ION Geophysical Corporation
Q3 2009 Earnings Call Transcript

Published: 5 Nov 2009

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the ION Geophysical third quarter earnings conference call. During today’s presentation all partied will be in a listen-only mode. Following the presentation the conference will be open for questions. This conference is being recorded today, Thursday, November 5, 2009. I would now like to turn the conference over to Jack Lascar with DRG&E. Please go ahead.

[Jack Lascar:]

Thank you Doug. Good morning and welcome to the ION Geophysical Corporation's third quarter earnings conference call. We appreciate you are joining us today. Your hosts 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 our an e-mail distribution list to receive future news releases, or experience a technical problem and didn't receive your news release yesterday, please call us at 713-529-6600 and let us know. 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 until November 19. The information was provided in yesterday's earnings release. Information reported on this call speaks only as of today, November 5, 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. This 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.

[Bob Peebler:]

Thanks, Jack. And good morning. On 23rd October, we announced the ION-BGP joint venture, which we believe is transformational for the company, both short, medium and long term. In the short term, we go from struggling with a serious liquidity issue to a significantly de-leveraged and much stronger balance sheet. In the medium term, we have a strong possibility of significantly increasing our market share, including a built-in large customer. And in the longer term, we have the likelihood of capturing the future leadership in land acquisition technology in cooperation with our joint venture partner, BGP. Before I go into the details of the exciting prospects of our new venture, I will give you a quick overview of quarter three. There are a few bright spots in our third quarter results, with overall performance continuing to reflect conservative spending by both oil companies and our contractor customers. I do believe the market has hit bottom in most of our segments. And with oil prices somewhat higher than expected, we may see some renewed year-end spending and likely improved activity starting in 2010. We believe North American land will likely lag in the recovery due to persistent low, but improving gas prices. And we don't expect to see much recovery in the North American land business until late 2010 or into 2011. One bright spot for ION is our proprietary data processing business that will end up with a record year and enter 2010 with a strong pipeline of business. The main drivers of our data processing business have been the large amounts of new complex data, such as wide-azimuth that has been acquired over the last few years, and now is being sent out by the oil and gas companies for additional reprocessing. Our GXT division has leading technology, including reverse time migration, which is underpinning our success in the data processing area. We also are seeing solid growth in our Concept System software business, where Orca is rapidly becoming the industry standard for marine command and control and streamer steering. We expect sales will continue to grow into 2010, as we are still seeing vessel operators migrate from the older SPECTRA platform to Orca. Our Marine DigiFIN product is also having great success this year with market penetration exceeding our earlier expectations. The oil and gas companies are eager to see more streamer steering capabilities on the marine seismic fleet, and have been increasingly specking the combination of Orca and DigiFIN on complex surveys around the world. Our multi-client business continues to be a mixed bag with continued interest in our new programs, such as the most recent addition to our [Arctic] SPAN library off the coast of Greenland. But relatively slow data library sales due to oil company budgetary constraints. We are confident that once oil companies budgets loosen, we will see a return to more normal multi-client spending patterns. As already announced, the big news during this quarter, was the announcement of our land equipment JV with BGP. The announced JV is a combination of two years of discussions, motivated partly by BGP's strong belief in ION's vision for the future of land acquisition. In addition, the parties realized that ION needed a strong operations partner to help with better defining market requirements and to supply a built-in market to provide more commercial stability for existing technologies like Aries and Scorpion, and also for game changers like FireFly. ION and BGP entered into a general MOU in September of 2008 that defined the overarching principles of ION-BGP cooperation. And that provided a broad framework to the negotiations that took place over the last several months, as we blueprinted our vision for the JV. I am going to speak to the JV in four parts. First, by providing an overview of BGP. Second, by outlining the rationale behind the joint venture. Third, the financial elements and impacts on ION. And fourth, what remains to be done before closing. First, the overview of BGP. The acronym, BGP stands for Bureau of Geophysical Prospecting. BGP is a wholly-owned subsidiary of the China National Petroleum Corporation, or CNPC, which as many of you know is one of the most active E&P operators in the world. CNPC in partnership with BGP, took over operatorship of one of the world's largest oil fields, and Iraq's largest, called Ramalia. They have also recently signed mega-asset development deals in Western Canada, Latin America, Africa and Central Asia, where their future commitments for exploration and reservoir development are measured in the billions of dollars. BGP is equally active and has experienced tremendous growth in these recent years, in part by being drawn into opportunities by its parent, but in large part because its reputation is established as a seismic contractor capable of acquiring data in almost any environment in a highly efficient and HSE friendly manner. BGP now operates 113 land seismic crews around the world, split almost equally between domestic China and international deployments. By comparison the major international land contractors, companies like WesternGeco, Global Geophysical, PGS, and CGGVeritas operate approximately 20 crews each. So BGP is by far the world's largest land contractor. They operate in every conceivable acquisition environment, from the deserts of North Africa to the jungles of Latin America, to the cold weather environments of Mongolia. This is important, because their diversity of operating experiences will carry over to the joint venture company and enable them to suggest new features and functions in land seismic equipment that should appeal to nearly every other contractor. Along with being the largest land seismic acquisition company, BGP has the largest installed base of seismic equipment. They are very large purchaser of new equipment, as they field new crews and expand their existing ones, but also feed the normal replacement cycle for spare parts. BGP also realizes that future growth will depending on pushing new technology and therefore have a very strong interest in ION's new technology such as FireFly