Earnings Call Transcript - GEOS Q4 2025

Rich Kelley, CEO

Good morning, and thank you for joining Geospace Technologies' conference call for the fourth quarter of fiscal year 2025. I am Rich Kelley, the Chief Executive Officer and President of the company, and with me is Robert Curda, our Chief Financial Officer. In our remarks, I will begin with an overview of the fourth quarter, after which Robert will provide a detailed commentary on our financial performance and a summary of our financials. I will conclude with some final thoughts before we open the floor for questions. Please note that today's discussion regarding markets, revenue, planned operations, and capital expenditures may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, but actual outcomes may be influenced by uncertainties beyond our control. Both recognized and unrecognized risks may result in outcomes that differ from our statements today. Some of these risks and uncertainties are outlined in our SEC Form 10-K and 10-Q filings. For your convenience, we will provide a recording of this call on the Investor Relations page of our geospace.com website, and I encourage everyone to visit it to learn more about Geospace, our subsidiaries, and our products. Please keep in mind that today's recorded information is time-sensitive and may be outdated by the time you listen to the replay. Yesterday, after the market closed, we announced our financial results for the period ending September 30, marking the end of our fiscal year 2025. For the three months ended September 30, we reported revenue of $30.7 million and a net loss of $9.1 million. For the full fiscal year, we recorded revenue of $110.8 million with a net loss of $9.7 million. The varied performance across market segments this fiscal year reinforces our commitment to diversification and innovation. Our Smart Water segment performed strongly, achieving double-digit revenue growth for the fourth consecutive year. The Hydroconn connector line gained market share and contributed significantly to our revenue increase compared to last year. Similarly, we are witnessing growing acceptance of Aquana products, both in the U.S. and Caribbean markets. Internationally, we plan to build on the U.S. municipal water management model to tackle challenges related to water scarcity, environmental change, and disaster mitigation. Domestically, we will focus on the heightened success and interest in the municipal and multifamily residential markets. We expect sustained demand for both Hydroconn and Aquana solutions. However, ongoing market uncertainty and fluctuating oil prices have led to reduced revenue from Energy Solutions, compounded by continued declines in offshore exploration activity and increased competition. These factors have resulted in lower utilization of our ocean bottom node rental fleet, negatively impacting segment revenue. Despite this, we have secured strategic wins in this area. As reported on June 16, 2025, we received a significant Permanent Reservoir Monitoring contract with Petrobras and completed a major sale of our lightweight land node to several clients, including Dawson Geophysical, a valued partner. We have a solid backlog as we head into the next fiscal year. While we see encouraging signs, the short-term exploration market is still uncertain due to ongoing pressure from low oil prices. Nonetheless, long-term demand forecasts suggest a more favorable market in the future. Our Intelligent Industrial segment continues to generate stable revenue through our industrial sensors and contract manufacturing solutions. To boost revenue from this segment, we previously announced our acquisition of Geovox Security Inc., the exclusive licensee of a heartbeat detection algorithm developed by Oak Ridge National Labs. The Heartbeat Detector enhances our border and perimeter security offerings and aligns with our strategy of incorporating more solutions that provide annual recurring revenues. We have also restructured our Exile product line to improve revenue and margins. Both Heartbeat Detector and Exile have garnered increased interest in their markets. While Energy Solutions remains a vital part of our overall strategy, we will continue to focus on driving growth and profitability through diversification. We recognize immense opportunities in our Smart Water and Intelligent Industrial segments to leverage our technology and manufacturing capabilities. We are well-positioned to capitalize on the vast potential of our products and services portfolio, our talented workforce, and our ongoing diversification into new high-margin markets. Additionally, our current backlog puts us in a robust position heading into the next fiscal year and beyond. Our leadership team continues to manage workforce costs and development expenses as we strive for sustained profitability. We will pursue growth through acquisitions that immediately contribute to top-line revenue. Now, I will hand it over to Robert for a deeper dive into 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 for our fourth quarter ended September 30, 2025, we reported revenue of $30.7 million compared to last year's revenue of $35.4 million. The net loss for the quarter was $9.1 million, or $0.71 per diluted share, compared to last year's net loss of $12.9 million, or $1 per diluted share. For the 12 months ended September 30, 2025, we reported revenue of $110.8 million compared to revenue of $135.6 million last year. Our net loss for the 12-month period was $9.7 million, or $0.76 per diluted share, compared to last year's net loss of $6.6 million or $0.50 per diluted share. Revenue for our Smart Water Segment totaled $8.5 million for the 3 months ended September 30, 2025. This compares to $11.9 million in revenue for the same period a year ago, a decrease of 28%. For the fiscal year, revenue for this segment totaled $35.8 million versus $32.4 million for the same prior year period for an increase of 10%. The decrease in revenue for the 3 months period is due to decreased demand for our Hydroconn universal AMI connectors. Typically, we expect a slight seasonal drop in demand for these products during the fall and winter months. The 12-month increase in revenue is due to the increased demand for our Hydroconn connectors. Fiscal year 2025 marks the fourth annual year with double-digit percentage revenue growth from these connectors. For the 3-month period ended September 30, 2025, revenue from our Energy Solutions segment totaled $15.7 million for a decrease of 11% when compared to $17.6 million from the same prior year period. Revenue from the 12-month period was $50.7 million, a decrease of 35% when compared to revenue from the same prior year period of $78 million. The decrease for the 3-month and 12-month period is due to lower utilization and sales of our marine ocean bottom nodes, partially offset by sales of our ultralight land node known as Pioneer. Revenue from our Intelligent Industrial segment totaled $6.4 million for the 3-month period ended September 30, 2025. This compares with $5.8 million for the equivalent year ago period, representing an increase of 9%. Revenue for the 12-month period ending September 30, 2025, was $24 million. This compares to the prior year period of $24.9 million, a decrease of 4%. The increase in revenue for the 3-month period was due to higher demand for our industrial sensors and contract manufacturing services. The decrease in revenue for the 12-month period was primarily due to revenue recognized for the 3 and 12 months ended September 30, 2024, on a government contract completed in the fourth quarter of fiscal year '24 and lower demand for our imaging products, partially offset by an increase in demand for our industrial sensors and contract manufacturing services. Our 12-month cash investments into our rental fleet and property, plant and equipment was $9.1 million, and we invested $1.8 million in the acquisition of the Heartbeat Detector product line. As of September 30, 2025, we have $26.3 million of cash and $8 million of additional available liquidity from our credit facility. Additionally, as of September 30, 2025, we have working capital of $64.1 million, which includes $28 million of trade accounts and financing receivables. That concludes my discussion, and I'll return the call to Rich.

