all field services that could extend well on to the next decade that is made up of two phases, first phase is a commodity phase well both rise, this is followed by the technology phase. The next phase companies that offer differentiated capabilities during their technology and services to better find and manage their own gas fields continue to share revenue and earnings growth. Meanwhile the more commodity focus businesses will start having margins in earnings issues related to competition from increased capacity. I believe we are on the latter stage of the first phase and then your second phase and Ion is well positioned for phase two. To support my position I would like to first speak to why I believe we are on a long activity cycle. On Saturday’s Wall Street Journal there was an article on Axon, the article starts out by stating that Axon success to finding new oil and gas and slipping. In fact Axon was less successful 2007 and in the prior years in finding new fields. Axon set a 101% reserve replacement with the companies lower than 14 years and Axon’s Senior Vice President was quoted to saying that mine should have remained hydrocarbons is found remote, complex geological formations and under hard conditions, this is not only a common thing to the large IOC’s like [00

[Operator:]

Thank you sir. (Operator Instructions). Our first question come from James West, go ahead sir.

[James West:]

Hey good morning Bob and Brian.

[Bob Peebler:]

Good morning.

[Brian:]

Good morning

[James West:]

On full-wave I saw you sold additional Scorpion, a full-wave Scorpion System during the quarter what do you think the market share is now for full-wave systems operating versus kind of 3D, 2D systems out there.

[Bob Peebler:]

I think its still in the probably the five to six percent range something like that, we track that, we track that mainly tracking whether or full-wave surveys so we look at the total activity now, what’s happened is that the rate of increase of full-wave has been pretty significant but the whole markets has been expanding rapidly also and so its just like a dollar in, a dollar is being spent in Land Imaging, there has been a lot of room I mean its been a very small part of the total.

[James West:]

Okay and is your market share still in the 80% range of equipment sold.

[Bob Peebler:]

Yes.

[James West:]

Okay, and if you look at the, this is the way I have been looking at the full-wave market, you sell a system or two into a certain region, I have issued some surveys and then drilled wells based on that and then it seems like the uptake release accelerates after that and I know Canada was a very successful market its now some 40% full-wave, its sounds like China is really accelerating right now, sort of those two regions what should be the focused on as the next market or the next regional play for full-wave, where do you think the acceleration will occur?

[Bob Peebler:]

Well I think, as you think I am explaining see with the large number of digital systems that was sold at India they are only now you know pretty much completed the commissioning of those systems, they are not out on operation yet, so we are working very closely with ONGC in making sure that you know they get the value out of that so I think that going into it just started I mean they purchase the equipment but they haven’t really started collecting the data so that’s one that works about, we think that that market wont say start getting experience with it will grow. Also we have had several systems sold into Russia and so that one is interesting and I think you can also see, you can also see some interesting activity in the Middle East so those are all, its all the places where you have got complex land, complex land reservoirs.

[James West:]

Okay that makes sense, and then on the cable less market you know obviously its you commercialize your FireFly system its going to be probably the most robust system in the market place but you do have a lot of kind of low technology competitors coming out with you know competed products, when you think about that market as to look up in the next couple of years, how do you think this market is going to fragment the cable less market I mean there will be high quality, you know large data set surveys and there will also be guys shooting surveys just to get the operational efficiencies but what do you think the percentage will be on the high end versus the low end.

[Bob Peebler:]

Well it’s a hard one, that’s a hard one probably in total earnings dollars its going to be the highest at the higher end just by almost by definition, I think the main thing for people to think about is the trend to higher density shooting we are seeing whether its on cable systems or cable less systems we are seeing a very strong trend almost every where of increasing channel account and we have been expecting that and it started to happen so that technology of that will happen, they are not doing that because they are just doing for fine, they just say its picking at a higher resolution to do the work and if you start expanding channel account then the cable less system will become more attractive particularly in areas of first where you have difficult trying and those kind of things, you know overtime I said over and over again and when I look out several years from now its hard to imagine that you have a whole lot of cable activities but its going to be an evolution return but in the short time I think we are going to see, we are going to get foot holes in both the high end, high density shooting, full-wave shooting and we will see foot holes in the sort of modern type shooting that’s mainly aimed to productivity or even places for you to set real tough terrain so you get all kinds of interesting segments and we have a report on those as the market unfolds.

[James West:]

Okay good then this one last question from me, with the VSO systems you sold large system to a delivery system to a RXT in the fourth quarter I know they are committed to buying a certain amount of equivalent in the next four years, have you scheduled the delivery or the, have they maybe ordered for the next system?

[Bob Peebler:]

We are in a process right now finalizing that there will be certain system in our plan and likely will be executed probably delivered sometimes.

[James West:]

Okay great thanks guys.

[Operator:]

Thank you our next questions comes from Cherry Savion with [00

[Cherry Savion:]

Good morning I have a question on your decision to set up international headquarters or a center in Dubai, can you explain what that means in terms of your operations, are you going to be staffing it at a cost and then also the other part of that equation is what kind of sales effect do you think it will be having.