and VectorSeis. In recent years our market share of the overall BGP account, both ION and ARAM combined, has been less than 20%. The other major equipment provider supplied the rest. Though not every BGP crew may end up carrying equipment from the joint venture, and though not all crews will switch to joint venture technology overnight, we’d expect the 20 to 80 account share to flip to 80/20 or better in coming years. And we assume that is a reasonable goal. Second, the rationale for forming the joint venture. BGP has acknowledged that ION is a highly innovative technology company, with the necessary vision for land acquisition in the 21st century. But also realized that ION is handicapped by not having a field acquisition services arm to test emerging technologies and serve as a built-in market for the products that are developed. Frankly, BGP also had growing concerns about ION's financial difficulties due to the recent financial crisis and was motivated to find a way to help ION in the short-term. BGP also has a strong desire to have more influence on the design of future land systems to the point that they had already launched their own internal product development efforts, which they ultimately are contributing to the joint venture. BGP believed that a combined effort between BGP and ION engineers would get them to where they wanted to be much faster than going it alone. ION's interests were very aligned with BGP's, as we also realized we needed better practical input on the market's requirements, needed a test partner and needed to substantially increase our market share to have a viable long-term land business. This was even more important, as we continue to believe that we were at the front end of a new land technology cycle, that will be led by cableless recording systems, sophisticated command and control operating software, and full wave digital sensors. All of these factors combined to make the venture compelling for both parties. And this convergence of factors and our belief in what we could accomplish by working together were the driving forces throughout the negotiations. It’s important to note that an important principle of the joint venture is to continue to sell equipment to all land contractors, which is a must to have a sufficient level of business to support the needed R&D levels required to gain and maintain market leadership. And also to assure competitive quality and cost due to the economies of scale and scope. The open selling model will not only benefit BGP, but all of the joint venture's contractor customers. The main message to our existing land customers, is it will be business as usual, except they can look forward to even more robust systems in the future that should be higher quality and lower cost. Third, the financial elements of the deal. As you can imagine, it was difficult to value the assets of both ION and BGP during this near collapse of the land equipment business. For example, ION's land business when combined with ARAM was over $425 million in annual run rate revenues when we acquired ARAM. But this year, we will be lucky to have $120 million in total land sales, including our geophone business, which is not in joint venture. We also had to take into account the assets that BGP were putting into the venture, such as their new land systems R&D program, but also the synergies they could bring, including a substantial future book of business. We valued our land business at an enterprise value north of $300 million, excluding the assets BGP contributed. Ultimately, it was agreed that BGP will be paying ION $109 million for 51% of the venture after contributing their assets, and assigning ION's $20 million of secured equipment financing to the joint venture. The joint venture will likely start with approximately 300 people, of which 250 of those will be coming from ION, and will mainly be located in North America, and 40 to 50 coming from BGP. We are confident that the gains from having BGP as a major customer, combined with the likely improvements of both quality and cost, will more than offset the loss of approximately half the future land revenue and earnings streams. In addition to the land joint venture, BGP will also be purchasing 16.6% of ION's equity post deal at a share price of $2.80, which will provide an additional $67 million of cash for ION. From BGP's perspective, an investment in ION makes good business sense, since they are assuming that their involvement in the joint venture will accrue to better financial results for ION and that should be reflected in our longer term share price. From ION's perspective, we like having BGP as a large shareholder, as they will even be more aligned with our company, and also, we'll have a strong financial incentive to not only purchase from the joint venture, but also from our other divisions where it makes business sense for them. In addition to the approximate $175 million in cash from the transaction, BGP has also arranged for funding for an additional $40 million to our current line of credit to assure we have sufficient short-term liquidity until the joint venture deal is closed. At closing, over our $20 million loan with ICON, we'll transfer the joint venture, and we plan to use the cash proceeds from the transaction to reduce our remaining debt by approximately $135 million. BGP is also arranging to have a Chinese bank refinance our term loan with better terms, including less restrictive covenants, and to provide us with a new $100 million line of credit. Once the transaction is completed, ION will have a significantly deleveraged balance sheet with over $100 million of liquidity. Fourth, what remains to be completed, prior to closing. Several items must be addressed between now and closing, a process that we believe will take roughly 90 to 120 days. These include drafting the definitive agreements for the joint venture and other transactions, securing regulatory approvals in both the United States and China, and developing a five-year plan for the joint venture, in which we include everything from revenue forecasts to supply chain networks. Jim Hollis, Brian Hanson and I along with several other ION senior leaders, will be working with our counterparts at BGP and a team of external advisors to ensure the timely completion of these items. It is important to note, that the joint venture will be launched as a new and separate company. It will have a new name and corporate identity, a Board of Directors, and separate management team from ION and BGP. Both parent companies will play an active role in assuring the joint venture gets off to a terrific start and through their board memberships in guiding the joint venture management team in the years ahead. Like any two parents are attempting to nurture their child, we may not always agree on the tactics of how to best go about it on any given day. But I can assure you that we are aligned at the most fundamental level, that being, that we now share a common belief that through this joint venture, we will have the opportunity to create the land seismic technology company of the 21st century. One, whose revolutionary products will be of the highest quality and able to consistently deliver upon the high expectations of our customer base inside of BGP and elsewhere in every acquisition environment around the world. With that, I will turn it over to Brian.

