ION Geophysical Corporation
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Ion Geophysical’s Second Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only-mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, August 8, 2013. I would now like to turn the conference over to Karen Abercrombie, Vice President of Corporate Communications. Please go ahead.

[Karen Abercrombie:]

Thank you, Douglas. Good morning and welcome to Ion Geophysical Corporation’s second quarter 2013 conference call. We appreciate you joining us today. As indicated on slide two, our hosts today are Brian Hanson, President and Chief Executive Officer and Greg Heinlein, Senior Vice President and Chief Financial Officer. Before I turn the call over to them, I have a few items to cover. We’ll be using PowerPoint slides to accompany today’s call. They are accessible via a link on the Investor Relations page of our website iongeo.com. There you will also find a replay of today’s call following the call. Moving on to side three information reported on this call speaks only as of today August 8, 2013 and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made by Ion 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 our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control that may cause our actual results or performance to differ materially from any future results or performance, expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by Ion from time-to-time in our filings within the SEC, including our Annual Report on Form 10-K and then our quarterly reports on Form 10-Q. Furthermore as we start this call, please refer to the disclosure regarding forward-looking statements incorporated into our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. I’ll now turn the call over to Brian Hanson who will begin on slide four.

[Brian Hanson:]

Thanks, Karen, and good morning everyone. Yesterday we reported second quarter revenues of $121 million up 15% from our second quarter revenues last year. We’ve been consistently delivering solid year-over-year revenue growth, but that being said the quarter was overall both challenging and disappointing for us from an earnings perspective. Our results were affected by few factors which I’ll touch on and Greg will cover in more detail later in the call. Even with the disappointing performance of the first half of the year the core business is strong and we remain confident in our long-term growth prospects. So first I’ll try to provide some operational context about 2013 then after Greg speaks to the financials, I’ll wrap up with a discussion around the growth areas of our business for the back half of the year and into 2014 and beyond. The biggest operational challenge we had was with the completion of our first proprietary 3D acquisition program of Morocco. We continue to struggle with weather delays due to unseasonably high wave heights that caused approximately 6 million of unanticipated cost overruns in the second quarter. We’re obviously disappointed with the performance of this program in the first half of the year but recognized it was a larger program that span 2012 and 2013 and in total was a profitable program for us so while worth doing. In addition it was the first major 3D program we cut our teeth on and of our marginally successful we’ve learned a lot for future programs as we enter the 3D multi-client space with our recently announced alliance with Polarcus. All-in-all though this was a significant earnings drag in the first half of the year. We’ve also experienced a slower than expected start with the GeoRXT Seabed JV which we announced in Q1. The JV has been hampered by a pullback in business in their home market of Brazil which resulted in an anticipated backlog through October evaporating in June. We’ve been assisting them to aggressively move into the international market getting them pre-qualified for work for the E&P companies, tender cycle, but of course this takes time. While we are expected by now to have increased our interest at 50% along with Georadar we’ve delayed DEM cell while the JV works to secure stronger backlog both within Brazil and beyond. As such we recorded a $1.6 million loss from GeoRXT during the quarter associated with a 30% position we picked up in Q1. Despite the delay we remain fully committed to putting our Calypso Seabed acquisition technology to work in a service model to meet the growing demand for seabed seismic. However given this delay we no longer anticipate selling a Calypso system until 2014. I’ll expand on the seabed market and our commitment to develop the right go-to market strategy a little later. Revenues in the software segment were down slightly in Q2 year-over-year. As for the first time we’re experiencing some degradation in our traditional command and control software business. Contract for consolidation as exemplified by the acquisition of Fugro by CGGV and more recently bankruptcy of RXT has impacted our installed base causing reduction in revenues from our Orca and Gator product lines. This same customer consolidation as well as a shift to proprietary technology by the top three marine Towed Streamer contractors has already impacted our marine product line in our system