Rich Kelley, CEO

Thank you, Robert. The ongoing trade disputes and related tariffs have impacted our material costs. We are working to mitigate the impact to our customers, but our product costs were higher in Q4, and we anticipate similar impacts in fiscal year 2026. The government shutdown resulted in delays related to our projects for the U.S. Navy as well as potential opportunities with the Department of Homeland Security and Customs and Border Protection. Now that Congress has passed the continuing resolution, we are working with our partners to better understand the new timelines for the relevant projects. This concludes our prepared commentary, and I'll now turn the call back to the moderator for any questions from our listeners.

Bill Dezellem, Analyst

You had mentioned the gross margin or cost of goods under pressure, specifically tied to tariffs. So the Energy Solutions segment was the one that had the greatest pressure and most noteworthy. Would you talk in more detail about that phenomenon given that you had higher revenues and lower profitability in that segment?

Rich Kelley, CEO

Bill, yes, specific to Energy Solutions, there was actually another weighing factor on that, which is the ongoing price pressure and commoditization in the land market. And so we did have a nice sale and revenue recognition on our Pioneer sales, but the margin results on that were lower. We also had higher-than-expected manufacturing costs because these were the first units that were built. We've since resolved some of those, and we expect better margins going forward. With regards to the tariff impact overall, we try to build and source as much from the U.S. as we can. However, there are certain components that we have to source overseas. Our procurement team and supply chain team have been working to try to mitigate that as much as possible. We've also been closely following the developments in the ongoing trade disputes. And we're hoping that some of that gets resolved now that it seems that there are a number of agreements in place now.

Bill Dezellem, Analyst

So walk us through how much of the impact, the margin impact this quarter was transitionary here this quarter versus what you would expect to last longer, if you would, please?

