Earnings Call Transcript - GEOS Q1 2023

Operator, Operator

Welcome to the Geospace Technologies’ first quarter 2023 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. 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 on a listen-only mode and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Rick Wheeler, President and CEO

Thank you, Brittney. Good morning, and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2023. I’m Rick Wheeler, the Company’s President and Chief Executive Officer, and I’m joined by Robert Curda, the Chief Financial Officer of the Company. In these prepared remarks, I will first provide an overview of the first quarter and Robert will then provide an in-depth commentary on our financial performance. After some final comments, we will open the line for questions. Some of today’s comments about markets, revenue recognition, planned operations and capital expenditures may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Statements we make are based on our present awareness, while actual outcomes are affected by uncertainties we cannot predict or control. Both known and unknown risks can lead to results that differ from what we say or imply today. These risks and uncertainties include those discussed in our SEC, Form 10-K and 10-Q filings. For convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. And I recommend that you browse our website to learn more about Geospace and our products. Note that the information recorded this morning is time-sensitive and may not be accurate at the time that listeners access the replay. Yesterday, after the market closed, we released our financial results for the first quarter of fiscal year 2023, spanning October 1st through December 31, 2022. We were pleased to see that revenue for the quarter reached $31.1 million, reflecting an increase of 73% over last year’s same period. Moreover, the amount represents the company’s highest quarterly revenue in the last 8.5 years, going back to June of 2014. Gross profits for the quarter were also strong and reached a three-year high of $10.5 million. Factoring in all other expenses, the first quarter posted a narrow net loss of $0.01 per share. However, it must be noted that the slight loss comes after including $1.4 million in one-time charges, which were a combination of restructuring costs, write-offs of Russian inventory, and non-recurring repair costs. Those actions stem from our commitment to achieve future profitability through streamlining our operations, reducing operating costs, and increasing revenue in each of our business segments. The majority of first quarter revenue came from our Oil and Gas segment, led by wireless seismic products, while the sale of GSX land equipment from our rental fleet was a contributing factor. The largest portion of wireless seismic revenue came from our OBX ocean bottom nodes. Rental revenue from performing OBX rental contracts was certainly the largest component. However, a significant amount of OBX-related revenue was the result of compensation for OBX equipment that was lost by a rental customer during a survey. We intend to build out additional OBX nodes to replenish this lost equipment in the rental fleet, as demand for both the deepwater and shallow water OBX models continues to strengthen. Many of our existing customers have stated an intention to move their crews to follow-on client contracts after their existing surveys are complete. Combining this demand with an increasing number of shallow water surveys being put out for bid, interest in using our new Mariner nodal technology is also growing significantly. Our strategic diversification efforts continue to bear fruit, as evidenced by the performance of our adjacent market segment. First quarter revenue from these products was within 1% of its all-time records set in last year’s third quarter, adding traction to our move toward profitability. As a premier manufacturer and supplier of ruggedized water meter connector cabling, our market position in these products continues to climb. To maintain this position, we work closely with trusted water meter companies to meet the design and specifications of their domestic municipality customers. The breadth of discussions taking place with these partners for specialty cables as well as the Aquana smart valve products gives us confidence that future growth in this market will continue. With that, I will now turn the call over to Robert to give more financial detail on first quarter performance.

