ION Geophysical Corporation
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Good day, ladies and gentlemen. Thank you so much for standing by and welcome to the ION Geophysical First Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). As a reminder, the conference is being recorded today on Thursday, the 7th of May 2009. I'll now turn the conference over to Mr. Ben Bernam of DRG&E. Please go ahead

[Ben Bernam:]

Thank you, Michael, and good morning everyone. Welcome to the ION Geophysical Corporation first quarter earnings conference call. We appreciate your joining us today. With me are Bob Peebler, Chief Executive Officer and Brian Hanson, Executive Vice President and Chief Financial Officer. Before I turn the call over to management, I have a few items to cover. If you would like to be on an email distribution list to receive future news releases or experience a technical problem and didn't receive your news release yesterday, please call DRG&E and provide us with that information. That number is 713-529-6600. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the company's website at www.iongeo.com or via a recorded instant replay available until late May 21st. That information was provided in yesterday's earnings release. Information reported on this call speaks only as of today, May 7, 2009, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations 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 company's actual results or performance to differ materially from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC, including in its Annual Report on Form 10-K for the year ended December 31, 2008 and in its quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. I will now turn the call over to Bob Peebler.

[Robert P. Peebler:]

Thanks Ben and good morning. As expected, our first quarter was a difficult one. A key priority was our continued efforts to rapidly adjust our operating costs to the size of the business at hand. Since late November, we have reduced our total head count by 23%. When combined with other cost initiatives, including significant salary reductions, we have reduced our run rate by approximately 43 million on an annualized basis. Although we continue to look for additional cost savings, I believe that the majority of the cuts are now behind us and we will be once again focusing on building our business while continuing to emphasize cash management. It's much too early to blow the all clear signal as we still have many challenges in our business. But I do sense that the worst may now be behind us. I believe that with oil prices appearing to settle into a $50 price range and with many in our industry expecting more price involvement... improvement into price decks in 2010, the oil and gas companies are starting to unlock their budgets, which brings more certainty to everyone in planning their business. It's important to note that much of our business comes from outside of North America and that many of our future prospects are in places like China, India, North Africa and the Middle East. And that is where we are focusing much of our business development efforts. One example of this is our recent announcement of our first ARIES II sale to a very large global Chinese-headquartered contractor. It's notable that initially we expected this to occur in North America, but we managed to quickly redirect our efforts and close the deal with the Chinese contractor. I also want to point out that we are a technology company and are not in the field crew business. As a result, we do not have large amounts of capital tied up in vessels, crews or other assets necessary to support contracted acquisition services. Our costs are mainly variable related to our personnel. This asset light model gives us a flexibility to rapidly adjust our cost basis when the market enters a downward cycle. In addition, our prices are mainly holding with the exception of some pricing movement in the commodity end of our business such as geophones. This fact is reflected in our year-over-year gross margins, which remain generally consistent at 35%. From a market perspective, even tough we have seen some softness in the majority of our businesses, other than proprietary data processing, which continues to grow, our main challenge continues to be the land systems market in North America and Russia. The precipitous drop in those markets has been dramatic with land system sales essentially dropping to zero in North America and not faring much better in Russia. We do not expect either market to improve much until commodity prices increase sufficiently to restart drilling activity and related seismic acquisition work. This unexpected decline has clearly tested the wisdom of our ARAM acquisition since ARAM's main customer base is in North America. I still believe we will ultimately benefit by owning ARAM as there is still a very large installed base of equipment throughout the world that supports approximately 700 to 800 land crews. The long-term trend is for more 3D systems and increased channel count which will drive significant future sales. With ARAM, we are now much better positioned to serve this market from both a quality and price perspective and expect to gain market share in the international markets. Another area of weakness that will likely continue during 2009 is our VSO business with RXT, which is currently suffering a slowdown in their business and compelling them to reduce their fleet from five to three active vessels. Until RXT begins adding to their fleet, ION's 2009 seabed revenues will primarily be limited to spares and repairs on the three active crews. The good news is they have made significant operational improvements and have managed to recently capitalize their business, which has resulted in significant recent payments to us against amounts they owe us. We plan to continue to work closely with RXT during this tough period as we both share the same belief that the potential market for seabed full-wave will enjoy rapid growth in the years ahead as the