Q3 2019 Earnings Call

Greetings and welcome to Ion Geophysical third quarter 2019 earnings conference call.

So I'm all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

Now my pleasure to introduce your host which are white Vice President of corporate communications. Thank you you may begin.

Thank you operator, good morning, and welcome to eye on third quarter 2019 earnings Conference call. We appreciate your joining us today as indicated on upside to our host today or Chris I sure President and Chief Executive Officer, and Steve <unk> Executive Vice President and Chief Financial Officer, before I turn the call over to them I have a few items to cover.

Well these slides to accompany today's call, which are accessible via link on our website I on to your dotcom. There you'll also find a replay of today's call.

Again, let me remind you that certain statements made during this call may constitute forward looking statements. These statements are subject to various risks and uncertainties, including those detailed in our latest 10-K, another FCC filings, which may cause our results or performance differ materially from those projected in these statements.

Our remarks today May also include non-GAAP financial measures additional detail details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release release issued yesterday I'll now turn the call over to Chris will begin on slide four.

Thank you Rachel good morning, everyone and thanks again for joining us today.

Our third quarter financial performance was an improvement year on year. However, we havent launch the scale of new multi client programs, we had originally anticipated.

Against the backdrop of continued fiscal discipline in the MP sector and limited geographies were serious investment is flowing our revenues were up 30% year on year and 27% sequentially. In fact, all aspects of our business improved our adjusted EBITDA of 16 million. This quarter was up from $13 million in the prior year year to date.

Our revenues are up 25% and our adjusted EBITDA is up over 300% from 2018.

Gross margin is also up from 35% in the prior year to 47% this quarter.

We will elaborate on our financial results in a few minutes.

As I mentioned last quarter and my first earnings call, let's see my near term focus for ion is improved execution, we're making tangible progress on a portfolio of growth initiatives and unhealthy expanding market segments, while delivering near term results. We are increasingly focused on where we're investing I'll call. It a couple examples we can speak to in each segment.

There are exciting opportunities to not only build on iOS traditional data library of imaging strength, but also to commercialize new technology, we've been developing over the last few years and to adopt our cutting edge capabilities for new markets.

I spoke at length about market dynamics last time, so I will just quickly reiterate that are npis look is unchanged. We expect continued portfolio rationalization and high grading as companies seek to find the best return on investment opportunities to meet oil and gas demand in the next decade.

Our term we are seeing positive market signals, but anticipate exploration will remain lumpy.

Due to more competitive return on investment and payback periods were seeing investment flow offshore again, which is favorable for our business. Our third party imaging services business is a decent barometer of the sector and both the number of bids and project duration is growing image and imaging services revenues are up 70% from last year in backlog remains near as highest level since 2015.

Investment returns offshore our customers are focusing on higher faster return infrastructure, let exploration that is often and complex geological environments. As a result, we believe these trends support the increased use of seabed seismic as a tool of choice and in a multi client business model.

The offerings or not well aligned across our segments to capitalize on this developing industry theme.

In our MP technology and services segment revenues increased 11% this quarter compared to the third quarter 2018, primarily due to an increase in our imaging services revenues.

Our multi client revenues were modestly up year over year with a significant portion of third quarter revenues from our pecan Your Threed Reimaging program offshore, Brazil and to a lesser extent from revenues from our North American programs year to date, our multi client revenues are up 29% due to north and South American data sales.

Bill has continued to garner considerable attention investment due to its attractive proven acreage at investor friendly business environment, Brazil helped six license ramps during 2008 during 2017 and 2018 their petroleum agency. The NP estimates generated $112 billion in new investment.

Oil and gas production in Brazil is up nearly 20% this year as some of these new projects started coming online additional upcoming license ramp later this year, including the highly anticipated transfer of rights surplus bidding round are expected to attract a number of large international MP companies are significant investment in data before the end of the year on year Threed multi client program.

Offshore Brazil is a huge 100000 square kilometers seamlessly reimaged multi finished dataset that many explores the found valuable and calibrating the exploration and bidding strategies for the first time since the downturn, we are starting to see more material corporate consolidation in our GMP customer base.

Which not only helps market dynamics, but also creates for us data library transfer fee opportunities one of which occurred in the quarter. Since our data library is still primarily to the in globally distributed we didnt see quite as much of a windfall as our competitors led concentrated three d. libraries in the Gulf of Mexico, We were pleased to modestly benefit from this event Nonetheless.

As expected we had very focused engagement from Mt clients on targeted exploration programs within specific geographic areas. We believe the new venture program activity will continue to improve and as we stated in February we plan to increase the number of new sanction programs. This year, we have sanction eight new multi client program. So far this year compared to seven for all 2018.

Well the quantity improve the scale and timing of new multi client programs didn't materialize as we had envisioned at the beginning of the year.

During the quarter, we sanctioned to new Threed multi client programs. The first is offshore Denmark that we described in detail on the last call. The second as a threed multi client program and Argentina's new can basin I on has nearly tripling the size of its vaca Muerta program to 25000 square kilometers I want to over one of the most prospective unconventional plays in the world which is that.

Submitted to hold 16 billion barrels of recoverable hydrocarbons. The first phase of the program is complete with 25 seamlessly merge threed datasets, comprising a single 9000 square kilometer depth volume. The second phase of the program was sanctioned this week and will increase the project size to 25000 square kilometers by merging an additional 60 surveys and incorporating a 150 wells.

