Geospace Technologies Corp Q2 FY2021 Earnings Call

Welcome to the Geospace Technologies Second Quarter 2021 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curda, the company's Chief Financial Officer, and Mark Tinker, CEO of Geospace subsidiary Quantum Technology Services. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode. And the floor will be open for your questions following the presentation. And it is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Thank you, Brittany. Good morning, and welcome to Geospace Technologies conference call for the second quarter of our 2021 fiscal year. I'm Rick Wheeler, the company's President and Chief Executive Officer, and I'm joined by Robert Curda, the company's Chief Financial Officer, and also with us this morning is Dr. Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the second quarter and Robert will follow with an in-depth commentary on our financial performance. After a few last remarks, we'll open the line for questions that hopefully Robert, Mark, and I can answer. Some of today's statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about product markets, revenue recognition, planned operations, and capital expenditures. Such statements are based on our present awareness, while actual outcomes are affected by factors and uncertainties we cannot predict or control. Both known and unknown risks can lead to different performance or results from what we say or imply today. These risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings. As a convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website and I encourage everyone to visit and browse that site to learn more about Geospace and its products. Note that the information discussed and recorded this morning is time-sensitive and may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released financial results for our second quarter of fiscal year 2021 which ended March 31, 2021. Just as the COVID-19 play worsened in some locations, while improving in others, our business segments reflected similar divergence in the second fiscal quarter. Yet, despite the challenges, the pandemic has thrust upon us, there are signs of recovery for the overall economy as well as the businesses we serve. In many places, COVID-19 restrictions are being lifted. Air travel is ramping up, and businesses are reopening and returning to work. Nonetheless, the pandemic's severe impact is evidenced in the three and six-month periods ended March 31, 2021. In our oil and gas market segment, gaps in demand for our OBX marine nodal systems continued through the second quarter. This led to much lower rental revenue throughout the first six months of the fiscal year compared to last year. Moreover, as earlier OBX rental contracts ran to completion, many of the planned contracts for follow-on work and new surveys could not be started due to COVID-19 lockdowns and travel restrictions. However, we believe much of this work will resume as COVID-19 vaccines are broadly distributed and recovery from the pandemic gains momentum. Even now, requests for quotes on future OBX system rentals have increased, and some new contracts are already underway or about to begin.

Thanks, Rick, and good morning. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday's press release for our second quarter ended March 31st, 2021, we reported revenue of $23.9 million compared to last year's revenue of $25.9 million. The net loss for the quarter was $7.2 million or $0.53 per diluted share compared to last year's net loss of $3.8 million or $0.28 per diluted share. For the six months ended March 31st, 2021, we reported revenue of $52.3 million compared to revenue of $43.6 million last year. Our net loss for the six-month period was $8.2 million or $0.61 per diluted share compared to last year's net loss of $13.1 million or $0.97 per diluted share. Our oil and gas market's revenue is as follows: Our traditional seismic product revenue for the second quarter was $789,000, a decrease of 61% compared to revenue of $2 million last year. Revenue for the six months of 2021 was $1.8 million, a decrease of 59% compared to revenue of $4.4 million for the same prior year period. The reduction of revenue in both comparable periods is due to lower demand for traditional sensor products and marine seismic products. Our wireless product revenue for the quarter was $14.8 million, a decrease of 8% compared to revenue of $16.1 million last year. Wireless product revenues for the six months were $26.5 million, an increase of 6% compared to revenue of $25 million for the same period last fiscal year. The three and six-month periods both benefited from the recognition of $12.5 million in revenue from the sale of land wireless systems delivered to our customer in the second quarter of fiscal year 2020. Excluding this sale, revenue from wireless products for the three and six-month periods was $2.3 million and $14 million, an 85% and 44% decrease in revenue for the same periods of fiscal year 2020. The six-month period is partially offset by the sale of $9.9 million in used OBX rental equipment. The decrease in revenue due to selling a portion of our OBX rental fleet and lower utilization of the remaining OBX rental fleet was caused by COVID-19 related lockdowns and travel restrictions globally.

Thank you, Robert. COVID-19 has not yet gone away, but fortunately neither has our resolve to overcome the challenges it created. Many people continue to be impacted, but relief seems to be in sight, especially as vaccines are more broadly distributed throughout the world. In parts of the U.S., more than 40% of the population has been fully vaccinated and in some countries, even higher rates have been achieved. As economic conditions improve, the engines of commerce everywhere will accelerate. We firmly believe this will translate into higher demand for our products and services, including a further upward climb for those products that have seen growing demand despite the pandemic. In the broader landscape, the world will need energy to fuel its rebounding economies, and it will need even more energy to raise the quality of life for those portions of society continuing their journey out of poverty toward a higher standard of living. It must be remembered that oil and gas will remain the primary means of supplying this energy for some time to come.

The floor is now open for questions. We will take our first question from Bill Dezellem with Tieton Capital. Your line is now open.

Good morning and thank you. Let's start, if we could, with OBX and your comments inferred that you're starting to see some green shoots once again in that segment. So the question is, when do you expect the OBX rentals to return to the prior peak quarterly run rate levels?

That's a very good question, Bill, and thanks for calling in. I don't know that we could actually go so far as to say they'll reach prior levels that they were; I mean, that remains to be seen. I certainly think the opportunity is there for that to occur. But as far as the green shoots, we are already seeing that. We have contracts that are underway now, new contracts, and ones that are about to begin. And we're certainly answering quotes for those that some of them even extending into the next fiscal year. So, I mean, it's a good question, but I don't really have an answer for you. I think this is going to be contingent on how the recovery takes place and how these projects get scheduled. There's certainly been some disruptions actually within the actual service providers, so some of that has to get sorted out as well.

Is it your sense that from this point forward that at least for the foreseeable future you will have sequential increases in revenue from the OBX rentals?

I think that we believe the demand is going to increase. So to what extent that would lead to sequential increases in revenue, then there is certainly a likelihood that's the way it will manifest.

Great. Understood. OK, thank you. Let me shift to PRM, and then we can ensure that Mark can participate as well. Regarding the tender that you chose not to bid on, could you please provide us with an update? Is the PRM system still the leading option in terms of potential opportunities?

Discussions with that company are ongoing and continuing. There are other oil companies that we are also talking to. So, which one would manifest first I really couldn't say because this interest is pervasive. I think all companies are realizing that to maximize these resources, which they've already learned to do, the PRM is again going to continue to provide a good way of doing that. That being said, I can't tell you which of those companies that we're currently in discussions with would manifest into a first system. But we think we can accommodate any and all of them as they would come on board. As we said, we don't expect any of that to translate into any sort of revenue in this fiscal year certainly. But nonetheless, discussions keep going.

But let me take to say a step further. Your comments just in answering the question seemed more favorable than maybe what we've heard in the past and certainly more favorable than if someone were new to the company and heard that you hadn't sold the system since 2012. It sounds like something different is unfolding. Would you maybe expand upon that or just correct me if I'm wrong?

No, I think things are unfolding differently and it's certainly with more interest that's being expressed. If you think about it, the oil companies, their reactions have had to deal with the destruction of demand in the last year. So, the focus on oil companies has been how to navigate that particular circumstance. With the economy shutting down, air travel just demand in general. What they're now grappling with is, the recovery and the demands that that will now place on their existing resources. They've already learned that there is a lot of success gained and being able to leverage existing resources. OBX is a part of that as they are exploring and examining reservoirs near their existing platforms and infrastructure. To this extent, as I've mentioned before, there is an interest now extending into the deep water as we have a lot of OBX, our deep water version of that product, in play. So I'd certainly believe that with that new focus on being able to adjust to an increasing demand, I think that brings new attention to PRM, especially in light of maximizing their existing resources.

Rick, I have one more question, and it comes from a place of curiosity. If an oil company were to implement a PRM system around a platform that they would typically use OBX to conduct a survey for identifying new reserves, could they utilize the PRM instead? I think of PRM as being more comprehensive, allowing for monitoring over time, but it seems like it might also be capable of performing the functions that OBX would usually handle in the initial survey.

No, I think your original perspective is actually the more correct one. The PRM systems, generally speaking, are located above a reservoir. They can be quite large, as you can imagine. But the OBX is more utilized in examining nearby potential resources. So, where there is a reservoir, oftentimes there are other reservoirs that are very near that one. So, to that extent, I think the OBX is extending beyond the imaging opportunities of the PRM systems. To some extent, they can see out and beyond the geologies that they're sent over. But for the most part, that requires the additional exploration effort.

Let's switch to Quantum and Border Security. Mark, I have a few questions, but let's start with an update on what you are seeing. Please give us a general overview.