challenges of characterizing high cost, hard to image reservoirs will only increase. Another good news story in our Marine business involves the payoff we are beginning to see on a significant investment in Intelligent Acquisition portfolio of streamer technologies, which include Orca, DigiFIN, DigiBIRD, and DigiSTREAMER. The value of combining Orca, DigiFIN and DigiBIRD as an integrated offering has the attention of both oil companies and contractors because the offering has a dual benefit of much more efficient operations and better imaging for both 3D and time-lapse 4D acquisition projects. For example, our Intelligent Acquisition technologies are able to significantly reduce infill or the re-shootings that most contractors must do when the streamer cable separates behind the vessel and have insufficient cross line spacing to properly sample the subsurface. In many marine surveys, the cost of infill can account for 30% of the total acquisition costs. So far, we are seeing reductions of 20% to 50% in infill on vessels using our Intelligent Acquisition technologies, which could save the oil and gas companies 5% to 15% on their acquisition bill. Even though our Marine business started significantly slower than last year, our pipeline of backlog gives us confidence that we can still look forward to solid year with sales mainly tied to the delivery of new vessels which... where we already have purchase orders or good visibility of future sales. Although our 2009 multi-client and related data library sales will likely not be as strong as last year, we are still expecting a solid year. Our advantage compared to others is the fact that we are a niche player that's focused on the exploration hot spots around the world and that we are offering more comprehensive, base of scale geoscience offerings that oil and gas companies use to plan their regional exploration programs far in the future. As such, we are less affected by prevailing commodity prices compared to other data library providers whose products more closely tie to where do we drill this year. Areas such as the Artic, the West Coast of Africa, Brazil and India are examples where we have focused. And most companies operating there are well capitalized and have a long view when it comes to their global exploration portfolio. One benefit of the slowdown that is already accruing to us and will likely increase as the decrease in day rates for the vessels we subcontract to do our surveys. As always, the biggest challenge with our multi-client business is the timing of library sales, which continues to be lumpy. However, the unpredictability is somewhat offset by the fact that we now have a significant portfolio of individual programs that helps create more balance. Even in this environment, we are continuing to attract new underwritings for key programs in regions ranging from the Artic to Southeast Asia. Our proprietary data processing business continues to be strong and growing. Although we have seen some weakness in some areas of our pipeline, our leadership in technology including reverse time migration is providing a significant competitive advantage against the commodity end of the processing business. We still expect our proprietary data processing business to grow compared to 2008, a true bright spot in our portfolio of product and services. Before I turn the call over to Brian, I would like to update you on key areas of technology. First, at a high level, we have reduced R&D spending by approximately 15%, but expect we will spend approximately $42 million in 2009. This represents about 7% of our forecasted revenue, which we believe is appropriate for a technology-based business such as ION. Related to this spend is a significant focus on the commercialization of FireFly. I'm pleased to announce that for the first time, we are supporting more than one commercial FireFly project. The first project is in China where as of today the project is approximately 65% complete with a productivity rate greater than what was contracted and with excellent trace recovery that is approaching what is routinely possible with cable systems. The second job is with BP in Northeast Taxes in the area of Hayneville Shale play. The project recently started and is currently being laid out. This job is notable in three ways. First, it's our first project using vibrators as a sound source compared to dynamite. Second, the project is in a very high canopy area, meaning significant foliage, almost as advanced as encountered in jungles. We are pleased so far our radio system is working well in this environment, which is an important achievement. Third, I consider it significant that we are working with BP again. As you remember, they were one of our early field trial partners and know FireFly about as well as anyone. They provide a great input into their expectations for what a cable system needs to deliver. And because of their input and commitment, I think we've made some great improvements in the system that is accelerating the adoption of this technology. The third job is in Mexico where the Mexican contractor Comesa will operate a our FireFly system for PEMEX on three full scope end-to-end projects that range from swamps to remote farming areas that also present difficult imaging challenges. PEMEX projects are a poster child for our Solutions strategy as ION not only will be providing the FireFly technology, but also working directly with PEMEX on all aspects of the seismic workflow including survey planning, project management of acquisition operations and follow-on processing of the full-wave data with the goal of identifying individual locations in partnership with PEMEX geoscientists. We recently signed a contract with PEMEX and Comesa and are in the process of shipping the equipment. The job will likely start in June. Considering the very tough market conditions, I am pleased that with these three projects, we're making steady progress with the introduction of FireFly and a related full-wave acquisition. I will now turn the call over to Brain.

[R. Brian Hanson:]

Thank you, Bob. Good morning everyone. I'd first like to go through our latest quarter's results and then move into a broader discussion relating to our updated guidance and our current liquidity and cost reduction initiatives. Moving into the financials for the quarter. As we expected, our first quarter continued to show market weakness, especially in the North American and Russian land markets. Overall, we generated revenues of $107 million compared to $140 million during the first quarter of 2008, a decrease of approximately 24%, primarily on the system sales side of our business. Our ION Solutions revenues were up slightly as compared to prior year at approximately $47 million. We experienced both sales growth and an increase in our backlog in our data processing business. Revenues from our Data Management Solutions division decreased $2 million, entirely as a result of changes in currency exchange rates. Excluding the impact of currency, that business grew year-over-year 9%. Our Land and Marine Imaging Systems each showed a decrease of approximately $16 million in revenues compared to prior year. For the Land Imaging Systems business, the decrease was attributed to the softness in the North American and Russian markets. For the Marine Imaging Systems business, it was more a question of the timing of new vessels this year as there is more actively projected for the second through fourth quarters than it was planned in the first quarter. We saw a decrease in our gross margin rate in the first quarter to 32% compared to 35% in 2008. The quarterly decrease in margins was due to the amortization of ARAM's acquired intangibles. Removing the impact of the amortization charges, consolidated gross margins for the first quarter of 2009 and 2008 were both 35%. In our Marine Imaging Systems division, we experienced a 2 percentage point decrease in gross margin, mainly related to the product sales mix for the quarter. Our Data Management Solutions segment gross margins showed a 4 percentage point improvement over last year as a result of more software versus hardware sales. Margins in our ION Solutions segment remained stable when compared to the first quarter of 2008. First quarter of 2009 contained two special charges that directly impacted our results. The first special charge relates to an additional impairment of the acquired intangible assets of ARAM. At March 31, 2009, our acquired intangibles were evaluated again for possible impairment. Based upon this evaluation and the continuing prevailing market conditions, it was determined that 38 million of ARAM's proprietary technology intangible assets were impaired. We recorded that charge as a separate line item on our income statement. As of March 31, 2009, ARAM's intangible assets have a remaining net book of $33 million and a remaining weighted average life of 6.9 years. The second special charge for the quarter relates to the additional employee reductions in force that occurred throughout the first quarter. At March 31, 2009, we had expensed approximately $1.6 million in severance related to these reductions. In total, the first quarter contains approximately $40 million of special charges before taxes. In our Land Imaging Systems segment, first quarter revenues decreased to $34 million compared to $50 million in 2008. As expected, the North American and Russian markets continued to be soft following the slow fourth quarter of last year. However, we did see continued activity in the North African, Indian and Chinese markets. We also saw success bringing ARAM's ARIES product line in the international markets, selling systems in both China and Russia in the first quarter. Gross margins in our Land business decreased during the first quarter of 2009 to 17% compared to 24% in 2008. Lower Land revenues for the quarter contributed to this decrease in margins. Margins were diluted through the inclusion of the amortization charges associated with the ARAM acquisition, which totaled approximately $3 million for the quarter. Marine Imaging Systems revenues decreased to $18 million in the first quarter of 2009, primarily due to the timing of new vessel deliveries into the market. While the new vessel builds are forecasted to be large this year, the related sales activity is projected to occur during the remainder of 2009. During the first quarter, however, we did continue to retrofit existing vessels with our new steering technology DigiFIN as we enjoyed continued sales to two of our largest customers. We expect the sales in our Marine division to continue to increase as new vessels enter the market this year. First quarter gross margin in the Marine group decreased 2 percentage points to 44% compared to 46% in the first quarter of 2008, primarily as a result of product sales mix. Our first quarter Data Management Solutions segment revenues decreased $7 million compared to $9 million in the first quarter of 2008, entirely as a result of changes in foreign currency exchange rates. This division conducts business primarily in pound sterling and during the first quarter, the U.S. dollar strengthened significantly against the pound sterling. In our ION Solutions division, net revenues remained at $47 million for the first quarters of 2009 and 2008. The results were driven by strong data processing activity and sales of our data library including Artic spend. First quarter gross margin in the Solutions division remained stable at 32% for both 2009 and 2008. As a result of lower revenues this year, first quarter consolidated operating expenses, including the impairment charges of... excluding the