segment, more about that later. Finally as indicated on the last call we incurred a $4.7 million loss associated with INOVA’s prior quarter performance. The Land business in general is soft with customers expressing more interest and rentals versus purchases as CapEx budgets are tight. As such we expect INOVA to perform similarly last year. Greg will highlight more on this topic. Over the last couple of years we’ve stated our intent to deliver 25% of our earnings in the first half of the year. Last year we delivered a third of our earnings in the first half. We believe in most years this goal should be generally achievable because of the expanding portfolio we’ve assembled in both Land and Marine GeoVentures programs as well as the growing influence of our software earnings. Clearly that’s not going to happen this year. In particular our GeoVentures Group will be more dependent on the back half of this year for earnings given the headwinds we had in the first half. So our first half results can be characterized by some good successes offset by a couple of key challenges. On our list of successes in the first half our Solutions segment revenues were up 29% and up 23% in the second quarter led by strong new ventures revenues. This increase was primarily the result of the completion of acquisition of our first major 3D marine program and two 2D BasinSPAN programs in the quarter. A 12,000 kilometer program our Australia’s Northwest Shelf and a 5000 kilometer program Offshore Suriname. Another highlight for us this past quarter was our growing development of our Land 3D ResSCAN offering. We now have nine ResSCAN programs either complete or in progress comprising about 1,400 square miles of data. As we mentioned on our first quarter call microseismic for fracture monitoring is a new and integral component of our ResSCAN workflow and highlight in the second quarter was the completion of our first two commercial frac monitors in Pennsylvania and Oklahoma using shallow arrays instrumented with our proprietary SM64 sensors. The back half of the year looks strong for this segment as we recently sanctioned the portfolio of three land programs which were well underwritten totaling a commitment of more than $50 million in CapEx. Later in the call I’ll address why this is strategically important to us. Our Data Processing business had another record quarter with 20% year-over-year growth in revenues driven by exceptionally strong demand in Europe, the Middle East and the Gulf of Mexico. We continue to see increased demand for our WiBand broadband processing solution with over 40 WiBand projects complete or in progress and we now have WiBand capacity or capability deployed in all of our large data processing centers. We continue to expand our footprint into E&P hotspots. Last month we formally opened a new processing center in Perth to serve the needs of oil and gas companies in Australia and throughout the Asia-Pacific region. Economic growth in Asia-Pacific is driving the need for dependable energy supply in the region prompting industry experts to predict an estimated 20% year-over-year growth in E&P CapEx in 2013. In 2012 alone there were 13 offshore discoveries in the area. Australia is experiencing the oil and gas exploration industry boom driven by the massive resources of its Northwest Shelf and also by the significant potential for unconventional hydrocarbon reserves. We see Asia-Pacific as an underserved market for the high-end imaging services where we excel and are pleased to have opened this center with solid backlog. While software revenues were down our Concept System Group achieved near record revenues of our 40 optimization services to E&P customers. Demand for our unique technology as a service continues to be strong and we are now engagement in active planning with customers for 40 services for the 2014 season. So all-in-all we have good revenue growth and solid core businesses, it’s a shame we had such a drag on earnings for the 3D survey and the poor performance of INOVA. Before I turn it over to Greg, I would like to provide an update on our WesternGeco litigation. As you know in August 2012 the jury in the case returned a verdict against us and awarded WesternGeco a total of $105.9 million in damages. Mostly consisting of loss profits damages related to seismic survey revenue received by our customers. We use our DigiFIN products to conduct seismic acquisitions outside of the U.S. As we disclosed in June, while the trial court rejected the jury's findings of willfulness and any related enhanced damages, the court denied our challenges to the jury’s infringement findings and the related damages amount. The court still has not yet entered the final judgment in the case, after judgment is entered we will appeal the case to the federal circuit in Washington DC. And appeal will take some time to go through the court system, but we still believe that we will ultimately prevail in this case. However, the U.S. GAAP Accounting practices guide us to increase our legal reserve consistent with the June order. Greg will provide details on the legal approval later in the call. With that, I’ll now turn the call over to Greg to take us through the financials.