No. I've never known you to ask such a specific question before. I'd be delighted to. The update is contract performance is going very well on the revenue that everyone is aware of. I'm very, very pleased with what we have been able to accomplish from the architecture design and manufacturing and the deployment of our system. It's one in the client system and we now have it in the ground operationally, and we're now being able to reference that system in going forward. So, as we look to the future we're going to see where we are going to be able to apply its capabilities for other customers who are interested in similar solutions of such a scale. It's kind of like a PRM type of model. We expect it with more frequency, but where we are looking at larger scale opportunities, so quarters will bounce around on the low end, and then we'll have a big quarter like we did last one. So, I'm pretty pleased with where we're sitting right now and the fact that we can go forward and use it as a reference system.

And in Robert's opening remarks, he referenced that the system should be completed this year. My sense was that it would have been done by the end of March. Was there something that extended, or did I just misinterpret the opening remarks?

Both of you are right. To be honest, the system is in the ground doing its job. There are just nuances on the end of the contract that we have to tie up. And right now, we have a COVID scenario and we have an immigration scenario that is taking our customers' resources. So, there's a few loose ends that we are cleaning up on contracts. It’s always part of the contract. And we're just going to put those off for about a month or so, but it's nothing of any substantial nature.

Understood. So, I'm going to ask you to characterize what disruption, if any, you have experienced from the administration transitioning, and I'm not trying to get you to bash the administration. I think there is disruption that takes place anytime that there is an administration change. But hoping that you can characterize it and to what degree it's creating challenges and/or opportunities for Quantum?

I don't think the landscape has changed from our perspective around the administration change. The Border Patrol remains the Border Patrol under Customs and Border Protection within the Department of Homeland Security. And whether you're under the prior administration or this one, putting people in place of stability is the biggest factor, and that is happening. I wouldn't label it as a boundary between prior and now. Overall, what's happened has not been so much about the administration, but what we see on the hill remains also the same, which is we have bipartisan support for the capabilities that we provide because we are doing a job that is a security function, and so it enjoys that bipartisan support, and that hasn't changed either.

I think also, Bill, it's important to sort of make everyone aware that we're not building or not a part of building a wall or any of that sort of thing. So I mean, clearly, there has been a withdrawal of funds and other work and effort towards it, and where that goes, who knows? That's something that I guess will unfold over the course of time. But that's not what we were involved in or are involved in. Our technology is advanced in a different way. And if you recall even in Biden's recent address to Congress, he mentioned the fact that even his administration is interested in deploying technology solutions on the border for our security. So that's the area that we really focus on and employ ourselves doing.

Great. That’s helpful. And the SBIR Phase three approval that you have, does this apply to government contractors or is it just the border patrol? And I'm asking this question in the spirit of a prior conference call you had referenced some interaction with contractors.

It is not limited to Homeland Security; it extends throughout the federal sector.

And would that include when working with other government contractors or would you really need to be operating under whatever level that they have?

No, it is not bound by whether we are the prime or the sub. We can still receive a sole source for the procurement of our systems.

That is helpful. You may have partially answered this question earlier, but I have been wondering why a sector of the border patrol wouldn't independently order additional equipment for areas they identify as high risk instead of relying on corporate decisions. I thought the SBIR Phase three would enable any sector to do that. Could you discuss this point and share your perspective?

Well, remember the Headwaters for funding within the government starts on the hill, where they're authorized and appropriated by Congress. And then as they trickle down into the various departments, each department does it somewhat differently. Homeland Security has more open buckets, if you will, for funds, whereas the Department of Defense is far more site-specific. So it remains in D.C. at that level within the Border Patrol. And that's how they then choose to go forward with where they deploy because they view all borders, not just certain quarters, to decide where best to apply those resources.

Great. Thank you all for taking so many questions.

You're welcome.

And it appears I apologize. We do have a question from Glenn Kukla with Kukla Capital.

Hi, guys. Good morning.

Hi, Glenn.

I wanted to dive into a couple of topics. First of all, please again that the cash is ever-growing, it's great for the balance sheet using its repurchased stock gives us a lot of confidence. I want to ask about the GCL contract that seems to be performing well. What do you think would trigger reclassifying that from deferred revenue to another line item on the balance sheet such as unrestricted cash, etc.?

We actually recognized that sale in this quarter. So we no longer have that recorded as deferred revenue; it's actually revenue now.

Okay.