Robert Curda, CFO

Thanks, Rick and good morning. Before I begin, I would 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 first quarter ended December 31, 2022, we reported revenue of $31.1 million compared to last year’s revenue of $18 million. The net loss for the quarter was $100,000 or $0.01 per diluted share compared to the first quarter of last year’s net loss of $6.8 million or $0.52 per diluted share. Our oil and gas product revenue is as follows: traditional product revenue for the three-month period ending December 31, 2022 was $2.8 million compared to revenue of $600,000 for last year. The increase in revenue is due to higher demand for seismic sensors and marine products. Seismic sensor sales are up due to a long-term order with an international company and a modest increase in domestic sales from our Russian entity. Our wireless product revenue for the quarter was $17.2 million, an increase of 98% compared to revenue of $8.7 million last year. The increase in revenue is due to higher rental revenue from higher utilization of our OBX rental fleet and higher marine wireless product revenue from a rental customer’s compensation for lost OBX nodes. Moving to our adjacent markets product segment, our industrial product revenue for the first quarter was $7.9 million, an increase of 58% compared to last year’s revenue of $5 million. The increase in revenue is due to a higher demand for our smart water meter connectors and cables. Imaging product revenue for the three months ending December 31, 2022 was $2.9 million, a decrease of 8% when compared to $3.2 million from the same period last year. Lower demand for thermal film products during the holiday season explains the slight reduction in revenue for the first quarter as compared to the same prior year period. Revenue from our emerging market segments for the first quarter of fiscal year 2023 was $93,000 compared to $137,000 for the first quarter of fiscal year 2022. The revenue for both periods is related to the ongoing contract with the U.S. Customs and Border Protection Agency. Our consolidated gross profit for the first quarter of fiscal year 2023 was $10.5 million compared to $1.7 million last year. The increase in gross profit was due to higher utilization of our OBX rental fleet, higher marine wireless exploration product sales, and an increased demand for our water meter cables and connector products. The first quarter of fiscal year 2023 operating expenses were $10.8 million. This is an increase of 26% when compared to $8.6 million for the first three months of fiscal year 2022. The increase is due to a favorable non-cash adjustment reported in the prior year for a change in the estimated fair value of contingent consideration related to our quantum and at the sites acquisitions. Severance costs we announced in our prior teleconference and higher selling general and administrative expenses resulting from our increase in revenue. These increases are partially offset by a decrease in R&D project costs. Q1 2023 cash investments into our property, plant, and equipment were $265,000 and cash investments into our rental fleet were $162,000. Our 2023 capital investments into the rental fleet could be as much as $6 million provided new rental contracts warrant the additions to our fleet. Investments in property and plant and equipment could be as much as $1 million for the fiscal year. Our balance sheet at the end of the first quarter of fiscal year 2023 reflected $12.3 million in short-term investments, and we maintained additional borrowing ability of $8.5 million under our bank credit agreement, giving the Company a total liquidity of $20.8 million. We currently have no debt and own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. This concludes my discussion, and I will turn the call back to Rick.

Rick Wheeler, President and CEO

Thanks, Robert. After the first quarter closed, our Quantum Technology Sciences Subsidiary secured a new contract with an undisclosed federal government contractor. While the initial dollar amount of the contract is modest, it holds strategic significance for our future potential to serve an application unrelated to our previous border security work. In conjunction with multiple active discussions surrounding other unique applications of Quantum’s Analytics Technology, we believe the outlook for projects in our emerging market segment is expanding. As part of our plans for streamlining operations and reducing costs, we anticipate completing the sale of our satellite use facility within the second fiscal quarter. This facility currently houses our OBX rental operations, which we are in the process of consolidating into our main campus location. In accommodating this consolidation, we sold some obsolete equipment after the first quarter closed. We believe that our planned efforts and vigilance in maintaining a strong balance sheet will successfully lead us to profitable returns for our shareholders. With that, this concludes our prepared commentary and I will now turn the call back over to Brittany, our moderator, for questions from our listeners.

Operator, Operator

Thank you. Now we will take our first question from Martin Laurinson, who is a Private Investor. Your line is now open.

Unidentified Analyst, Analyst

Hi, Texas from Germany, and thank you for taking my questions. I have a few, if I may. The first one, can you shed some additional light on the property sale you indicated last quarter on this call? Are we talking about the Langfield Road facility?

Rick Wheeler, President and CEO

Yes. That is exactly the one we are discussing.

Unidentified Analyst, Analyst

Okay. Thank you. And in terms of streamlining operations, can we expect further sales this year?

Rick Wheeler, President and CEO

We are certainly going to be examining our assets with our property, plant, and equipment as far as that goes. I don’t think there is any anticipation of our properties at this point in putting those up for sale, but we are open to doing that if, in fact, our examination shows that would be beneficial for us in our overall approach towards profitability.