[Greg Heinlein:]

Thanks Brian. Good morning everyone. Our second quarter revenues were a $121 million up 15% over the second quarter of last year. Solutions segment revenues of $88.6 million improved to 23%. System segment revenues of $23.8 million were up slightly, while Software segment revenues declined to $8.4 million from $10.4 million. Excluding the legal approval which I will discuss in a moment, we reported breakeven earnings per share. While revenues were up, our overall results were negatively affected by those items Brian mentioned most notably $6 million of cost overruns as we completed acquisition on the large 3D and marine program and $6.3 million of losses in our INOVA and GeoRXT joint ventures, combined these items results in $0.07 of the EPS impact. Now let’s take a closer look at our second quarter performance starting on slide 8. Our second quarter Solution segment revenues were up 23% year-over-year led by revenues from new ventures up 54% and data processing up 20%. Operating margins were hampered in Q2 by the $6 million of weather related cost overruns associated with that large 3d marine program. Data library sales were flat largely attributable to delays in licensing rounds in Greenland and Tanzania, and also the smaller than expected outcome of the announced licensing round in Brazil containing only a single block. Our multi-client investment in the first half was $34 million compared to nearly $53 million spent in the first half of last year. While our first half multi-client investment was low due to program delays, we are starting several new programs both on land and offshore over the next few months. Given these delays our estimated full year multi-client investment will likely be in the range of a $120 million to $140 million down from our previously stated target of $140 million to $160 million. Our data processing business remained strong with revenue growth of 20% during the quarter. For the year we expect similar growth has experienced in the first half, one item to note looking ahead to the third quarter we are currently working on a sizable data processing contract renewal with existing client with whom we have a strong existing relationship. Projects under this renewal have already been allocated to us. While we are performing some of the renewal work during this third quarter, we will neither deliver data nor recognize revenues on those projects until the contract is renewed which is expected to occur during the fourth quarter. It is conceivable at this point that approximately $7 million of revenue could shift from Q3 to Q4 pending the renewal of this contract. This $7 million nearly flows through equally to operating income. Turning to slide 9, we saw a decrease in Software segment revenues in Q2 due to consolidations in our customer base this year. Its clear that the Fugro acquisition by CGGV in the recent RXT bankruptcy had negatively affected our software revenues and earnings. On a positive note demand for our 4D survey optimization services continues to rise, resulting in a near record quarter for service revenues. Operating margins were similarly impacted by decline in our Orca and Gator product sales due to the customer consolidation. We expect this segment to show sequential improvement during the second half of the year. Moving to slide 10, System segment revenues increased 5% to $24 million. We experienced a slight increase in operating margins from 4% to 6% driven by lower R&D spending as compared to last year. Given the consolidation in the towed streamer market we expect the towed streamer side of our business to remain relatively flat moving forward. Turning to slide 11, as we indicate on our last call, INOVA’s revenue in their first quarter was $22 million and they reported a net loss of $9.8 million resulting in our reporting a loss of $4.7 million in our second quarter. During INOVA’s first quarter they experienced a 61% decline in revenues resulting from reduced vibrator truck sales and equipment rental activities. For INOVA’s second quarter, we estimate revenues to be in the range of approximately $64 million to $68 million with operating income of $2 million to $3 million. The improvement in INOVA’s second quarter results compared to their first quarter is due to their continued penetration of their G3i cable-based system of which BGP has purchased over 100,000 channels to-date. They also sold 26 vibrator trucks and 15 UniVibs and completed their second and third sales of their Hawk cableless system for an additional 21,000 channels. Since introducing Hawk last year INOVA has sold over 50,000 channels of the system. As you may have seen they recently announced the commitment of 15,000 channels to Greyco, a leading seismic rental equipment provider. In that agreement they signed a co-marketing commitment with Greyco that place stock on the market for immediate rental worldwide. Turning to slide 12, our cash balance stands at a $110 million up $43 million from the first quarter. This increase was a result of our new $175 million bond offering which resulted in $71 million of net proceeds. After we use the funds paid on the balance under our outstanding revolver. This increase was partially offset by use of working capital as we continue to build inventory of Calypso and our un-build receivables have grown pending completion and final building on certain key projects later this year. This $29 million use of working capital primarily drove our free cash flow negative during the quarter. Moving on to more details on the balance sheet on slide 13, our debt has increased $79 million since year end primarily has a result of our five year bond offering. With our pay-down of our revolving credit facility, we now have its full availability which combined with our cash balances brings our available liquidity to $285 million. Net debt increased to $74 million during the quarter attributable to our new funding and increase in working capital. Turning to slide 14, as Brian mentioned we’ve increased our loss contingency accrual related to the WesternGeco lawsuit from $10 million to $120 million. To cover jury verdict damages court cost and estimates of prejudgment interest and supplemental damages. As a result our second quarter results were negatively impacted by an after tax charge of $71.5 million or $0.45 per share. We continue to believe we have strong merits in our defense and we’ll appeal the judgment. The appeal process will take up to two years however given the judges second quarter ruling U.S. GAAP requires that we record this non-cash charge this past quarter. Its important to note that to support the appeal we have obtained from two surety underwriters a commitment for a total of up to $122 million in surety bonds which we expect to be unsecured. With that, I’ll turn it back to Brian.

[Brian Hanson:]

Thanks, Greg. There is no doubt that our second quarter and first half were disappointing from an earnings perspective, despite strong revenues or margins and operating income were impacted by a couple of items which we’ve covered in today’s call. Forward I would like to take a little time to discuss our long-term strategy as we remain confident in the growth profile of this business. While our 2D multi-client business has been a significant revenue and earnings generator for us and should continue to be, we have also been planning the seeds for growth in the 3D market both offshore and on land. We see a great growth opportunity for ION in the 3D seismic market. To expand our presence in this market on July 26, we announced the formation of a strategic alliance with Polarcus to jointly develop 3D multi-client programs globally. We are very excited about expanding our long standing working relationship with Polarcus. The alliance will leverage the complimentary strengths of our two companies, Polarcus vessels and crews for data acquisition and petroleum and system insights from our 2D BasinSPANS library much of it in newer growth areas like Latin America and East and West Africa. Achieving superior multi-client returns is all about location and the ability to locate 3D surveys optimally and the knowledge from our basin spends will allow us together provide E&P companies with a differentiated 3D seismic offering as they look to move from gaining an early exploration understanding of the basins in front of licensing rounds to later stage exploration. This alliance is strategic for us and that will provides us access to a world class seismic fleet which is consistent with our asset light strategy and lets us leverage key assets. Our Geophysical expertise and our 2D base and span library which is generated over $1.4 billion in revenues today. To create an important new growth segment for us. Another growth emphasis for us is our ResSCAN and micro-seismic offering in unconventionals. In short this offering is designed to reduce one of the most significant risk in unconventional development today. The need to have a better understanding of subsurface rock properties to optimize well location and frac parameters. Based on industry research overwhelmingly the number one cause of frac jobs not meeting performance expectations was a failure to truly understand the subsurface. As I mentioned briefly earlier we now have nine programs complete or underway comprising 1400 square miles of data. Our latest programs will be launched in the third quarter and will cover nearly 500 square miles in Pennsylvania. We have secured 75% upfront underwriting for these programs which are designed to continue to prove out our combined technology offering of both the key ways and the converted way of data to improve subsurface understanding. We are encouraged that operators and E&P companies are funding us as we drive this technology forward. This family of programs will launch to generate over $50 million in revenue over the next few quarters. Our data processing business continues to grow nicely, organically. We expect growth will come from geographic expansions in Southeast Asia, the Middle East ad Russia as well as from organic growth in our core regional centers in Northern Europe, Houston and Denver. As we expand our land 3D ResSCANs our data processing in Houston and Denver will continue to benefit from these activities because of new technologies like WiBand and further integration with our software group we expect good solid growth for our processing business. Regarding our software segment as mentioned earlier it has been impacted by recent contract consolidation in our core Command & Control market. However we expect future growth to come from new E&P company facing solutions including our new Narwhal solution for ice management. We will officially launch Narwhal at the Society of Exploration Geophysicists or SEG show here in Houston next month. Narwhal is a software solution that enables E&P companies drilling in the Artic as well as companies acquiring seismic data there to improve their operational efficiencies and reduce the risk of operating in the harsh Artic environment. Narwhal enables operators to visualize, track, analyze and predict the movement of ice other obstacles and marine mammals thereby allowing them to take proactive and prescriptive action to address the challenge in hand. It is currently in commercially use in the Canadian Northwest passage and our (indiscernible) and has the ability to deliver a significant growth edge and our software business potentially surpassing Orca. Looking at our system segment it’s clear that we need to quickly adapt to a changing marketplace where the top three seismic contractors have 75% Towed Streamer market share and are attempting to integrate their own solutions. In addition our Geophone business is more commoditized than never before. This quarter I’ve installed new leadership in that division and we are taking a hard look at how we are presently investing in it and how we are going to run that division for profitability. It is conceivable that there could be some charges recorded this year as we scrub this business from top to bottom. Having said that we remain extremely committed to see that product line and we continue to view our Seabed technology as an important strategic growth driver for Ion. Just in the most recent quarter we saw Seabed industry growth in both un-awarded backlog and new contact awards in excess of $3 million. We continue to help our JV partner developed to international qualifications for winning outside of Brazil and of course it takes time. In the meantime it is conceivable that we will continue to incur non-cash losses as we book a portion of the JV losses through the remainder of this year. In summary our strategy remain sound and has been focused on shifting from selling equipment of contractors to leveraging our technology to deliver Geophysical solutions to oil companies. We are on the right course with growth being led by our GeoVentures and data processing business and the Solutions segment. Our software business will develop new avenues for growth away from the traditional marine contractors. More and more of our systems business will be refocused and adapted for the concentrated customer base and our focus for growth will be in the seabed services market. With that I’ll turn the call back to the operator for Q&A.

[Operator:]

Thank you, sir. We will now begin the question and answer session. (Operator Instructions). Our first question is from the line of Georg Venturatos with Johnson Rice. Please go ahead.

[Georg Venturatos:]

Good morning Brian, good morning Greg.

[Brian Hanson:]

Good morning, Georg.

[Georg Venturatos:]

I just wanted to start at the new venture side and more importantly kind of the 3D multi-client opportunity. Obviously the Polarcus alliance looks like a style of strategic agreement. Can you may be talk about the length of time with that agreement and what may be if you can talk about what’s required of both parties when you look at a potential project?

[Brian Hanson:]

Sure Georg. The first of all the length of the agreement the initial term of the agreement is a three year agreement and what we’ve agreed to do is pretty much bring all of the potential projects that each party has together to flush out and prioritize what once we want a focus on. And then in addition of that Polarcus obviously is contributing the steel and the operational excellence to execute the surveys and ION is contributing the sort of the geophysical expertise around the planning and design all the way through to the processing of the data. And then over and above of that any incremental cash that needs to be contributed we’ve – we’ve agreed on what that allocated percentage of contribution on both sides have been.

[Georg Venturatos:]

Okay great. And just in terms of you talked about your learnings from some of the recent 3D program on Morocco is it more contractual or is it operational how do you think you’re better positioned going forward with future 3D programs?