Rich Kelley, CEO

I don't have a clear understanding of the percentages you’re asking about, Bill, as I haven't delved deeply into that area yet. We are keeping an eye on it, and the procurement team is working hard to address the issues. Additionally, I want to mention our previous discussions about the ongoing capacity and underutilization of our manufacturing. Is there anything else you'd like to ask, Bill?

Bill Dezellem, Analyst

Yes. Did you have something more you wanted to add to that?

Rich Kelley, CEO

No, I was just looking at another note I had. I think we're okay.

Bill Dezellem, Analyst

So then the way to think about this is that you had inefficiencies with manufacturing of Pioneer given that it was your first order. And there is some commodity pricing, that probably sticks around, but your manufacturing inefficiencies, those will improve and tariffs, you're still trying to get your head wrapped around what the longer-term implications are of those.

Rich Kelley, CEO

That's a good summary, Bill. Yes, now that we've completed our initial runs of Pioneer, our manufacturing costs align more closely with our expectations. We anticipate improved margins. Some tariffs have been resolved since we procured those components earlier in the year when tariffs were higher, and we've mitigated some of that impact as well. Therefore, we expect better margins for that product line moving forward.

Bill Dezellem, Analyst

So then in your opening remarks, you referenced that you had expected ongoing margin pressure. My initial read on interpreting those comments would have been that this level of gross margin for the Energy Solutions would continue, particularly with the PRM contract, but that is not at all what you're trying to communicate. It sounds like that you have mitigated a lot of those impacts and the margin will maybe be a bit less than historical, but much closer to normal margins than what you had this quarter.

Rich Kelley, CEO

I would parse that just slightly different. I would say that on PRM because there's not the same pricing pressure on that product line as we see on the land nodes and even on the ocean bottom nodes that we expect better margin performance on the PRM project going forward. So I think that will help balance out some of the lower margin performance on these other products.

Bill Dezellem, Analyst

Great. Have I taken up my time or may I ask a couple of additional questions?

Rich Kelley, CEO

You could ask one more question, Bill, how about that?

Bill Dezellem, Analyst

That's fair. So the government has a couple of different initiatives where they are looking at you all, I believe, the Customs Border Patrol, the military. Update us what you are seeing, hearing and thinking that there may be for a decision matrix with the government activities, please?

Rich Kelley, CEO

I will start with the tunnel detection project for Customs and Border Protection. There has been little communication from CBP since before the government shutdown, and we expect to receive some feedback early next year. Given that they are not fully operational and with the holidays approaching, I don't expect much more information until our second quarter of next year. Regarding the Navy, we have maintained informal discussions, but it seems that their project will be delayed until our third quarter, potentially even into the fourth quarter, which means we're looking at middle of summer next year for any updates. As far as we know, both projects are still anticipated; it's just a matter of understanding the timeline for their progress.

Sheldon Grodsky, Analyst

Early this year, you announced 2 large projects, the Brazilian project and another sale of nodes. Have any of these been shipped yet? Or are you still waiting for these to be shipped?

Rich Kelley, CEO

I appreciate the question. The Permanent Reservoir Monitoring project for Petrobras is a long-term initiative for us. We have not shipped any units yet. Our planned first shipments are likely to occur in the early to middle part of next year, around spring or summer, which we anticipate will be when we first recognize revenue from this project. This revenue will be reflected in fiscal year 2027. We expect the project to last between 12 and 18 months. Regarding the large contract we sold to Dawson Geophysical, I apologize.

Robert Curda, CFO

I think he's talking about the Mariner contract.

Rich Kelley, CEO

Yes. Regarding the Mariner contract, I will defer to Robert.

Robert Curda, CFO

Yes. So earlier this year, we announced the Mariner contract. We have not shipped that contract yet. It's been deferred by our customer due to delays from their customer.

Rich Kelley, CEO

I do want to speak to the Pioneer sale that we had. That was a large channel count and those shipments were broken into smaller shipments between this quarter and next quarter. So we have shipped some of those units this year. We anticipate a majority of revenue recognition in Q1 with some of the revenue in Q2.

Operator, Operator

Thank you. And at this time, there are no further questions in queue. I'd like to now turn the meeting back to our presenters for any additional or closing remarks.

Rich Kelley, CEO

Thank you, Stephanie, 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 first quarter of fiscal year 2026. Goodbye, and happy holidays.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect.