Earnings Call Transcript - GEOS Q3 2025

Rich Kelley, CEO

Thank you, Angela. Good morning, and welcome to Geospace Technologies conference call for the third quarter of fiscal year 2025. I am Rich Kelley, the company's Chief Executive Officer and President. I'm joined by Robert Curda, the company's Chief Financial Officer. In our prepared remarks, I will first provide an overview of the third quarter, and Robert will then follow up with more in-depth commentary on our financial performance as well as an overview of our financials. I will then give some final comments before opening the line for questions. Today's commentary on markets, revenue, planned operations, and capital expenditures may be considered forward-looking as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on what we know now, but actual outcomes are affected by uncertainties beyond our control or prediction. Both known and unknown risks can lead to results that differ from what is said or implied today. Some of these risks and uncertainties are 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, which I invite everyone to browse through and learn more about Geospace, our subsidiaries, and our products. Note that today's recorded information is time-sensitive and may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released our financial results for the period ended June 30, our third quarter fiscal year 2025. For the 3 months ended June 30, 2025, we reported revenue of $24.8 million with a net income of $0.8 million. For the first 9 months of our fiscal year, we had $80.1 million in revenue with a net loss of $0.7 million. Strategic accomplishments during the third quarter in all of our business segments have reinforced the success of our diversification efforts, laying the foundation to further our revenue and profitability goals. In our Smart Water segment, we continue to generate strong organic growth with our Hydroconn universal AMI connectors. They remain a reliable revenue and profit center, setting another revenue record for the first 9 months. Our Quantum line of products continues to gain market acceptance, and we are seeing increased demand. We also announced the product launch of AquaLink. It is an advanced multi-device and multiunit Internet of Things, or IoT endpoint designed to transform submetering and leak detection into multiunit residential and commercial properties. With AquaLink, we are providing a smart, scalable solution that addresses the growing demand for accurate water monitoring and multiunit properties. This multi-device, multiunit capability, combined with advanced intelligence features makes it an invaluable tool for property owners and managers to meet regulatory standards while smartly monitoring usage. These achievements continue to support our position that the Smart Water segment has great potential for growth. Our Energy Solutions team announced a permanent reservoir monitoring contract award for the Mero Field 3 & 4 from Petrobras, operator of the Mero Field Consortium. The contract encompasses the supply and installation of nearly 500 kilometers of the OptoSeis Permanent Reservoir Monitoring System, or PRM, covering 140 square kilometers of seabed area located deep offshore in the Santos Basin off the coast of Brazil. The equipment manufacturing portion of this contract should generate in excess of $80 million in revenue and is anticipated to take 16 to 18 months to complete. We will be recognizing this revenue throughout the project for normal revenue recognition rules. We do not anticipate any revenue recognition in this fiscal year. The contract also includes installation of the system, which is to be completed by Blue Marine Telecom, a Brazilian subsea cable company. Full installation of this system and any associated revenue is anticipated in fiscal year 2027. Energy Solutions also achieved its first sale of the newly released Pioneer, an ultra-lightweight land node used for seismic surveys. The first units were purchased by a global engineering and professional services firm based in Canada. As part of our ongoing review and modernization of our product portfolio, we sold the assets associated with our streamer recovery device product line to Seis Gear, in June. We have confidence that Seis Gear will support SRD customers with outstanding service and experience. While we continue to face headwinds in the ocean bottom node markets, these accomplishments indicate there are still opportunities to generate revenue and profitability in this segment. The increased success in our Smart Water and Energy Solutions segments have further improved utilization of our Houston facility and should positively impact operational efficiencies. Building off this success, we invested in the growth of our Intelligent Industrial segment this quarter with a recently announced acquisition of Heartbeat Detector, a security technology developed by the United States Department of Energy's Oak Ridge National Laboratory. Used in more than a dozen countries to address human trafficking and prison security, the Heartbeat Detector is a small portable device that uses advanced sensors to rapidly identify people hidden in vehicles, providing a modern, user-friendly interface in as little as 10 seconds. The product, which relies on the GS-ONE low-frequency single-element geophones manufactured in our facilities has been proven 99% effective by Oak Ridge, Sandia, and Thunder Mountain National Laboratories. Domestically, the Heartbeat Detector is used extensively by Departments of Corrections and prison systems. Globally, the product has been leveraged for border crossings and prisons in many countries. There are more than 300 manned border checkpoint crossings in the United States and more than double that in Europe based on EU estimates. We intend to offer the Heartbeat Detector on a subscription basis, aligning with our strategy to grow recurring revenue streams. As we increase the emphasis on our security and defense product portfolio, we have engaged former U.S. Border Patrol Chief, Carla Provost, to educate fellow national and homeland security professionals and accelerate end-user adoption of our advanced analytics and sensing solutions for border and perimeter security applications. We remain well positioned to exploit the tremendous potential we have created with our products and services portfolio, our talented staff and our continuing diversification into new high-margin markets. Additionally, our current backlog places us in a strong position going into the remainder of this year and beyond. Executive leadership continues to address workforce costs and development expenses on our path to sustained profitability. We will continue to pursue growth through acquisition with immediately accretive additions to top line revenue. Overall, I have continued optimism that our company is well positioned to perform going forward. I will now turn the call over to Robert to provide more detail of our financial performance.