[Brian Hanson:]

Now first let me step back and talk just a little bit about the accounting and how that impacts a proprietary versus a multi-client program. If this was a 3D multi-client program it would appear as a good program to the investment community because the program was a profitable program and with a positive cash generating event for us. The reality is the multi-client program we’re able to capitalize that program and distribute the expenses in proportion of the revenue over time. So that’s how it appears that it’s a good profitable program. On a proprietary program you’re taking all the expense directly through the P&L is correct and so that squeeze the result so the profitability of this program showed up in Q4 and it turned out be an earnings drag in Q1 and Q2. So the first learning here Georg is the accounting is not necessarily conducive for proprietary programs. The second is truly operationally and its probably less contractual and more operational when we evaluated the risk associated with working in that area and we did our modeling around the weather that we would expect – the way you try to model these programs is they’ll go back and they’ll take a look at the weather in that area for a 10 or 20 year period and develop the model around what they expect the down time will be associated with those weather delays. And in this particular case it was just an absolutely abnormal season where wave heights were just ridiculously outside of the normal, the statistics for around the historical expansion in that area. So the learning on that is to be a little more conservative on those models and not necessarily like as specifically to the historical weather experience. And I got to tell you we also have that same learning on a LAN program this year too we’re, well we modeled it based on historical experience and had an unusually bad season and so we’ve adjusted our model moving forward.

[Georg Venturatos:]

Great that makes sense and then last one from me just you mentioned the OBC opportunity still looks like great potential there particularly with Calypso’s launch you mentioned the $350 million in contracts award I just wanted to check but sounds like that backlog of un-awarded projects I think previously you mentioned may be $1.5 billion that’s still growing as well right?

[Brian Hanson:]

Yeah that’s correct in fact the actual, yeah the backlog actually grew by 300 million as well so its that market is growing nicely in that in the last quarter. We’re also observing quite a bit of tendering activity right now there are a number of large projects that are going through the tendering process today that primarily will probably start it up toward the end of the first quarter of next year so. So it is not a tremendous rush to jump into, to jump into anything we’d rather move slowly and cautiously because we really see, when we look at the tender activity in the projects that are on the drawing board the real opportunity in my mind is securing some of that work for 2014.

[Georg Venturatos:]

Great I appreciate the answers Brian.

[Brian Hanson:]

Thanks, Georg.

[Operator:]

The next question is from the line of Joe Maxa with Dougherty and Company. Please go ahead.

[Joe Maxa:]

Thank you and good morning.

[Brian Hanson:]

Hi Joe.

[Joe Maxa:]

Some follow up questions regarding the 3D marine projects, do you anticipate taking on more of these proprietary projects or will you focus more on the multi-client with the Polarcus in the mix?

[Brian Hanson:]

If we I don’t think that 3D proprietary is going to be a huge opportunity for us Joe. It’s a, its kind of a one-type event really and so no I don’t anticipate – I do think that we’ll take on the odd one and when we do we’ll certainly be much more conservative than we were on the first one given the nature of the accounting and some of the learnings we’ve had. But I don’t see it as a core growth vehicle for us I see the 3D multi-client as a core growth vehicle because you can get much better returns on that stuff.

[Joe Maxa:]

Yeah and regarding the 3D multi-client I mean if you think a few years from now I know the initial term is three years in length but how do you see your projects may be on a number perspective or revenue been allocated between the 3D and 2D if you look through the three years down the road?

[Brian Hanson:]

Yeah I think if I look three years down the road I would expect that the 3D multi-client would probably be somewhere in the range of half the size of our 2D from a revenue perspective.

[Joe Maxa:]

Okay and is that how much more profitable or is it much more profitable in 2D your expectations be?

[Brian Hanson:]

Expectations would be comparable.

[Joe Maxa:]

Okay understood. And then I just wanted to follow up on the GeoRXT, now they’re having a bit of struggles currently in Brazil and you’re looking to move them internationally but I guess my question is are you, you are holding off this 50% investment are you still planning to make that as their backlog goals or would you look the enter the Seabed market through another means?

[Brian Hanson:]

We’re exploring all options Joe and so in my mind its critical that GeoRXT is able to build the backlog and not sit back with no business and burn cash. And so if they’re in a situation where they’re going to be pretty much burning cash through to the end of the first quarter before they can secure a large job then I would be hesitant to inject capital into them until much closer to that job. So that could preclude our, us taking our investment up to 50% matter of fact the case we’re also, we’re also examining other options so we will be in the Seabed business and we expect that we will be in the Seabed business by early 2014 its just a question of what’s the right vehicle and we’re trying to be conservative about our approach.