impairment charges of $38 million and the $2 million of severance charges as a percentage of revenue increased to 37% compared to 27% for the first quarter of 2008. Removing the impact of the special charges, operating expenses increased by $1 million year-over-year. We incurred an income tax benefit of approximately 414 million in the first quarter of 2009. Excluding the special charges, we generated a net loss of $10 million compared to net income of $8 million for first quarter of 2008. Including the special charges, diluted EPS was a loss of $0.39 compared to income of $0.08 in the first quarter of 2008. The total impact of the special charges was approximately $28 million or $0.29 per diluted share. Excluding these special items, our loss was $0.10 per diluted share. Turning to the balance sheet. Inventories during the first quarter rose by $9 million to $272 million as a result of trailing advanced purchase commitments for certain materials. As has been discussed in prior earnings calls, our main focus at this point is to monetize our inventory. And based on our current pipeline of business, we project this to begin occurring in the second quarter. Accounts receivable decreased by $49 million in the first quarter of 2009 from year-end 2008 as we continue to focus on collections. Excluding the investment in our multi-client data library, CapEx for the first quarter of 2009 was $2 million. Additionally, we had $7 million related to transfers of inventory into our rental pool. Given the current weakness in the North American market, we have successfully shifted our focus to providing more rental opportunities to our customers. Cash decreased $13 million compared to year end, primarily as a result of reducing trade payables related to our build of inventory in the fourth quarter of 2008. The first quarter is historically our weakest quarter of the year and therefore is typically our lightest cash generating quarter. We have already seen our cash balance increase and, as of the end of April, our unrestricted cash balance was approximately $30 million. Beginning in the fourth quarter of 2008 and continuing through the first quarter of 2009, we implemented several cost reduction initiatives including significant general expense reductions, reductions in head count, a salary reduction program, suspension of the matching contributions to employees 401(k) plans and additional policy changes including a focus on decreased travel and the renegotiation of agent contracts. The largest of these programs is the reduction in head count. Including contractors, we've reduced our total head count by 424 positions or 23% of our workforce. These reductions were made to right size our organization in order to align with the level of industry activity and protect our EBITDA generation capabilities in spite of lower projected revenues this year. The salary reduction program reduced employees' base salaries by 12% for Bob Peebler, Jim Hollis and myself, 10% for all other executives and senior management and 5% for most other employees. Additionally, the Board reduced board compensation by 15%. Through our cost reduction initiatives in the fourth quarter of 2008 and the first quarter of 2009, we have removed an estimated annual expense of approximately $43 million. After one-time charges and accounting for the partial year impact of some of these expenses, we estimate that we will save approximately $36 million during the remaining three quarters of 2009. As a result of the continuing uncertainties surrounding the duration of severity of this economic downturn, we are updating our guidance for 2009 to better reflect current activity levels. We are continuing to run our business conservatively with the primary objective to generate cash flows and have taken a very deliberate approach to analyzing product and service demand in our business on a worldwide basis. Based on our first quarter results and current expectations, we are updating our overall guidance for 2009. We now anticipate 2009 consolidated revenues to range between $570 million and $630 million. Even with lowered revenue guidance, we anticipate generating approximately $120 million to $160 million of adjusted EBITDA in 2009, which, as a result of the significant cost reduction measures taken in the first quarter, is only slightly lower than our original guidance. The remaining detail regarding our updated guidance is contained in the earning release issued yesterday. Moving to liquidity, our revolving line of credit remains drawn 100% and we have approximately $30 million of cash on hand as of the end of April. In addition, our cash balance is building coming out of the first quarter and should show improvement each of the next three quarters of 2009. After the significant cost reduction activities mentioned earlier, it is our belief that cash generated from our anticipated adjusted EBITDA range in 2009 is adequate to provide us with sufficient liquidity for operations. Under our credit facility, we are required to satisfy certain quarterly financial covenants and ratios. We are currently in compliance with all loan covenants and ratios. However, based upon the softness of the past two quarters and our current forecast for the remainder of the year, our estimated projections indicate that we might bump up against one or more financial covenants at the end of the third quarter and then continue in compliance in the fourth quarter. We are working proactively with our bank group on an amendment to relax the covenants and expect to have it completed in the second quarter. With that, we will open up the call for questions.

[Operator:]

Thank you, sir. Ladies and gentlemen, at this time we will now begin our question-and-answer session. (Operator Instructions). Our first question is from James West with Barclays Capital. Please go ahead.

[James West:]

Good afternoon.

[Robert Peebler:]

Good morning James.

[James West:]

Bob, on FireFly, I think first, congratulation on all the FireFly related announcements we have seen this year. I think it's particularly impressive given the industry environment we're in. But now that you have three projects in various stages, should we expect you to take on additional projects at this point or are you guys kind of tapped out from a manpower and technology standpoint?

[Robert Peebler:]

We're tapped out. We've got pretty much the equipment we have deployed. And as you can imagine, we have basically three drops (ph) going out of launch in three parts of the world. So that's pretty much what we can get done. As the year unfolds and some of these... we roll off these projects, we're constantly looking for additional projects. But right now, we're pretty much tapped out.

[James West:]

Okay. And then on the processing side of the business, you have great backlog there. It's been extremely strong. What's driving that? Is it just pull through from last year's exploration work? Is it reprocessing and activity? I mean is it something of a technology niche you have. I've been surprised at how well that business has performed.

[Robert Peebler:]

It's sort of all the above. One of the things we see for... I'll just give a couple of examples. For example, there was a lot of wide-azimuth work, as you know, acquisition work down over the least year or two. And now companies are stepping back and actually wanted to reprocess a lot of that data. And so... and once that happens, the opportunity moves from the original contractors that acquire the data to reprocessing jobs like ourselves and have a really good and high-end reputations. So we're doing... we are now reprocessing a lot of the data that has been collected over the last couple of years, which is sort of why we like that business. It's a great addition to our portfolio. (inaudible) acquisition slows down high-end processing increases. The other fact is that we've been working very hard to expand our global footprint. And because of that, we just have a much broader portfolio of activity, which gives us more activity. And then I think third, we have just a really strong reputation and leading technology, and that's really benefiting us now. Our leadership for example in reverse time migration has really opened up a lot of opportunities for us. And that's a real hot area we're seeing companies. So it's a great business, we've got a great technical leadership and it's going to be a really good year for the guys.

[James West:]

Okay. That's very helpful. Thanks Bob.

[Operator:]

Thank you. And Joe Agular with Johnson Rice, please go ahead with your question.

[Joe Agular:]

Thank you. Bob, I wanted to ask you a question on a remark you made in your opening statement, which was that you're starting to see some signs that oil companies are unlocking their budgets. I was just wondering if you could maybe give some more color to that, maybe where... given that seismic is seen... is always thought of as so discretionary, it's a very interesting comment.

[Robert Peebler:]

Yeah, one thing, Joe, is that what I've seen is that just a change in things settling down a little bit. If you go back to as early as January or even February, I think there was a lot of concern in the industry we might see oil prices go to 20. There was all kinds of scenarios out there. And I think just a combination of the sense that the economy is starting to slowly but surely get a little bit better, the sense that the oil prices are likely going to hold in that upper 40, lower 50 range at least and it has sort of held there I think has given oil companies more confidence to basically start releasing their plans for the year. So we sort of saw in the first part of the Q1 people really in turmoil and everybody sort of internally focus. So now it's... I won't say it's business as usual, but people are now starting to... you get a feeling that people really now have plans that they are going to operate against this year. Now as far as where, we certainly have not seen a strong increase in North America because of the natural gas problem. But even there, some of our contractors are saying that they are now starting to see a little better deal flow, some activity, some bidding. And so I think even there people are starting to, they're sort of adjusting to the reality of the market and then they are all starting to make some plans. And then the international markets, in our international markets, places like China, which we just got back from. There is still a lot going on in the domestic side there. Most of our international markets, less Russia, still seem to be relatively strong. But I think mainly it's I think a growing confidence that we probably got the worst behind us from the oil prices diving and there is some stability. And I think most people are also thinking that next year, the price is going to go up some. So I think it's that combination.

[Joe Agular:]

Okay. That was it for me. I will queue in later. Thanks.

[Robert Peebler:]

Okay.

[Operator:]

All right, thank you. Terese Fabian with Sidoti, please go ahead with your question.