Unidentified Analyst, Analyst

Got it. And on a higher level, can you address market share and how that potentially shifted since the onset of the pandemic, especially given the consolidation that seems to be happening and picking up in Europe as well?

Rick Wheeler, President and CEO

Well, the market is certainly picking up. The pandemic, for the most part, had a massive effect on the overall demand for oil and gas, and subsequent to that, seismic exploration for several years now has been at the lowest it has ever been in history. But that being the case, we see with what is happening in Ukraine as well as the fact that China is coming out of its isolation more so from the pandemic; the demand for oil and gas and energy in general is improving. I think that is what is driving most of what we see today. It is true that we don’t see as much improvement on the land side of things, although there are signs of that also improving. Most of what we see is occurring in the offshore space, and certainly, that is why you see that our OBX rental fleet and ocean bottom nodes are driving our revenue at this point in time.

Unidentified Analyst, Analyst

Got it. Okay. And then lastly, do you see room for further freeing up of working capital that we have seen over the last few quarters and what can we expect the cash balance to look like?

Rick Wheeler, President and CEO

I think we are looking good for cash. Again, we don’t give any guidance on how those things are manifesting in the future, but we do conservatively manage our cash as has been exemplified for many years. Therefore, we expect ourselves to be in good shape with respect to our cash.

Unidentified Analyst, Analyst

Okay. Thanks and good luck.

Rick Wheeler, President and CEO

Thank you very much.

Operator, Operator

Our next question comes from Bill Dezellem with Tieton Capital. Your line is open.

William Dezellem, Analyst

Thank you. Rick, I would like to start with the comment you just made about the land market and that there are some small signs that it is improving. Would you walk through those for us?

Rick Wheeler, President and CEO

Well, many of these improvements are coming about in foreign locations. Certainly, in Canada and North America, things are still depressed, but even there we are seeing improvements. To the extent that seismic exploration has just been at such low levels, there is a little bit of pent-up demand that we believe is driving some of that. But overall, it is still too early to tell what sort of recovery we might see in the land side of the business.

William Dezellem, Analyst

Thank you. So then relative to the new Mariner product, you’d mentioned that there was increasing interest. Would you help us understand whether that is predominantly an interest in rental or if that product is gaining purchase interest?

Rick Wheeler, President and CEO

It is actually both, but certainly, the Mariner represents a very cost-effective solution compared to what has historically been available for ocean bottom nodes. That was one of the primary design targets of our engineers, to ensure that we could maintain the quality while lowering costs in that manufacturing process. I think we have been successful with that, and it has features that you won’t find in the general equipment available. That being said, I think that is driving interest both on the sales side and on the rental side, but I’m sure that the rental of those units will certainly be a driving force, and we will have to see to what extent the sales also manifest.

William Dezellem, Analyst

And Rick, how are you thinking that you may look back say a couple of years from now on this and see Mariner versus OBX in terms of what is a bigger driver of the business?

Rick Wheeler, President and CEO

That is really too hard to predict. So long as the prevalence of ocean bottom surveys persists, I think the Mariner has a good future. The OBX technology is serving that industry very well, and the Mariner is going to serve it equally well, if not better.

William Dezellem, Analyst

And do you see cases where customers will be making a choice between OBX and Mariner, or where Mariner will be taking share from OBX, or are they really serving different applications?

Rick Wheeler, President and CEO

No, I think you are not going to see one overtake the other particularly from a use case point of view. The Mariner is a shallow water designed node just like the OBX 750. To that extent, it has been carefully designed such that you can mix these units. The data from each of them is completely cross-compatible, as well as the systems that operate that equipment can operate both simultaneously and in any cross-combination of the two. Now, the deep water OBX is one that has seen some of the very same improvements embedded in its design. So it serves a different market, but you are not going to see the Mariner represent a different use case than what the current shallow water version of the OBX uses. Therefore, they are both going to be able to be mixed together.