[Joe Maxa:]

Alright, thank you very much.

[Operator:]

Our next question is from the line of Rudy Hokanson with Barrington Research. Please go ahead.

[Rudy Hokanson:]

Thank you. I have follow up or a little bit on the GeoRXT and that is could you explain while you’re waiting to see what your position will be with them or if they’re the right vehicle of going into the Seabed business you mentioned that you’re also building inventory on the Calypso. As I recall with the original agenda on GeoRXT was to make that a proprietary use of Calypso and not go into the larger market selling to other contractors and if you’re building inventory right now can you may be explain a little bit more the strategy there or if it’s a hedge or that use of working capital right now?

[Brian Hanson:]

Sure. First let me step back and give you an update on where we’re at with the development of Calypso. And then I’ll speak a little bit about why we, what are strategies putting Calypso in one of the market. So we have we are obviously Calypso development program and we are we are building our inventory levels and anticipation to going into full manufacturing for the first commercial system probably sometime around October. We are now at the point where we are pretty much we are pretty much worked at the bucks and system and we are going into the field soon with our with one Calypso to field tested for the last time and then based on the results of that test if there is any tweaks and modifications we’ll implement them and then we are going to start manufacturing. Now Calypso is a big system and so to build and to build one system that’s large enough to really equipped an effective ocean bottom prove. It’s going to take quite a long time to build it. Well into early part of the first quarter and so we need to start manufacturing in October just an anticipation of being able to deploy the system on a job at the end of the first quarter where it looks like most of these tenders that are and being a bit really now are going to start working. The strategy for Calypso remains one where we are going to do it on an exclusive basis. GeoRXT is still our first choice. We need to see that business recover financially before we inject our capital in the event that business is not successful. We have other options and we are going to explore those options and those options as well will be exclusive vehicle for Calypso to go to work on one of these projects early next year.

[Rudy Hokanson:]

Okay. Thank you very much. That does it from me.

[Brian Hanson:]

Thank you.

[Operator:]

(Operator Instructions). Our next question is from the line Steffen Rødsjø with Pareto Securities. Please go ahead.

[Steffen Rødsjø:]

Hi, guys.

[Brian Hanson:]

Hey, Steffen.

[Steffen Rødsjø:]

I have a few questions it’s related towards the multi-client market your European figures have been talking. Can you give any some mixed signals on the pre-funding in the multi-client market. Have you seen any change to that pushing it lower or any change to client behavior?

[Brian Hanson:]

Yeah, Steffen I can tell you that we have it seems like there I would characterize this year as a year where not as much as on the 2D but on the 3D probably more but it’s a year where it seems to be more multi-client capacity being allocated it’s more competitive whenever I can tell you that oil companies are getting they are they have any opportunity to sort of pick and choose and so there has been pressure on the levels of underwriting on projects. Absolutely.

[Steffen Rødsjø:]

I understand and also helpful would be if you give some personal color on the figures for your library going into the second half there. What should we look for you guys in terms of the library exposure?

[Brian Hanson:]

Yeah we never give we don’t give guidance as a company and I can tell you one thing I’ve learned over the years is never absolutely never try and guess what’s going to happen with the library is I just have I have no idea it’s all about fourth quarter spending and how capital budgets are released now I can tell you there is a general sentiment out there that there should be good year end capital available to allocated into libraries. So walks out there and see how it takes out.

[Steffen Rødsjø:]

Yeah, sure. Okay. Thank you guys.

[Brian Hanson:]

Thanks Steffen.

[Operator:]

At this time there are no further questions in the queue. I would like to turn the call back over to management for closing remarks.

[Brian Hanson:]

Okay. Well thank you for taking the time to attend our conference call. And we look forward to talking to you during our third quarter call.

[Operator:]

Ladies and gentlemen, this concludes the Ion Geophysical second quarter earnings conference call. You may now disconnect. Thank you for using ACT Teleconferencing.