And I mean as it was the entire story, I mean there was a case where through the public financial statements of SA Exploration, they had in times past indicated in their filings that they were at risk, if not remaining a going concern. So that sale was to them prior to that filing. And that prompted us that we needed to hold that as a reserve on revenue. So that's what ended up putting it on our balance sheet over the course of time. But since then, they've gone through bankruptcy, emerged from that bankruptcy, and more recently, we've gotten audited financial statements, all of which indicated that as we've mentioned in the press release, the probability of full payment on this is high. So it makes sense to go ahead and recognize that revenue now that they've emerged.

Great. I appreciate your conservative classification of that in prior quarters and your instincts on their viability as eventually coming through to pay that; it's great to see. Did those payments, once they were reclassified from deferred, flow through and add to the unrestricted cash number?

I think they were already in the cash statement on the balance sheet.

Yes. That's correct.

Okay. Great. Moving on to other sales like that, do you expect to see more consistent sales similar to the OBX and GCL sales, or do you think it will be more unpredictable in the next couple of years?

Glenn, it's going to be lumpy, it always really has. So I think your instinct on that is accurate; that's how it's likely going to manifest in the course of time.

Okay, great. And flipping over to a new investment, Robert. Could you repeat having quite high of the amount you are expecting to the project and invest in new equipment and PP&E?

Yeah. So we think we could invest as much as $3 million towards plant property and equipment. We've already put almost $2 million towards that this fiscal year. And then on our rental fleet depending on what kind of demand we see throughout the rest of the year, we expect to spend as much as $2 million. That could change though depending on if things that we don't have visibility to today come up.

It's encouraging to see potential signs of improvement as Bill Dezellem mentioned. This indicates that you are anticipating some activity in that area. While we are not certain when it will start, it's a positive development.

It is encouraging.

So, building off that, if there isn't a significant PRM award in the next couple of years and that doesn’t have an impact, what do you think would be the best contributor to both the top line and bottom line, in very general terms? I'm not asking for specific guidance.

Well, I think our wireless portion of the oil and gas markets has historically been the other main producer, and I suspect that will remain to be the case. The traditional products, which typically or the sensors and that sort of thing, those manifested consumable items as exploration takes place primarily on land. Land exploration is still very much in a depressed state compared to prior norms. So we don't have evidence that that's going to change right away. But to what extent it does, we believe our GCL, which is a part of our wireless product line within the oil and gas, would continue to contribute because it's an easier deployment, less weight, all that just makes the seismic survey capabilities easier.

I mean further to Rick's comments though, in the land seismic world, there is a huge amount of stacked equipment that our customers have. So recovery would take a lot of recovery for us to see anything significant within that line of products.

Yeah, the one thing that might accelerate some of that to Robert's point is with this stacked equipment. Much of it is older legacy type equipment, not all of it, but some of it is. And to the extent that those are much less efficient and costly to operate than the newer technologies such as we offer today, then they may be abandoned in some sense. So we'll just have to see how that turns out.

Thanks for the information. I have one last question about PRM. Can you explain the typical timeframe between receiving an award and when the first portion of revenue is recognized?

Typically that depends a lot on the size of the contract; the amount of cable we're providing that has a big factor in that. It could also have some factors based upon weather windows and where this equipment needs to be installed that could affect when that happens. Typically, it could be as long as six months out or up to a year or even more.

It also amounts to sifting through all the revenue recognition rules of accounting. These contracts do not necessarily represent cash flow.

Fair enough. Great. Carbon sequestration is something I know Dr. Tinker has expressed excitement about in previous calls. But do we see any potential for it to be incorporated into our business, or is it mainly a long-term opportunity?

No, it definitely has potential as future business. It is a rather infant market with respect to how that might manifest. I think most focus these days is on the actual capture and storage aspects, where we would fit in mostly is in the monitoring aspects of the reservoir. But keep in mind too that PRM systems really fall into the utilization of carbon capture because oftentimes they inject CO2, flood these reservoirs with CO2, enhance their oil recovery. And they learn where and how to do that oftentimes by monitoring the reservoir and its changes with the PRM. So the PRM actually becomes a carbon sequestration management tool in those situations where they are actually using CO2 for that enhanced oil recovery.

Great. Well, Rick, that sounds like also a good sales pitch to coach your sales team with, I think I’m a believer.

Well, it's all true.

Great. That’s all I have for today. You guys take care.

Thank you.

All right. Thank you, Glenn.

And we have no further questions at this time. I will turn the floor back over to Rick Wheeler for any additional or closing remarks.

All right. Well, thank you, Brittany. And I'd like to thank everybody that joined our call today. And we'll look forward to speaking with you again on our conference call for the third quarter of fiscal year 2021, which will occur in August. So thanks and goodbye.