Robert Curda, CFO

Thanks, Rich, 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 of our third quarter ended June 30, 2025, we reported revenue of $24.8 million compared to last year's revenue of $24.9 million. The net income for the quarter was $760,000 or $0.06 per diluted share compared to last year's net loss of $2.1 million or $0.16 per diluted share. For the 9 months ended June 30, 2025, we reported revenue of $80.1 million compared to revenue of $100.2 million last year. Our net loss for the 9-month period was $662,000 or $0.05 per diluted share compared to last year's net income of $6.3 million or $0.47 per diluted share. Our Smart Water segment produced revenue of $10.5 million for the 3 months ended June 30, 2025. This compares with revenue of $9.9 million for the same period of the prior fiscal year, an increase of 6%. For the 9-month period, the segment contributed revenue of $27.3 million versus $20.6 million, an increase of 33%. The increase in revenue of both periods is due to higher demand for our Hydroconn connectors. The 9-month revenue marks a new high revenue for our Smart Water segment. Revenue from our Energy Solutions segment totalled $8.1 million for the 3-month period ended June 30, 2025. This compares to $9.4 million in revenue for the same prior year period, representing a decrease of 14%. Revenue for the 9-month period is $35 million, a decrease of 42% over the equivalent prior year period. The decrease in revenue for the 3-month and 9-month period was due to lower utilization and sales of our marine ocean bottom nodes. Our Intelligent Industrial segment revenue totalled $6.1 million for the 3-month period ended June 30, 2025. This compares with $6.5 million for the equivalent year-ago period, representing a decrease of 5%. Revenue for the 9-month period was $17.6 million. This compares to the prior year period of $19.1 million, a decrease of 8%. The decrease in revenue for both periods is due to lower demand from our surveillance and defense products and our imaging products. The decrease for both periods was partially offset by an increase in demand for our contract manufacturing services. Our operating expenses increased by $900,000 for the third quarter of 2025 or 8% and increased by $5.4 million or 18% for the 9-month period. The increase for both periods is due to the higher personnel costs and increased sales and marketing costs. Our 9-month cash investments into plant, property and equipment was $5.8 million and additions to our rental fleet was $1.1 million. Our balance sheet at the end of the third quarter reflects $25.6 million of cash and short-term investments and our credit facility has available borrowings of $15 million with no borrowings outstanding. As of June 30, 2025, the company's working capital is $75 million, which includes $32 million of trade accounts and financing receivables. Additionally, the company owns unencumbered property and real estate in both domestic and international locations. This concludes my discussion, and I'll turn the call back to Rich.

Michael Cox, Analyst

I wanted to start by asking a couple of questions about the PRM announcement. The announcement itself was a bit surprising. Based on our discussions in previous quarters, it seemed like there were conversations taking place, but it didn't feel like the announcement of a contract was imminent. Can you discuss how we arrived at the point where this announcement was made unexpectedly? I understand it wasn't surprising to you, but the fact that it turned out to be a surprising announcement is noteworthy.

Rich Kelley, CEO

Well, thank you, Michael, for the call. Yes, as you know, we really don't discuss in detail operations ongoing. This contract was actually in discussions for many months with Petrobras, lots of back and forth with regards to technical requirements and commercial requirements. So it was nice to be able to land that contract against our competitor that's already on Barrel 1 and 2. So I would say, overall, we worked on the negotiations of the contract for around 6 months.