[Terese Fabian:]

Thank you. I have a question. On the FireFly survey in China, can you talk a little bit about the scope of the work and when it would be completed? And relating to all of the projects that you have going on, how long will it take to actually see the results of the work for the customers to be able to assess the results?

[Robert Peebler:]

Yes, there is two ways the customers are looking at this; one is just the operational aspect of FireFly and of course, they see that immediately. And then secondly, to get a sense of the quality of the data itself. And there is two ways they look at that. Part of that's what's called trace recovery, meaning sort of what percent of the data is actually being collected with the system. And then also they sample the data as we pull that data off the FireFly, it's put into a form that then geophysicists are already looking at the data and they get a good sense of whether or not the data is good data or not. And I would say in all three of those areas, we are passing the test. Obviously, when you're out there in outer Mongolia or wherever at in China, the logistics are different than we've experienced. We've got a great customer that is working closely with us. We're learning more about what they expect from an operational, procedural point of view. So there is a lot of things you sort of learn together as you go forward. But we are seeing a system, compared to where we were at even last summer, we've made just significant progress on things like trace recovery to the point it's getting nearly to where I think we could expect with a wireless system and then our cable system. And the data looks really good. I don't think anyone has any concerns at all about the data quality. And the job, even though it's a new system with a new customer, right now the job is moving along faster than they had planned for in sort of like total shots per day. And we should have that one finished up sometime in late May in the China world (ph). In the BP, we've been laying out, I think as of today, we should be getting our first vibe point. So they were moving the vibes in position this morning. And we're expecting to get some word sometime today that they have started the actual data collection side. We've been quite pleasantly pleased how well the radio, from the point of view of connecting to the FireFly boxes, has been working in the layout process. So now we'll see how we do in the... with the vibes. And that's the first time we've used vibes, so that's pretty exciting for us. And the Mexico job, we are just shipping the equipment. So the whole adventure is ahead of us pretty much on that one. We are quite excited about that because it's a... it's three projects. We'll be pretty much out there for the rest of the year and maybe into next year, at least for the rest of the year working with Comesa and PEMEX.

[Terese Fabian:]

Can you talk anything about what kind of revenue realization you have on these jobs, is it profitable for you, are you doing the data processing on the seismic?

[Robert Peebler:]

Yeah. Each one is a bit different. The Chinese job will be ultimately a sale. We've shipped equipment, we have a contract. This is one where, because it's a brand new system, we need to go through a checklist of this works and that works. And at some point then we get paid against the contract and it will be profitable. And then it'll be where our expected margins will be on the system. And then the Mexico job is a rental with the purchase option. And so that's a three... whatever it is in the time, several months of rental which is profitable for us. In fact the rental purchase model is a good model for us for new technology. And that's sort of those two. And then the BP job is a little bit more complicated because it goes back to our original agreement with them. And so that one is structured to sort of accommodate some of those requirements. But it's also going to be fine.

[Terese Fabian:]

Okay. Good, thank you. And then I have... a question. You had released that on the completion of the Brazil spend. What's the significant of that in terms of your sales and what's going on with other spends? Because you had mentioned in your press release that a multi-client data library investments are going to be reduced this year, but that comes from the clients if I understood it?

[Robert Peebler:]

I'll let Brian cover that one.

[R. Hanson:]

Hi Terese.

[Terese Fabian:]

Hi.

[R. Hanson:]

It's fairly significant. That was a very well underwritten project from the get-go. So the significance of completing that one is just that we get another really great library that's on our library shelf. So that's a little bit of a different question then what the new venture program looks like moving forward. We had a fairly robust year last year with multiple projects going on multiple fronts. And this year, we've just taken a more cautious approach to that business and have just... and lined up fewer projects. So we don't anticipate spending as much CapEx as we work those projects. But we have some very interesting projects in the pipeline.

[Terese Fabian:]

Okay. And again, that CapEx is basically from the project participants?

[R. Hanson:]

That's correct.

[Terese Fabian:]

Okay. Thank you.

[R. Hanson:]

We're still running under the same model where we look at the portfolio of new venture programs. And that portfolio should fund our new venture activity.

[Terese Fabian:]

Okay. Thank you very much.

[Operator:]

Alright, thank you. Mark Thomas with Simmons & Company, please go ahead with your question.