[Brian Hanson:]

Thank you, Bob. Good morning everyone. I'd like to first start by discussing the recently announced restatement. We are amending our second quarter 2009 10-Q to reflect the restatement of our consolidated financial statements for the three and six months ended June 30, 2009. We are restating due to an error in revenue recognition in the second quarter of 2009 of product revenues in connection with the delivery in China of our FireFly system. The error resulted from not all sales records being in management's possession at June 30, 2009 relating to that particular sale. Upon receipt and subsequent review of all documentation related to the sale, we concluded that we should not have recognized the revenues from the sale in the second quarter of 2009. The customers confirmed that they accepted the delivered FireFly system, and they have committed to pay for the system in the fourth quarter of 2009. We will subsequently recognize revenue for the system at that time. For this quarter's call I'd like to give an overview of our latest quarter's results and then go into more detail of the joint venture that we just announced. Similar to the first two quarters of 2009, our third quarter continued to be weaker than prior year due to the decreased market activity, especially in our land and multi client business. Overall, we generated revenues of $102 million compared to $219 million during the third quarter of 2008, a decrease of approximately 53%. All our segments experienced a lower level of revenues compared to last year's third quarter. Sequentially however, our ION Solutions and our Marine Imaging Systems segments had an improved quarter compared to the second quarter of 2009. We saw a slight increase in our gross margin in the third quarter to 34% compared to 33% in 2008. In our Marine Imaging Systems division, we experienced a 7 percentage point increase in gross margin, mainly related to the product sales mix for the quarter. Our Data Management Solutions segment gross margin showed a 9 percentage point decrease over last year, as a result of more hardware versus software sales. Margins in our ION Solutions segment remained fairly consistent with an increase of 2% when compared to the third quarter of 2008. Similar to last quarter, our Land Imaging Systems segment showed the largest deterioration of margins, mainly due to the increased amortization charges related to the ARAM acquisition and to increased restructuring charges compared to 2008. Moving to revenues. Our Land Imaging Systems business third quarter revenues decreased to $15 million compared to $82 million in 2008. This decrease was mainly attributed to the continued softness in land system and vibrator vehicle sales. Lower sales volume, coupled with increased amortization and restructuring charges significantly impacted our third-quarter margins, dropping them to a negative 7% compared to 26% in 2008. For the Marine Imaging Systems business, revenues for the third quarter were $29 million compared to $49 million for the third quarter of 2008. The revenues for 2009 were impacted by the timing of new vessels and lower VectorSeis Ocean revenues. In 2008, we delivered a portion of VSO System 5 which was not duplicated in 2009. Market acceptance and demand has continued to grow for our DigiFIN streamer steering technology, which resulted in continued sales in the third quarter. Third quarter gross margin in the Marine group increased seven percentage points to 48% compared to 41% in the third quarter of 2008, primarily a result of product mix. Third-quarter revenues from our Data Management Solutions division, Concept Systems, decreased by $2.8 million to $7.6 million compared to the same period of 2008, primarily as a result of foreign currency exchange rate fluctuations and reduced software sales in the quarter. Our third quarter ION Solutions revenues of $50 million were also down $27 million compared to prior year, primarily as a result of lower multi-client data library and lower new venture programs sales, driven by our customers' reduced budgets and spending cuts. However, on the data processing side of our business, we have continued to experience both sales growth and an increase in our backlog. Third quarter gross margin in the Solutions division increased to 33% from 31% in the third quarter of 2008. As a result of lower revenues this year, third quarter consolidated operating expenses as a percentage of revenue, increased significantly to 35% compared to 19% for the third quarter of 2008. Total operating expenses actually decreased by $5 million in the quarter as compared to 2008, reflecting the results of our cost reduction initiatives, partially offset by the inclusion in 2009 of the ARAM business. We incurred an income tax expense of approximately $100,000 in the third quarter of 2009 due to the sales mix in our US and foreign locations. We generated a net loss of $7 million in the third quarter compared to net income of $25 million for the third quarter of 2008. Diluted EPS in the third quarter was a loss of $0.06 compared to income of $0.25 in 2008. Turning to the balance sheet, inventories adjusted for $5 million of equipment capitalized to our rental pool, decreased by $3 million for the quarter. A large portion of our current inventory is held in our land division, which will take time to monetize given the continued softness of that business. Accounts receivable decreased by $3 million from the second quarter of 2009, as we continue to focus on collections. Excluding the investment in our multi-client data library, CapEx for the quarter was $400,000. The investment in our multi-client data library was $30 million for the quarter, and finally, our accounts payable decreased $13 million from the second quarter of 2009, as we continue to see the results of our cost reduction measures. Cash decreased compared to year end primarily as a result of lower sales revenues, combined with increased debt and interest payments related to our ARAM acquisition financing. Our adjusted EBITDA was $27 million for the third quarter of 2009 and $69 million for the third quarter of 2008. As mentioned in the earnings release last night, we are suspending earnings guidance. The market volatility that began in 2008 has greatly impacted our ability to accurately forecast our land seismic, new venture and data library sales. These market conditions combined with the potential timing of our recently announced joint venture with BGP, creates too much unpredictability and uncertainty to provide an accurate forecast. In late October 2009 we obtained waivers from the banks relating to our debt covenants. These waivers eliminated our debt covenants through June 30, 2010 as we pursue closing the joint venture with BGP, provided that the BGP joint venture transactions occur by March 31, 2010. While we anticipate meeting this timeline and consequently structure the agreements to provide adequate timing, accounting rules consider the time limit to be a limiting factor which forces the reclassification from long-term to short-term. Thus, we reclassified $237 million, which is comprised of the revolving credit facility, the secured equipment financing, the term loan facility, and the amended and restated Subordinated Sellers' Note. Once the BGP transaction closes, we will be recapitalized with reduced long-term debt. As Bob has already discussed, we announced a joint venture with BGP. While Bob has laid out the strategic roadmap and initiatives in the transaction, I like to now discuss the financial impact as well. In terms of the status in the agreement, we are currently working with regulatory agencies to gain approval of the transaction both in the US and on the Chinese side, what I currently want to focus on is the financing transactions that have occurred today and are anticipated to occur upon the closing of the agreement. To begin, we entered into a sixth amendment of our revolving credit facility in late October. This amendment increased our maximum allowed borrowings from $100 million to $140 million. At the same time, we also granted BGP a warrant to purchase shares equal to $40 million at a share price of $2.80 per share, subject to adjustment. Additionally, we also provided BGP with convertible notes equal to $40 million. In total, the closing of the joint venture transactions will allow BGP to acquire $23.8 million shares or approximately 17%, of our outstanding common stock. As Bob mentioned, this acquisition should provide more strategic opportunities to increase BGP sales in our other segments as well. Proceeds from the transaction will be used to pay off our current revolving line of credit of $98 million at September 30, 2009, to pay off the amended and restated Subordinated Sellers' Note of $35 million, and for general working capital needs. Additionally, the remaining $20 million of secured equipment financing will be contributed to the BGP joint venture. Once the transaction closes, our term loan, currently $106 million as of September 30th will be refinanced, and we will receive a new $100 million revolving line of credit. We are very excited about these events and look forward to continuing our strong relationship with BGP, first as a customer and now as a joint venture partner. With that, we will open up the call for questions.

[Operator:]

(Operator Instructions). In the interest of time, we ask that you limit your questions to one question and one follow-up. Our first question comes from the line of Mark Thomas with Simmons & Company.

[Mark Thomas:]

Bob, a quick question, circling back around on the JV with BGP, I just wanted to get your thoughts on how the JV will affect sales with existing customers, more specifically customers that are a direct competitor of BGP. How do you see those relationships playing out as the JV matures?

[Bob Peebler:]

One of the advantages of our announcement on the 23rd was, it was the Friday before the [FAG]. So we had all our customers, almost all of them actually represented it at the convention and I had personally the opportunity to speak to majority of them. And then on balance, I think our team talked to everyone. I will say that it was pleasant that almost without an exception, people were actually happy for us with the venture. I think they like the idea of having a viable alternative to the largest equipment manufacturer out there. I think they knew that we were struggling financially. So, I think they were all pleased with that. I think they also understand the benefits of us having a test partner. And also, it's not a whole lot has changed from the point of view of their alternative is still a very direct competitor with them in almost every aspect of their business. So, and we have learned that even though the issue of buying from someone that competes, that doesn't seem to have slowed them down in the past. So, I would guess, my view of this is still a net net positive with our current customers.

[Mark Thomas:]

And then, if I heard you correctly, I think you said the Land Imaging segment would be lucky to do $120 million in revenue for '09. You've done almost $80 million through Q3. That would imply approximately $40 million for Q4, which would be a pretty significant jump over Q3. Did I hear you correctly?

[Bob Peebler:]

Yeah. That was a broad statement. Certainly, I think our intent was not to try to back out and figure out what the Q4 was going to be. That's why we've taken that off the table forecast. So, we frankly really can't forecast. All I can tell you today, is our base land business compared to last year is just extremely weak. And in fact, it's weak enough that it's very hard to forecast, because we just don't have the volume of business to do that. And as you know, the majority of our land equipment business has in fact been both in North America and Russia, which turns out to be two of the softer markets.

[Operator:]

Our next question comes from line of Terese Fabian with Sidoti & Company. Please go ahead.

[Terese Fabian:]

In looking at your earnings release, your nine months revenues statement for Land Imaging Systems sales, seems to indicate about $11 million is going to be broken out of that June quarter. Does that all get recognized in the December quarter?

[Brian Hanson:]

That's our anticipation. The customer is committed to paying for the system in the fourth quarter Terese. So, when we receive the cash, we're going to recognize it. So, we believe that will be the fourth quarter.

[Terese Fabian:]

It seems like a major issue not to have seen that the revenue was not going to be there in the second quarter. Is this an unusual situation for you all?

[Brian Hanson:]

Yeah, it's very unusual situation. Quite frankly, there was some sales documentation that was not forwarded to corporate that essentially had some acceptance criteria in it and once we discovered that documentation through the process of going through the work on the JV, we recognized that we shouldn't have booked that system in Q2 until the acceptance criteria had been complete. Now the acceptance criteria is complete, and the customer has confirmed that. The problem is, the confirmation comes in the fourth quarter, even though they've confirmed it was accepted effective the second quarter. So, it's more of an accounting issue than anything else.

[Terese Fabian:]

I have a couple of other questions, but I'll queue back up. Thank you.

[Operator:]

Our next question comes from the line of Stephen Gengaro with Jefferies.

[Stephen Gengaro:]

You noted that you are about 20% I guess of BGP's purchases come from you. Can you give us a sense for how big BGP is from a revenue perspective for you or what percentage of your sales are to BGP?

[Bob Peebler:]

We can't do that for a couple of reasons. One that we just don't break out by customer, and also, that information is very proprietary to BGP. So we know what their number is. Obviously through this work, we know it even better than we've ever known it, but we really aren't privy to give that out. That's their information.

[Stephen Gengaro:]

When we look ahead at the technology, the technology that BGP is bringing into the joint venture, and I assume that that becomes free for you to sell it to anybody or there is (inaudible).

[Bob Peebler:]

That's correct. Everything that’s in the joint venture will be sold to all contractors.