Michael Cox, Analyst

In comparing the announcement, we initially lacked detailed numbers to reference, and you mentioned $80 million in equipment manufacturing revenue. Size-wise, in terms of kilometers, it is comparable to the field from a decade ago. However, I don't remember that being categorized into equipment, installation, or other revenues. That headline number was significant, but could you clarify what the overall revenue impact will be throughout the duration of the contract?

Rich Kelley, CEO

So it's slightly different than Sonora and the other Equinor contracts in the sense that that was the older PRM technology with electromechanical devices versus the optical solution that we have now. The other thing, too, is that our end customer, Petrobras, has announced the overall value of the contract in their press release, but they did not break down the details between the goods portion and the installation portion. So we're not at liberty to discuss the details of that as well. But what we can say is the majority of the installation revenue will be recognized by our partner in Brazil, Blue Marine. So that's why I can address what the goods portion is, but I can't really address the overall services contract.

Michael Cox, Analyst

It seems that there is a comparison between the new technology and the older mechanical version in terms of margin and revenue. Is the new technology yielding higher margins but lower revenue for you, or is it simply that the current market conditions mean you're not able to earn as much on PRM?

Rich Kelley, CEO

I mean we still anticipate good margins on it. But just the cost breakdown of the components themselves put forth a completely different financial model with regards to calculating revenue and costs.

Michael Cox, Analyst

Well, how are there other discussions going on, on the PRM front now that this one has been announced?

Rich Kelley, CEO

So what I can say is, yes, I mean, there are ongoing discussions with other partners, including Petrobras. I mean they have a multiyear plan for their fields. Of course, each of those are subject to final approval by their management team where it makes financial sense. So I mean, we will continue to discuss with partners who are interested in PRM, advising them on the opportunities and the benefits of our technology. But I would not want you to read into that. There are other contracts pending.

Scott Bundy, Analyst

Does OptoSeis allow you to go deeper than the existing equipment available from sources like Petrobras?

Rich Kelley, CEO

I think the depth performance between the two are very similar. I mean, in the sense that they're already going to be on Mero 1 & 2, we're on Mero 3 & 4. I think the depth performance is the same. However, we differentiate on the fact that our technology does not require any kind of in-water wagmi connectors, which improves the reliability of the product over the life of the reservoir. There are some other technologies with regards to how we actually interpret the optical signals that give us an advantage over our competitors as well.

Scott Bundy, Analyst

And just for Rob, going back to December of '23, when we produced something in the vicinity of $50 million in revenues and gross margins around pushing 40% in a $45 million to $50 million revenue per quarter, are we capable of getting back to that 40% gross margin?

Robert Curda, CFO

I think you said 2023, did you mean 2013?

Scott Bundy, Analyst

No. We sold a product that generated approximately $50 million in revenue in the December quarter of 2023, with margins around 40%. This product was originally intended for rental but was converted to a sale.

Robert Curda, CFO

Yes. We sold some mariners at that time.

Scott Bundy, Analyst

Correct.

Robert Curda, CFO

Yes. I think part of the things that affect the gross margin at that time is we had some manufacturing times, manufacturing activity that went on to build that equipment, so we had nice absorption, also that's a high profitability product to begin with. And through the PRM contract, we will certainly have a higher level of absorption, which will lead to a higher profitability. I would expect it to be somewhere in the 40% to 45% range overall.

Scott Bundy, Analyst

Okay. Great. And just while I have you there's a receivable for that particular contract that I believe comes due in late September or early October that's somewhere in the vicinity of $25 million to $30 million. Do I have that correct?

Robert Curda, CFO

No, from October to December 2023, we do not have a receivable on the books associated with that transaction.

Scott Bundy, Analyst

I could be mistaken, but there is a receivable that, if I'm correct, is due in October of this year for $25 million to $30 million. Am I wrong?

Robert Curda, CFO

We have receivables on the books for customers that have Energy Solutions equipment, but their due dates are a bit further out than that.

Scott Bundy, Analyst

Okay. But this calendar year, is that correct?

Robert Curda, CFO

No, I think they extend beyond this calendar year. They're on progress payment plans, so we'll have some this year and some next year.

Rich Kelley, CEO

Can you talk a little bit about the product that you just purchased? Can you indicate whether we bought it for stock or cash? What sort of revenues are we looking at? The only information you've provided is that it would be accretive. Can you give us more detail about this particular product and why you're excited about it?