[Mark Thomas:]

Good morning, guys.

[Robert Peebler:]

Hi Mark.

[R. Hanson:]

Good morning.

[Mark Thomas:]

Just a couple of questions here, touching on the Marine segment first. I know you mentioned you expect solid Marine sales going forward with the newbuild vessels coming out. Thus, would the Marine segment revenues this quarter be reflective of a good baseline for maintenance-related sales on a quarterly basis?

[R. Hanson:]

It's probably reflective of maintenance-related sales and in addition you have to layer in the retrofitting of vessels with the DigiFIN technology. It's sort of the...

[Mark Thomas:]

Okay. And then...

[R. Hanson:]

Go ahead.

[Mark Thomas:]

And then turning to your customers, are you seeing any improvement on some of your customers' financial situations where you may feel more comfortable making sales without cash upfront?

[R. Hanson:]

Well, on the Marine side of the business, we do make sales without cash upfront for certain customers, like customers like PGS, where we have a longstanding relationship. They've got a tight balance sheet and we extend normal trade terms with them. So that's the normal course of business. Same thing with the customers like truegro (ph).

[Mark Thomas:]

I guess more specifically on the land side.

[R. Hanson:]

Well on the land side, I think we're still typically pretty conservative with your average contractor.

[Mark Thomas:]

Okay. And then...

[Robert Peebler:]

Yes, that very much depends on the contractor. If you look at land, we do have some contractors that are quite substantial and you would be comfortable with them. But obviously, right now, our preference is also to get as much cash upfront as we can get.

[Mark Thomas:]

Okay. And then a final question for me. Just on a percentage basis, could you estimate how much your marketing efforts have shifted to the more robust markets like China, India and North Africa, say, relative to six months ago?

[Robert Peebler:]

Yes, I would say the majority, probably 80% is in outside of North America with the exception of the Gulf of Mexico processing obviously and data library sales and that kind of things. So our processing business, we still have a substantial piece of that business that would be related to North American based customers. But from a systems point of view, we are almost totally focused external. The business we get here with our known customers and it's more of ARIES repairs and that kind of business.

[Mark Thomas:]

Okay. Thank you very much for taking my questions.

[Operator:]

Alright, thank you. (Operator Instructions). George Gaspar with Robert W. Baird. Please go ahead.

[George Gaspar:]

Yes, good morning. I'm sorry I got on late and I didn't know if you had commented on the proposed request to shareholders for a reverse tax split.

[Robert Peebler:]

We have not commented on that.

[George Gaspar:]

You have not?

[Robert Peebler:]

We have not.

[George Gaspar:]

Okay. All right, I mean what's the strategy here? Can you talk about that?

[Robert Peebler:]

Yeah. The strategy, obviously, we would like to have that option to do that. If you look at the number of shares even in our... when times are a lot better for us, we felt like we had a bit of a share overhang. And so if you look at how market works, there's a lot of companies out there that until you get above $5 or so, they don't really take a look at you. And so we just want to have that in our arsenal of things that if we decide we can do the reverse spilt.

[George Gaspar:]

Okay. And in terms of financing, I don't know if you've made a comment on this. On the high interest rate financing that's in place, you've got any strategy on trying to drive that down or is that just going to have to work its way through the business process over the next year, and hopefully you get some room to maneuver or to replace this?

[R. Hanson:]

Actually, George, we are working very aggressively to take that out as soon as we can. And we are looking at different scenarios to put a lower cost instrument in place and extend the maturity and have a lot of support and cooperation with our general bank group to do that.

[George Gaspar:]

Okay. All right. And then one question on here if you are working with Africa, Nigeria offshore area, do you work that area?

[Robert Peebler:]

Yes. And in fact, it shows up in different ways. One is we do have spans in that part of the world, which is our multi-client. And then we also have a lot of our contractors that use our equipment in that part of the world.

[George Gaspar:]

Okay. Are you going to... there is a pretty significant exploration project that's going to begin in September in the Joint Development Zone off Nigeria. Are you going to be involved in that or have you been involved in doing or supporting seismic activity there?

[Robert Peebler:]

Yes, again because we don't ourselves provide crews and so we show up in two ways. One way is for the contractors to be ease our equipment like the Intelligent Acquisition equipment. And I would be surprised if that didn't show up there in one for or another. And second is this expands (ph) our multi-client and then actually the other is the VSO and of the West Coast of Africa, which RXT has quite an extensive project with Exxon... ExxonMobil.