[Operator:]

(Operator Instructions). And our next comes from the line of [John Rosenberg] with Geneva Capital Group. Please go ahead.

[Unidentified Analyst:]

I had a question regarding BGP and could you give us some more color regarding BGP and its relationship with CNPC in terms of how much of their business exactly is with CNPC and what terms they contract?

[Bob Peebler:]

We do not have that granularity on BGP's business, but I will say that I am guessing that the majority of their crews are operating for other people in addition to CNPC. Now what often happens is that CNPC goes into various places, and obviously a lot of the service contractors, Chinese contractors, follow. So for example, if you look at what's going on in Iraq today, BGP is already getting some contracts in Iraq, and part of that is because CNPC is in there as one of the large participants. They work for the IOCs, the NOCs. One of their big customers would be Saudi Aramco, for example. They are very big in the Middle East. They are very big in North Africa. I think they're the biggest contractor in Libya, and I believe that most of those contracts, if not all of them, are not with CNPC. So they are just a very, very large land contractor.

[Operator:]

Our next question comes from the line of Mark Thomas with Simmons & Company. Please go ahead.

[Mark Thomas:]

Brian, just a couple of housekeeping questions. What was CapEx for the quarter?

[Brian Hanson:]

CapEx for the quarter was $400,000 excluding multi-client, and $30 million for the multi-client side.

[Mark Thomas:]

$30 million for the multi-client, got it. And then G&A was higher quarter-over-quarter. Are there any one-time items in there, and how should we think about Q4 for G&A?

[Brian Hanson:]

There are some minor one-time items in there associated with some restructuring. I think G&A Q4 versus Q3 will be lower modestly.

[Operator:]

Our next question is a follow-up from Terese Fabian with Sidoti & Company. Please go ahead.

[Terese Fabian:]

If I could throw a couple of questions in here, where are you seeing your purchases for the land seismic systems coming from, recognizing that North America and Russia are both weak markets at this time?

[Bob Peebler:]

You're talking about currently?

[Terese Fabian:]

Currently, yes, for the third quarter.

[Bob Peebler:]

Just a scattering here and there. I really don't know on that. I think we have got a little bit out in North America.

[Brian Hanson:]

Yeah I can answer that Bob. The third quarter is a reflection of a lot of small deals, and so spares and repairs, placements, geophones things like that and they really are all over the place. Little deals spread out all over the world.

[Terese Fabian:]

And I think you had said last time, Bob that until a turn in the technology takes place, I don't know if I am misquoting you, that there probably won't be a great deal of land seismic equipment sales, because the markets are quite saturated.

[Bob Peebler:]

No. What I was talking about US land maybe, not the world. So, if you look at the majority of seismic crews that are operating today, the majority of them are outside of North America. So, what I was suggesting is within North America because of the collapse, the activity that's going on in North America tends to be the higher end. We're seeing very large shoots. Now some of that now is coming where the contractors had lots of crews running. So they are just combining equipment from shutdown crews and they are fielding larger crews. But I think in the US, it is a new technology that will drive, I think the US market in particular. But there is still going to be a lot of activity in the rest of the world, whether it's China, Russia, Middle East. And so we still see those ultimately as very robust markets. But right now, even like BGP have seen a real impact on their business, but that’s not going to go on forever.

[Terese Fabian:]

Okay, thank you for that clarification. Going back to the P&L statement, there is that other income item there for $1.6 million or so. Can you tell me what that is?

[Brian Hanson:]

That is primarily the currency exchange.

[Terese Fabian:]

And then on the EBITDA amount, it went up quite significantly. Usually that's been related to data library sales. What is driving that in the third quarter?

[Brian Hanson:]

A lot of the EBITDA is generated out of the multi-client side of the house for the third quarter.

[Terese Fabian:]

So that would indicate a fairly good level of sales?

[Brian Hanson:]

Or at least a good level of profitable sales.

[Terese Fabian:]

And then on the balance sheet, the inventories are leveling off at this number. What's going to happen with that? Will they be transferred to the JV? Is that something that you are talking about with them at this time or will that get written down?

[Brian Hanson:]

They will not be written down. We're pretty tight on our inventories, Terese, but what will happen is, inventories that are related to the land business that's being contributed. Well, those inventories will follow that business into the JV.

[Terese Fabian:]

Just to follow up on that. You've been talking with BGP for a considerable amount of time now, but how much more is left in the negotiations to be still worked out? They say the devil is always in the details.

[Brian Hanson:]

I will leave that one to Bob.

[Bob Peebler:]

I would say my view of it is, because there was a binding term sheet versus just what you normally have on a term sheet, that, much of what you normally do in the definitive agreement stage has already been done. And, so from a negotiating point of view, we've pretty much defined the broad governance models, all the financial details have been worked out with the exception, I think Brian has some work to do on the finalization of the long-term debt. On an operating basis, I think we're quite aligned on basically how we want to operate. Obviously, this is something that, because we are not combining, BGP is not in the equipment sales business. And so, we're really not combining two companies that are in the same business. So, from an operations point of view, that's not really all that complicated. We have a little bit of reconciliation to do between what they have on their roadmap and what they had been working on with their land system, and what we're working on. So our technical guys will be working together on mix and matching the best from that. But the actual venture, if you think about it, most of the people are in the US and Canada, and some in Edinburgh, and that will just continue all those business is for a while, and then obviously how we set it up from a separate entity, getting the board booted up and running, and then ultimately we'll start out in a transition period. We'll be providing services to the JV, but ultimately we'd like to have it pretty much self-contained. So, those things will be worked out at some level over the next 90 to 120 days, before we close. But we'll be doing a lot of the work after we close. I would say from a negotiating point of view, there is really very little left to negotiate, certainly from a business perspective of it. And from an operating point of view it’s not so much of negotiation, it’s just really the two companies coming together and figure out how we maximize the venture.

[Terese Fabian:]

Okay, thank you. I appreciate the answer.

[Operator:]

(Operator Instructions). And our next question is a follow up from Stephen Gengaro with Jefferies. Please go ahead.

[Stephen Gengaro:]

Gentlemen, just I wanted to be clear on a couple of things, if you don't mind. The joint venture will basically be created from your Land Imaging Systems business, is that correct?

[Bob Peebler:]

That’s correct.

[Stephen Gengaro:]

There is nothing else as that will go into it?

[Bob Peebler:]

That's correct.

[Stephen Gengaro:]

Okay. And then your portion of the profit will show up ultimately in an equity income line?

[Brian Hanson:]

That's right.

[Stephen Gengaro:]

Okay. And then your share count goes up by the new shares being issued directly to BGP?

[Bob Peebler:]

Correct.

[Brian Hanson:]

That's right.

[Stephen Gengaro:]

Do they have any restraints on their ability and the timing of when they can ultimately sell that stock?

[Brian Hanson:]

No, it's free to trade.

[Stephen Gengaro:]

Okay. I think that's all for now. The other question, just quickly. BGP's view, to the extent that you guys have a good sense for this, their view of FireFly, and the any potential evolution of FireFly that’s may be necessary to make it a better, more sellable product going forward, do you have any sense for that?

[Bob Peebler:]

Absolutely. Your question I think a big question is why did BGP want to do a joint venture with ION? And this hasn't been a something that’s happened over the last two or three months. We have had discussions with them over the last two years. And it really started out more as ideas in cooperating around the new technology. That’s where they see the market, we are very much aligned in our view of how the market is going to evolve, and whether its cable systems, full wave, new generation land sources, all these different things of people are working on. And felt like that we were the innovators of the industry. But they could also see our challenge has always been, particularly with new technology, how do you get it tested and get the feedback in and get it to where it’s rock solid and all those things. So that has always been a bit of our Achilles' heel. And so it started a couple of years ago of saying, well, could we do some ventures around new technology, and then they would be as a test partner. And when you get into that, just gets really complicated because there is so many overlaps between existing and new technology. And so then just doesn’t make sense to put it all together. And also it made sense because a lot of your volume still comes out of your mature product lines. And so if you have this now built-in very large customer, who can also be buying your base business and helps pay for the R&D for the new stuff. So they are very much aligned. They are excited about the technology. As you know, even though we had the bottle on exactly on the revenue recog thing, they were absolutely, they accepted the system back in June. And, in fact, I believe we're going to have it out on another Chinese job here, if we don't have it out right now. And they have given us great feedback on the system. It just gets down to [devils] in detail. Plus they operate in so many places that we just don't have access to, whether it’s cold or jungles or different places like that. And most of our testing has been more North America. So, I think the fact that they have chosen us as their partner is a very strong indication of their support of our new technology.

[Stephen Gengaro:]

That's helpful. And just two quick follow-ups, if you don't mind. The first, in the details, is there any agreement at which BGP purchases equipment at a discounted rate?