Richard James Kelley, CEO

The deal was a cash agreement that included an upfront payment and an earn-out component based on the product's performance over the next five years. This is our first entry into a fully subscription model, primarily utilized in the U.S. prison system for security. It addresses concerns related to securing areas where access is controlled, such as gates manned by security personnel and truck checkpoints. The solution offers a cost-effective way to run sensors on vehicles to quickly determine if a human is inside, a process that takes just 10 seconds, and has been validated over 25 years. This technology was developed by Oak Ridge National Labs for their security needs, and we hold the exclusive license to use it. It integrates well with our existing security and perimeter detection product lineup, complementing our SADAR perimeter security solutions. The previous offering from the acquired company required significant capital expenditure, but we've reengineered it into a low-cost subscription model that presents significant growth opportunities both domestically and globally. We are particularly enthusiastic about its applications for the U.S. Border Patrol, especially in addressing human trafficking at truck checkpoints. Carla Provost's experience in this area makes her a valuable advocate for this technology within the U.S.

Scott Bundy, Analyst

So speaking of Carla, was Carla involved in the original Homeland Security $10 million sale back in early 2020, I think.

Rich Kelley, CEO

She was not directly involved, but she was aware of it. I mean she was obviously in border patrol at the time. What she'll tell you is she was in the room when that tunnel was detected by our technology. And there were highs all around.

Scott Bundy, Analyst

So just a couple of others regarding budget and homeland, the annual review that comes out of February has a pretty significant number over years associated with a 30-mile project. The recent budget looks a little different. Can you square that up for me?

Rich Kelley, CEO

Yes, I believe you're referring to the General Accounting Office report that we discussed earlier in relation to the One Big Beautiful Bill, which has around $30 million allocated for it. Although the line item mentions tunnel detection specifically, it also includes other expenses. According to CBP, they expect to issue another request for proposals for additional mileage. However, that figure is not yet finalized, and the timing has likely been pushed to next calendar year. With the funds available, we do expect CBP to pursue more mileage on tunnel detection, but we don't have any further information at this moment.

Scott Bundy, Analyst

But the committee has directed the CBP to provide tunnel detection technology no later than 90 days, which is 90 days from July. Is that going to help the cause here?

Rich Kelley, CEO

I don’t think so. I know they were directed that, but you know what's happening in D.C. and in those agencies. They are scrambling, losing people, and are resource constrained. The procurement people are prioritizing their directives to review and justify all their contracts. So regarding this being a priority for them, I don’t see it being a top priority given all the other directives they have to follow.

Scott Bundy, Analyst

So your best guess is that this will happen in 2026, not during the calendar year 2026, and definitely not in 2025.

Rich Kelley, CEO

That's the feedback we're getting, Scott, is that we can anticipate an RFP sometime early next calendar year.

Bill Dezellem, Analyst

Let's start with the Petrobras comment or contract for just a moment, and then we'll jump to a couple of other areas. So relative to that contract, given that there's some confusion about the revenue versus for you all versus contractors, et cetera, et cetera. And I guess, electromechanical versus the fiber optic. Is it fair to say that this is the second largest contract in Geospace's history based off of the operating income or gross margin dollar contribution that you will ultimately receive over the life of the contract?

Robert Curda, CFO

Yes, absolutely.

Bill Dezellem, Analyst

And congratulations, by the way. It's not every day one wins the second largest contract in your history, so well done. And that revenue, you are going to begin recognizing that revenue in your first fiscal quarter of the coming fiscal year. Is that what we heard? Or am I confused?

Rich Kelley, CEO

Well, I was very careful about that because we are still working with our customer to define the actual revenue recognition milestones and the timing of those. So we are hoping to be able to recognize revenue in Q1, but that has not been finalized yet.

Bill Dezellem, Analyst

Explains why I was a little bit confused. Let me shift then to the border patrol and first of all, why is the border patrol not adopted the Heartbeat Detector technology up to this point?

Rich Kelley, CEO

That's a great question and one that gets asked frequently. So we had long conversations with the team from GeoVox about how the border works and there are two technologies that are currently used down there. One is a Backscatter and the other one is x-ray. Neither one of those are ideal, but they are used, they've already made the investment. So the uphill climb that we have, I guess, for Carla and the team is to sell them on the efficiency of using this technology. So the other ones that take a long time to set up. They're very capital intensive. This just takes less than a minute to set up less than 10 seconds to detect and the truck is on its way. So we can vastly improve their operational efficiency at the border. The other thing, too, is at the border with their current technology, they scan less than 1% of the trucks that come through the border. This should vastly improve the percentage of trucks that they can actually scan and detect. So we think we have some winning arguments going forward. And I think with this current environment and the current focus on the border that we'll have a much better success in selling the solution.