[George Gaspar:]

Great. And if I could ask one additional. In your annual report, you gave a pretty good revenue of some of the technologies that are coming about and you're trying to help your customers on. This business of steering the streamers and trying to get rid of the black spots or whatever, can you comment on how the DigiFIN system or whatever you're doing that can eliminate some of the retracking that's been required in the past by oil operators in doing seismic?

[Robert Peebler:]

Yes, George, I think you actually missed that part on the call, but I can always...

[George Gaspar:]

Oh, sorry.

[Robert Peebler:]

Repeat real quick. Yes, I covered that on infill. But we're seeing infill can represent up to 30% of their total costs. And we're seeing with using our streamer technology the DigiFIN addition in particular, and in concern with Orca which is sort of our operating system, we're seeing some 30 to 50% improvement in infields. So that really equates to much more productive operations and obviously lower cost to the oil companies.

[George Gaspar:]

That's very encouraging. Thank you.

[Operator:]

Thank you. (Operator Instructions). We have a follow-up from Terese Fabian. Please go ahead.

[Terese Fabian:]

Hi, I have two questions actually. And first is on the market recovery, when it does come for seismic equipment sales. Do you think that... I mean there have been very heavy sales over the past couple of years, some seismic equipment is abundant, it's all over the market. What kind of land seismic sales do you expect to see when the improvement comes?

[Robert Peebler:]

I think Terese, one thing I'd really like to point out to people that there is 700 to 800 crews around the world, of which only 118 are in North America. And so I think people here tends to think about the market being North America. But if you think about it, only 100 out of say 700, 800 is North America. Another thing to look at is in North America, 80% of the crews are 3D, 20% are 2D. The rest of the world, it's more or like, in aggregate, is more... it's less than 50% of the crews are 3D and the rest are 2D. Also in aggregate, the channel count here is also higher. And so the trend, and I think the most fruitful trend for us is that all those crews internally, you are going to have them going more towards what's going on in North America as our market matures. So you are going to see a big shift over time from 2D to 3D probably up to those same kind of ratios and people are driving to higher and higher channel counts. So the majority of market I think now and forever will be primarily international. And it really isn't that equipment overhanging international because of that drive. There is a bit of an equipment overhang in Russia, but I think that will get corrected pretty naturally because their reserves are in decline. So that's... I see that more of an aberration. I think North America is more problematic. In North America, I don't think the play is going to be increasing capacity. I think there is plenty of capacity and there is probably a bit of a grey market right now of equipment. I think the play in North America is going to be higher-end technology that people are going to be go on towards full-wave, towards higher channel count and even towards things like FireFly. And so we'll be focused on FireFly and higher channel count with ARIES when the market start recovering here. And in the rest of the world, it's really more of equipping them with more and more 3D and higher channel count.

[Terese Fabian:]

Okay, thank you. We'll look forward to that one. On the G&A question I have, it's for Brian. The first quarter number was fairly high. Does that include severance costs and do you have a run rate going forward?

[R. Hanson:]

Yes. I am not sure if you picked that up in the script as we went through it. But the first quarter included about $1.6 million of severance charges. And as you run forward... if you take a look at our run rate from Q4 and Q1, our total cost reductions totaled $43 million on an annualized basis. In the last three quarters of this year, we would expect that we've cut out about $36 million worth of expense. Well some of that is not... it's not all just in G&A. You are going to have some of it above the line too and customer service expenses and varied (ph) costs and stuff like that.

[Terese Fabian:]

Right. So you don't have a breakdown in particular for G&A going forward.

[R. Hanson:]

I didn't take it to that level of granularity on the call, but I can always look at it.

[Terese Fabian:]

Okay. Thank you very much. That's it.

[Operator:]

Thank you. And management, there are no further questions at this time. Please continue with any closing comments.

[Robert Peebler:]

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

[Operator:]

Thank you. And ladies and gentlemen, this does conclude the ION Geophysical first quarter earnings conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 303-590-3030 and put the access code 4062393. That number again 3030-590-3030 and put the access code 4062393. ACT would like to thank you very much for your participation and you may now disconnect. Have a very pleasant rest of your day.