William Dezellem, Analyst

Great, thank you. And then shifting to Aquana, are the discussions that you are talking about there with Aquana, are those with the same buyers of the water meter connectors, or is this a different buyer set that you are interacting with?

Rick Wheeler, President and CEO

It is somewhat a combination of both, but it definitely intersects with a completely different market and group of customers than the water meter cables just themselves do. The fact is that the water meter cables are used in the same environment where those valves will be used. So, there is some crossover.

Robert Curda, CFO

We are also targeting Aquana valves for property management purposes too. So that is an entirely different set of customers.

Rick Wheeler, President and CEO

Yes, that is a good point. Therefore, it is not necessarily addressing the aspects of the needs of the municipalities. It is a different market altogether.

William Dezellem, Analyst

Okay. So in that case, you would be interacting with a real estate owner or property managers that would be making the decision to implement these either with new construction or with existing apartments.

Rick Wheeler, President and CEO

That is exactly right and/or the service providers that perform those sorts of services for those property owners.

William Dezellem, Analyst

And then shifting to Quantum, would you please discuss the new contract that happened here after quarter-end?

Rick Wheeler, President and CEO

Can’t get into too much detail about that contract. It is with a very well-known federal contractor for very specific and targeted purposes that really aren’t available to be discussed at this point. However, it is easy enough to say that the available commerce with this particular use case is going to be significant.

William Dezellem, Analyst

Thank you. And then, in the release, you mentioned that Quantum has an expectation for additional orders. I took note that the orders were plural as it was written in the release here in the remainder of this fiscal year, so over the next nine months. Can you talk more about that?

Rick Wheeler, President and CEO

One of the things that we are doing and are right in the middle of is expanding the utilization of the Quantum analytics into other spaces. That includes our oil and gas and other components of the energy business. Much of what we are examining will fall into that category. Additionally, there are some other government agencies we are in discussions with for projects, and we do expect those contracts to be issued sometime this year.

William Dezellem, Analyst

Great. Thank you both.

Operator, Operator

Our next question comes from Jeffrey Feldman with Primary Succession Capital LLC. Your line is now open.

Jeffrey Feldman, Analyst

Thank you for the updates on the company. I have been a shareholder for a long time, and I think you guys just keep fighting, which is tremendous. It sounds like things are just starting to turn, which is great. My question really goes back to liquidity and cash availability to see the outcome you are all hoping to achieve. The cash balance against the CapEx that you had reported. You are going to need working capital and so forth. I understand the bank line is there and I understand it is a forward-looking comment. But it is kind of simple math. When I look at it, I’m sort of feeling this year and a half to two years to make this work or there is something existential on the horizon. Am I seeing that right, or do you guys see it differently?

Rick Wheeler, President and CEO

Looking at our forecast, we think we are in pretty good shape over the next 12 months in a cash-positive position. So I’m not really concerned from a liquidity point of view at this point.

Jeffrey Feldman, Analyst

Great, if you are not nervous, I won’t be nervous. Thanks guys.

Operator, Operator

We will take our next question from Scott Bundy with Moors & Cabot. Your line is now open.

Scott Bundy, Analyst

Good morning, guys. So Rick, can you just give us a rough idea of what the building's value will be once sold in the quarter?

Rick Wheeler, President and CEO

I don’t think we have revealed that. I mean, it will become very evident as we close that this quarter. We definitely anticipate closing that sale in the second quarter here. It is not earth shattering, but it is also a substantial benefit to us, and we do anticipate a gain on that property on our books.

Scott Bundy, Analyst

And how much, if any of the $6 million that you have earmarked for rental equipment, are you guessing would come from Mariner?

Rick Wheeler, President and CEO

Well, the Mariner is not going to begin contributing until later on this fiscal year, I can tell you that. The construction of the Mariner is going to be a big part of that. I think the revenue from the Mariner will certainly be something that we will see more towards the tail end of the fiscal year and going forward.

Scott Bundy, Analyst

And Rick, no discussion regarding PRM; can you give us some idea if those multiple customers are still interested? We keep hearing a lot about the deepwater market opening up quite dramatically from other players in your field?