[Bob Peebler:]

First to start let me give you some anecdotal story I guess that will help you understand why this is important. When we travel out of Houston and go to whether its India or the Middle East or the Far East all those places you are looking at almost a round trip of 27 hours in flight, in fact its typically 30 hours door step to door step, when you are sitting in Dubai you are in the Middle East so you are you know you are two, three, four hours from all the places, you are six to eight hours from [00

[Cherry Savion:]

Okay and is there a tax implication on that in terms of tax guidance orally?

[Bob Peebler:]

It is you know we have already contemplated that in your guidance role entries and we will continue to do that in future years as well.

[Cherry Savion:]

Okay I think, okay I will key you for my next question.

[Operator:]

Ladies and gentlemen if there are any additional questions please press the star followed by the one at this time. (Operator Instructions). Our next question comes from Cindy Du with Jefferies & Co, go ahead please.

[Cindy Du:]

Good morning guys, my question is on the marine sizing business, when I look at the number of existing and new 3D vessels that are coming out with eight plus streamers I mean it looks like the DigiFin and DigiStream is market both to probably half of those vessels only because two of the larger marine contractors use their own proprietary equipments, first do you agree with my estimate and second what kind of penetration rates are you expecting from those vessels that are currently baked into your ’08 and five year guidance?

[Bob Peebler:]

I don’t think we have given at the product level specific guidance, the only thing I will say is that the marine businesses for us is made up of the positioning technology plus which we just now added DigiFin, DigiFin will be placed somewhat by how rapidly the higher density shooting and more complex shooting involves which is involving quickly so we are pretty bullish on DigiFin also Orca which is on all of the vessel, majority of the vessels with the exception of some have their own system like Slumber Jay, but we were on the majority of vessels and with what’s called spectra and over a time we expected Orca will replace those plus rent a lot more capability for higher end shooting, we really have a given specific guidance to our product line by product line in that overall guidance.

[Cindy Du:]

Okay fair enough and then the margins in the marine side this quarter where it looks like 300 basis points lower then the fourth quarter last year which also included a shipment to RXT so what’s the erosion in margin due primarily to the FX loss or was there something else in the mix driving it?

[Bob Peebler:]

No I think a big part of that was the FX loss.

[Cindy Du:]

Okay thanks.

[Bob Peebler:]

There is being, by product line there is being no margin erosion.

[Cindy Du:]

Okay thanks.

[Operator:]

Thank you our next question comes from Michael Marina with Johnson Ranks go ahead please.

[Michael Marina:]

Good morning guys, my question is on the land margins I am sorry I missed the operating cum number you gave for four years I wasn’t able to fully back into it but it looks like the land margins and the fourth quarter were you know better than maybe they have run in recent quarters. Do you have the operating income margin for the fourth quarter in the land businesses could you give that outline?

[Bob Peebler:]

Okay let me just pull it out to go to that part of that script but the, you are correct that the fourth quarter margins were better in the land business and that was really associated with you know the prior quarters had there were mixed issued with the vibroseis vehicles and in addition we had you know a lot of ONGC activity in prior quarters that had lower margin rates so we just saw a lower margin rate of fourth quarter -.

[Michael Marina:]

I guess my questions are is this a level that achievable with the mixed kind of a maybe representative of what it should be doing forward.

[Bob Peebler:]

Yeah excluding the impact of mix ones you look at systems and vibroseis vehicles this I think the fourth quarter represented more normal margin rate for our business.

[Michael Marina:]

And what was that margin rate?

[Bob Peebler:]

We in the fourth quarter.

[Michael Marina:]

Yes.

[Bob Peebler:]

The operating income was for the year was 28.7 so you can act on that.

[Michael Marina:]

Okay so it was over 12% though.

[Bob Peebler:]

Our margin, our gross margin.

[Michael Marina:]

No, no operating. Okay so you have received from marked improvement from recent launch.

[Bob Peebler:]

Well absolutely.

[Michael Marina:]

And FireFly should be edited to that or kind of neutral.

[Bob Peebler:]

That’s correct.

[Michael Marina:]

Edited okay, okay thank you then one last question on the RXT system delivered in the fourth quarter was the entire system delivered in the Q4 or is there some carryover that you want?

[Bob Peebler:]

The entire system was delivered.

[Michael Marina:]

Okay right that’s all I had, thank you guys.

[Operator:]

Thank you we have a follow up question with Cherry Savion go ahead please.

[Cherry Savion:]

Hi in terms of your data library sales and multi client library sales in the fourth quarter did you give a number on that it looks, it appears that they were quite high.

[Bob Peebler:]

Yeah we gave the number on the solutions division which is the number that we gave right and that solutions to this and really represents the processing on multi client data library sales are combined but it was a very strong quarter for us.

[Cherry Savion:]

And on the new span that you completed in the North Sea some place up is that going to be going on sales soon or what is the processing on that?

[Bob Peebler:]

Well keep the mind awaited that span programs work we start selling them at conception right as we go out and get underwriting for them and then when that span is complete we are always open for business to solve a data library.