[Bob Peebler:]

No, in fact, its an arm's [length], it will be a, it’s not like a set number. It’s going to be at market. It’ll be one thing its sort of like arm's length pricing. They would get a standard volume discount like a large customer gets, but no different really than what we have been selling to them in the past. So they understand the importance of this as a viable business. That’s one of the reasons I came in also at equity at the corporate level. And so if you think about it for them the economics of it is still good, because they get earnings that flow out of the ventures cash out of the venture. But there is no real sweetheart deal for them compared to your other purchasers.

[Stephen Gengaro:]

Great. And then just a final. And I know they're obviously doing this joint venture with you. This thought between cableless and sort of wireless land systems, where do you stand on that? Is there an evolution towards you being able to do this wirelessly with the digital sensors?

[Bob Peebler:]

Well, we do. Today, the FireFly is with a digital sensor. The long term trends…

[Stephen Gengaro:]

But it’s not wireless though to my knowledge, right? It’s just cableless?

[Bob Peebler:]

Well, it’s cableless. I see what you're saying. You are really saying can you actually move the data…

[Stephen Gengaro:]

Yes. And does that matter?

[Bob Peebler:]

I would say some day. The one difficulty is that even though you have wireless technology improving every day, our customers are wanting to collect more and more data. And so it’s a bit of an uphill struggle, because the other trend is to put out more sensors and to collect more data per sensor, and so you're trying to overcome that. But I would be very, very surprised if you went out in the five to 10 year out sort of the next five to 10 that you won't ultimately see people being able to bring the data in. And there is more than one scheme that have been thought about how to do that. Its just you don't want to do that until you can handle, you don't want to have the customer have to degrade the image with your handling techniques. So right now what we are doing, and putting the emphasis on, is using the wireless part to make sure we're bringing quality control, so we know we have good data. And then eventually it will evolve to where you will be able to move the data in, I suspect.

[Stephen Gengaro:]

Great, that's very helpful. Thank you.

[Operator:]

Thank you. And our next question is a follow up from Terese Fabian with Sidoti & Company. Please go ahead.

[Terese Fabian:]

I just have one question, and that concerns the FireFly project you have going on. Can you give an update on what is happening there?

[Bob Peebler:]

Yeah, we are quite busy right now. All of the equipment we have is in one form or another on jobs. We still have a very large project going on with BP. It’s been delayed because of rain. We have had a tremendous amount of rain up in East Texas, and so that one, I think they are back going again now. But they have really lost a lot of time just because of rain. And that project will go on for some time. And then we have moved, I believe we are on the third field now in Mexico. And then we have, mobilizing right now the system in China. So we've got all the equipment we have is out. And actually we are seeing some of the pipeline of opportunities is growing. If you look at one thing we do track is the number of traces that we are recording, or the number of stations we are recording, and sort of look at that by quarter. And that curve is just a really is sort of growing exponentially right now. So, we are starting to look forward into next year, and likely we’ll have to fire up the press and build some more equipment to keep up.

[Terese Fabian:]

Okay. Thank you.

[Operator:]

Thank you and our next question is a follow up from Mark Thomas with Simmons &Company. Please go ahead.

[Mark Thomas:]

Bob, just a quick one. In you're prepared remarks I sensed some optimism with respect to spending in the fourth quarter from your customers. Can you put a confidence level on that? Is it fair to assume that marine and processing are both higher quarter-over-quarter?

[Bob Peebler:]

As we said, we are not forecasting right now. The only thing I was referring to on year-end spending, is we may see some year-end spending on data library purchases. We just don't know. We are being told by some of our customers that they may have some leftover budget. Which, as compared to a year ago, people were just pulling in the ropes as fast as they could. But now if you think oil prices are $78 - $80, whatever it’s trading at, that’s probably higher than most of the companies, we are assuming, when they built their plans a few months ago. So that comment was mainly aimed towards potential to see a little bit of data library sales. But, the reason we are not giving guidance right now is we just really don't know.

[Mark Thomas:]

Okay thank you very much.

[Operator:]

Thank you. And there are no further questions in queue. I’d like to turn the call back over to management for closing remarks.

[Bob Peebler:]

Okay, well thanks for joining us in the call. And we all look forward to the next call, which will be at the end of, our Q4 call. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, this concludes the ION Geophysical third quarter earnings conference call. ACT would like to thank you for your participation. And you may now disconnect.