Rick Wheeler, President and CEO

That is a very good question. Yes, there is not much discussion because there is not much new. However, the interest is ongoing and active. We have had discussions with those representatives here at our facilities as well as being at their facilities. So the interest is still there. I think that, to your point, the examination of getting the most out of these deepwater assets is possibly what keeps those discussions afloat and on top of mind.

Scott Bundy, Analyst

Rick, can you just give us a rough idea of the potential addressable market that we are discussing for Quantum? I mean, are we talking PRM type contracts or can you give us any sense of what that addressable market looks like if you are successful?

Rick Wheeler, President and CEO

Again, I don’t think we have revealed what we think some of those numbers are, but we wouldn’t be looking at it if we didn't think it was significant. These opportunities certainly will be ones that the government itself will involve, both for military and some law enforcement agencies.

Scott Bundy, Analyst

Last question, for the land wireless customers; has most of that existing inventory by your customers been absorbed, or is that still an issue?

Rick Wheeler, President and CEO

No, we still have inventory related to the wireless land product. Certainly, some of it has made its way into customers' hands, and in fact, that is what we referred to in this release. There was a component of revenue in the wireless product space that was land equipment sold out of our rental fleet.

Scott Bundy, Analyst

I’m sorry, one more question. This environment reminds me a lot of 2005. Would you agree in terms of what you are seeing?

Rick Wheeler, President and CEO

In my mind, every one of these cycles has its own character and personality. While I do see some similarities to what has happened in the past, there are a lot of things that are very unique to this situation. Therefore, I don’t know that I would have a one-to-one correspondence, but I do understand the analogy you are drawing.

Scott Bundy, Analyst

Thanks, guys.

Operator, Operator

We have a follow-up question from Bill Dezellem with Tieton Capital. Your line is open.

William Dezellem, Analyst

Thank you. Continuing down the question regarding PRM, how are the discussions different today compared to back in 2012 when those conversations were taking place?

Rick Wheeler, President and CEO

Well, I think at the time, they were anticipating that they would be putting out a tender sooner than that actually occurred. So the discussions have become a little more realistic. That is why we would say that, even amidst these discussions, we don’t expect anything to generate revenue this fiscal year. Everything in these discussions focuses on aspects that would come in subsequent fiscal years.

William Dezellem, Analyst

And are the oil companies looking for something different, whether it be a use case or configurations just philosophically different today versus then or very similar?

Rick Wheeler, President and CEO

I think they are very similar. These are long-standing needs, and the fields have long lifetimes. They want to get into that early. So some of these are brand new fields. Others of these are fields that already exist. Thus, I think that sums up the general nature of the discussions, and it is why they are basically very similar to what they have been.

William Dezellem, Analyst

Rick, you said you don’t anticipate anything leading to revenue this year—do you anticipate you may see orders this year even though they would not contribute to revenue this fiscal year?

Rick Wheeler, President and CEO

I think that is possible, but again, I’m not putting a high probability on that occurring given the slip that has already occurred on several occasions in some of these anticipated tenders.

William Dezellem, Analyst

Alright and then, finally, what was the revenue associated with the lost OBX equipment?

Rick Wheeler, President and CEO

You know, we did not reveal that exact number. Honestly, the only ones that need to know that are the parties to the transaction, as competitors could try to leverage that information to their benefit. However, I will say that it was significant, and we made note of that to be transparent in our revenues. Nevertheless, I will also say that the quarterly revenues were the highest they have been in 8.5 years, and excluding that sale, there were very few quarters that could have been better within that same span.

William Dezellem, Analyst

Great. Thank you.

Operator, Operator

We will take our next question from Michael Melby with Gate City Capital. Your line is now open.

Michael Melby, Analyst

Hi. Good morning, gentlemen, and congratulations on the new results. You talked about a path to profitability, and that is encouraging to a lot of investors, I think. I realize you don’t discuss specifics, but could you talk at a high level on the components you envision to get you to profitability? I know higher revenue is part of it, but as you think about your business plan and model, could you highlight the components you need to improve either on the revenue or cost side to get to where you want to be? I think that would be helpful to frame it to the investment community.