Bill Dezellem, Analyst

Let's revisit the One Big Beautiful Bill Act. What funding is allocated in that bill for subterranean tunnel detection?

Rich Kelley, CEO

There's a particular line in there that is $30 million, but it's addressed in several different solutions in there is mission tunnel detection. And so it's at the discretion of the CBPs how they actually allocate those funds.

Bill Dezellem, Analyst

So it is not certain that the full $30 million would be for tunnels.

Rich Kelley, CEO

No. Given the current administration's approach to how they are distributing and assigning funds, everything is uncertain at this point.

Bill Dezellem, Analyst

And then relative to your comment in response to a prior question that you anticipate an RFP in the first calendar quarter, so the March quarter of next year. You all have -- and I don't understand the government contracting that well, so bear with me here. But I believe you have SBR 3 certification. And it was our understanding that the implications of that, that if there is a government need and an acquisition of tunnel detection equipment that it would be -- the contract would go to Geospace because you have the SBR 3 certification. But you mentioned an RFP. Can you -- would you please reconcile these things? And maybe help me understand what I don't understand about the whole process.

Rich Kelley, CEO

That's a great question, Bill. We certainly have the SBR 3 in place with regards to the technology. However, we've sought legal guidance on what that means for the government, whether they are required to purchase from us or what that entails. I don't have a clear answer for you on that. I do know that there are three solutions currently being evaluated on the border. Until the RFP is released, we can't defend our SBR 3 position regarding the RFP until we see it. I understand it's not very clear, and we share the same question. So, while I don't have a good answer for you today, we are investigating this matter and are looking forward to the actual RFP to understand the wording and technology referenced, to see if we can apply our SBR 3.

Bill Dezellem, Analyst

And what do you know about the, I'll call it, the bake-off between you and the 2 other competitors on the border?

Rich Kelley, CEO

Absolutely nothing. As I've said in the previous calls and previous meetings, the CBP has been very tight-lipped about the 3 solutions.

Bill Dezellem, Analyst

Then coming back to the One Big Beautiful Bill Act, what allocations are in that bill for military and/or Navy that would be interesting and relevant to Geospace?

Rich Kelley, CEO

That was not as clear. I mean, obviously, they have funds allocated for harbor protection, threat detection, and similar areas, but they weren't as specific as the earlier appropriations, which included $12.8 million designated for that purpose. We are still collaborating with our partners to understand the priorities and timing. I will note that based on discussions with our partners regarding this specific topic, we do not expect any decisions until late this calendar year or early next calendar year.

Bill Dezellem, Analyst

So the $12.8 million that was in the house bill, if I recall correctly, did not make it specifically into the final bill.

Rich Kelley, CEO

That’s correct.

Bill Dezellem, Analyst

That is appreciated. And yet, you think that there is some activity going on later this year or early next year that could be relevant to you all?

Rich Kelley, CEO

Yes. We are having discussions with our partners and the U.S. Navy, focusing on concerns related to harbor protection and threat detection, particularly involving unmanned underwater vehicles. They are looking for commercially available solutions, and with our SADAR technology and PRM technology, we can provide a viable option. These discussions are making progress, but we do not expect to reach any commercial agreements in the near term.

Bill Dezellem, Analyst

And then regarding Aquana, it has essentially been the star of the company here, but actually, Hydroconn has been the standout. Could you share more insights on it? I understand that connectors may not be as exciting as contracts worth over $80 million and Heartbeat Detection, but please discuss the details with us.

Rich Kelley, CEO

Sure. Hydroconn has been a strong performer for us, developed organically and in collaboration with our partners to bring it to market. As I've mentioned in previous calls, the water sector typically experiences 10% to 15% growth each year. Hydroconn falls within that range and even surpasses it in some quarters. It continues to be the industry standard. Recently, Nycor, our partner, was acquired by Hubbell, and we have had positive discussions with Hubbell about how to expand our relationship. Therefore, we anticipate ongoing growth and acceptance of this solution in the water space moving forward.

Operator, Operator

This does conclude today's question-and-answer session. I will now turn the program back over to Rich Kelley for any additional or closing remarks.

Rich Kelley, CEO

Thank you, Angela, 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 fourth quarter of fiscal year 2025. Goodbye, and have a good day.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.