[Cherry Savion:]

Okay and then just one more marine question, on the VectorSeis Ocean bottom cable system what I mean I know the difference between F ways and P ways and stuff but what does that provide in terms of resolution that streamers don’t provide and how does that compare in terms of clause?

[Bob Peebler:]

The one from the image itself assuming you can get good coupling to the sea bed then it eliminates a lot of the issue to deal when you are making an [00

[Cherry Savion:]

That’s all very, very interesting thank you, just one more question what depths kind of this go to.

[Bob Peebler:]

Today we are routinely running down the I think we are a 500 to 600, 800 meters its designed to go equal to that, you get in more not the VSO system but the backend of the boat and booties in deepwater and how you have to have either, you have to have a way of flowing the booty in the deepwater so this issue that can be managed over a time and we will be running some deeper tests this year.

[Cherry Savion:]

Thank you very much.

[Operator:]

Thank you our next question comes from Andrea Moore with Talent Asset Management go ahead please.

[Andrea Moore:]

Yes thanks for taking my question when you mention the long activity cycle on the XN article has it changed your sales cycles or your, you know visibility in backlog has that changed at all or stretched out?

[Bob Peebler:]

I guess in some parts of our business if I for example data processing because of the nature of that business it is a backlog business that you are working on your processing what you have in house and you are all accompanied to know that so they have to get in the queue sooner in the industries kind so in essence we have pretty good backlog disability and that targets the entire markets you get more because the client gets in the queue. The marine business is more of a backlog business in the sense that they have to bring new vessels on those are long term so we are very well aware of them very early and in its competition is to going on that they have to inside to get them installed so those are pretty good and again if people are building in the vessel spaces you have pretty good visibility into that market. On the other hand business you know we might have a mark to two or three a quarter to visibility but it’s a volume business you got a lot of activity.

[Andrea Moore:]

Okay great thank you.

[Operator:]

Thank you ladies and gentlemen is there are any additional questions please press the star followed by the one at this time and as a reminder if you are using a speaker equipment you will need to look the handset before making your selection. Our next question comes from Cindy Du with Jefferies & Co go ahead please.

[Cindy Du:]

Hi I just have a couple of follow ups, the first one, the award that you mentioned in the beginning of the call on with RXT and you guys getting the processing work was that bid together or did RXT pull you into that project award?

[Bob Peebler:]

Its separate in the sense of each of those are separate tenders and they have a process so we have to compete on our merits now obviously there is a natural connection the oil company would make, they know that where the offers of the – the sensor technology and they know we have tremendous experience now in processing it and so we have a national award advantage and we have relationships back into the oil company, you know they looked up sometimes they have to explain the signs of technology but if they separate we competed with all that, the top guys and we are proud to win it.

[Cindy Du:]

Okay that’s great and then in terms of OBC and relative to the current marine market what’s the market share that OBC has right now and how fast do you think it can grow with the next two years?

[Bob Peebler:]

The market share today is a little bit like the question on the market share always, the market is growing but the total market is also growing rapidly and so our estimate is about its only about five to ten percent of the total marine spend so it’s a but it’s a growing segment in total dollar volume and so you know that’s why I like that market that its not engaged in lot of more commodity activities, its very focused, its very high and we have got some great new technology, it addresses both the image and the productivity issues historically that markets have and our partner now has a critical mass of business so now they are stable start getting the efficiencies you get when you are in the service business you have in the portfolio so a lot of good thanks about it and they have a great high market share in that market.

[Cindy Du:]

Okay and then one last thing could you tell us the timing of any upcoming lease sales if any that your multi client library would benefit from specifically?

[Bob Peebler:]

Well as I mentioned it was just the recently sale up in anchorage and there was just a tremendous interest in that part of the world and ones you have a lease sale it also is a, it may have been attractive for other people either the people that I didn’t believe so it may or not [00

[Cindy Du:]

Okay that’s all for me thank you.

[Operator:]

Thank you our next question come from [00

[Analyst:]

Hi Bob and Brian I have just a housekeeping question, how many shares outstanding, basic and diluted that you have at the end of the quarter.

[Bob Peebler:]

Yeah we are actually we have that on our press release, at the bottom of our press release for the, we got it for the whole of the quarter and the full year if you want to pull it out for that.

[Analyst:]

Is that weighted number or at the end of the quarter.

[Bob Peebler:]

Yeah all of those details are in the press release.

[Analyst:]

Okay and one other question it seems like restricted cash has gone up significantly and I was wondering what is that related to?

[Bob Peebler:]

Now you are telling me about restricted cash as you are give me tied up cash associated with certain [00

[Analyst:]

Okay thank you.

[Operator:]

And we have no further questions I would like to turn the conference back to over to the management for any closing statements.

[Bob Peebler:]

I thank you for joining us and taking time and we look forward to talking to you our First Quarter Inc call.

[Operator:]

Ladies and gentlemen this concludes the Ion Geophysical’s Fourth Quarter Earnings Conference Call, you may now disconnect, thank you for using ACT Teleconferencing.