Rick Wheeler, President and CEO

Yes. I think all fronts will have to be pursued, Mike. That is exactly what’s in our plan. Part of that is examining in great detail the cost structure of our manufacturing operations; identifying which aspects have the greatest efficiencies, which ones do not, and where our assets and working capital are best put to use. So those pieces of the puzzle are ones we are still putting together, and we will act on them as we discover them. On the revenue side, there is a clear aspect that we need to increase revenues across all segments. Therefore, there are expansion efforts happening in some areas within the organization to increase our capacities for well-known products we forecast positively on. Therefore, it will be a combination, but as you said, we cannot provide any specific guidance on this matter.

Michael Melby, Analyst

I think it can be challenging from our side to think about how those come together. Could you highlight any timeframe you have internally to get you close to your profitability goals?

Rick Wheeler, President and CEO

We are targeting significant improvements this year based on what you have seen in this quarter. We expect to see more of that as we proceed in our exploration and restructuring efforts. That is not something that happens overnight, requiring careful examination as we move forward with these matters. I wish I could give you a more exact timeline, but it would not be accurate to do so.

Michael Melby, Analyst

Just a quick clarification, on the OBX rental equipment that was lost; was that included in product revenue or rental equipment revenue?

Robert Curda, CFO

It was included in product revenue.

Operator, Operator

We will take our next question from Father Amagou Levenson with Levenson Capital Management. Your line is now open.

Unidentified Analyst, Analyst

Thank you. Good morning. I think really the bottom line, both qualitatively and quantitatively, is that under the current leadership of the company, approximately 97% of shareholder value has been destroyed. Retained earnings and owner’s equity have dramatically reduced for the owners of the company. The only way you have come close to breakeven this last quarter is due to an equipment loss. The Board is bloated, and management salaries and benefits are always hidden in SG&A, which is consistently increasing. The Quantum acquisition hasn't panned out, at least not yet, after a couple of years. It feels like you are always dangling a carrot in front of investors. In the meantime, management and the Board are well compensated, while investors are left holding the bag. To me, that looks like corporate governance failures that should lead to Rick Wheeler’s ouster. A Board that allows the management team to remain in place this long with these losses—forty-two quarters—is remarkable. The price of oil goes up, and you lose money. The price goes down, and you lose money. The economy is booming, and you lose money. The economy is bad, and you lose money. This is corporate governance failure. You need to address these failures before you continue losing money. Every call someone asks when you will be profitable; you can’t give a clear answer. Investors should be concerned. You have great technology and R&D but you will run out of physical assets to sell to bolster your cash position.

Rick Wheeler, President and CEO

I think in many respects, you are mistaken about how this business operates. We are managing our resources well. All companies may experience challenges but how we align ourselves with more revenue-producing components is our main focus. The current economic conditions are complex, and I assure you that we are doing everything to pivot towards growth.

Unidentified Analyst, Analyst

I’m stating facts. The company exists to earn a profit and increase shareholder wealth. You have not done this for eight years, which is a true statement. Look at your retained earnings; they have eroded. You should be concerned.

Rick Wheeler, President and CEO

We are restructuring and aligning with components that are more revenue-producing, which will allow us to improve operational outcomes.

Unidentified Analyst, Analyst

I hope that is true because I believe the Board should be reduced. A bloated Board doesn’t help when your market cap is so low. We need effective leadership on the ground rather than nice guys. This performance is indefensible, and you must change quickly.

Rick Wheeler, President and CEO

I have noted your concerns.

Operator, Operator

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

Rick Wheeler, President and CEO

Alright, well, thanks Brittany, and thanks to all of you who joined our call today. We look forward to speaking with you again on our conference call for the second quarter of fiscal year 2023 in May. Thanks again, and goodbye.

Operator, Operator

Thank you. This does conclude today’s Geospace Technologies’ first quarter 2023 earnings conference call. Please disconnect your line at this time, and have a wonderful day.