We also announced and began acquisition on a previously function program offshore Africa, bringing our data library there to over 150000 kilometers. This new industry supported to de Multiclient program covers the under explored Unami basin offshore Southern Angola, Angola past several petroleum laws in 2018 to make the legislative and fiscal terms more favorable for.

Investment and to prevent anticipated decline in oil production.

As a result this basin is garnering significant interest from MP companies seeking attractive frontier investment opportunities.

The other new program that we are acquiring offshore northeast, Canada Grand span two has wrapped up nicely on time and on budget. The data quality is as outstanding as our initial program was.

Moving to imaging services revenues increased 70% compared to the prior quarter as we mentioned last quarter imaging services backlog at June Thirtyth was at its highest level since 2015, which resulted in a significant increase in revenues during the quarter. We continue distressed strategically reserve the majority of our imaging capacity to distinguish our multi client offerings and today.

Deployed the remaining resources on challenging proprietary projects that keep ions brand front and center with our customer base.

Highlighting our successful execution of this approach I'm happy to say imaging services backlog remains robust, which should lead lead to a year over year increase in imaging services revenues during the fourth quarter of 2019.

Our MP advisors team has not met with the new Panamanian government multiple times regarding the future energy plants, we presented the policy and economic case for development of Panama's offshore hydrocarbon resources and how such development supports Panama as long term energy plan economic goals and other national interest a license route is required to attract foreign investment needed to properly develop hanam as oil.

Oil and gas resources.

To ensure license round success. The government is taking a cautious approach ensuring that they are adequately prepared to host a successful license round carrying out required due diligence and securing alignment among ministry's.

As this process will require additional time, we now anticipate that the earliest a license Rob will be announced will be late 2020, we are well positioned with our Panama spend data as and when they move ahead.

Im excited to share some additional advances we made in the seabed market one of the few strong growth segments in our space with record level of spending crews and equipment. This year, we are dedicated to advancing ocean bottom acquisition to significantly expand the use of superior seabed data to enhance clients reservoir decision, making.

You've heard us talk in prior calls, but a number of asset light offerings targeting this grilling high value market such as our next generation Ocean bottom system foresee and our full waveform inversion suite of imaging technologies.

Building on that tool kit, we are further position to differentiate ourselves in this rapidly evolving opiates ecosystem with our recently developed enhance frequency source. This novel energy source significantly extends low frequencies in the acquired data for improved velocity model estimation, whilst limiting higher frequencies to a more environmentally friendly range. This key ingredient as we develop.

Rationing within the MP, operator, and validated during multiple field trials over the last 24 months, we rolled it out to select clients at ESG one of our major trade shows in September .

And it was extremely well received these customers were impressed with our rapid development of the solution and commented how well aligned with their subsurface imaging objectives in their respective portfolio geographies.

We are maturing our portfolio of opn opportunities and have secured a number of seabed multiclient permits around the world, we're hoping to announce our first Threed Opn Multiclient program and the next few quarters and we believe our seabed technology portfolio will be a key ingredient in launching the significant addition to ions data library portfolio.

And our operations optimization segment revenues were up 19% due to increases in Marlin deployments and marine equipment replacement and repairs are software group's revenue is up 25% to the highest level since the downturn due to continued strong performance of our command control solutions augmented by record Marlin related revenues and deployments Im very pleased that year to date.

About a third of our software revenues have risen from recent technology investments and commercialization.

We are seeing growing adoption of our strategy to better link offshore operations to onshore offices. There is an industry wide desire to shift a number of offshore rules onshore to reduce risks and costs. We've expanded some of the functionality to develop for Marlin and retrofitted that connectivity to our core products such as Orca command control and are pleased to see commercial take up we point of similar.

Our derivative product enhancement to our core command and control software suite, which can expand revenues and drive stickiness and our installed base.

Building on the growth in the EBIT market mentioned earlier, we commercialized one of the last foresee components. This quarter a client initially trial may system survey.

And very quickly switch to a recurring license validating the value is providing survey is a multi scenarios simulator for complex CE bit operations, including survey costing and project duration estimates effectively as a digital to end for operations that enables customers to choose an optimal plan for project execution with the specific operational assets at their disposal.

After a full year of worldwide use we held an in depth workshop with a major empty company, who adopted Marlin to monitor global seismic operations from our Houston control Roe.

The software is achieved high corporate visibility after repeatedly demonstrating its ability to prevent multimillion dollar operational shutdowns, our client champion Marlins situational awareness and re planning capabilities that have avoided project curtailment and operational theaters highly congested with floating fisheries degree, we got great feedback listening to the clients use cases and revealed our next feature enhancements.

We believe will provide even more value to them over the coming year.

And the same timeframe, we employed marlin at the heart of a large simops contract into congested oilfield, where I on services team leveraging our wireless software has been indispensable around optimizing seabed seismic operations and several other non seismic logistics use cases, the key responsibility is to drive alerts around vessels penetrating sensitive national boundaries adjacent to the broad.

Act area.

Marlin is designed to be the operations optimization platform supporting a number of offshore applications course, and harbors were identified last year as one of the most attractive markets for our technology.

Last quarter I alluded to the large market opportunity for digital transformation offshore the global freight market is estimated to be over a trillion dollars, 90% of goods or transported by sea using 50000 cargo vessels and over 5000 shop shipping ports.

The ship Tech sector alone is estimated to be over $100 billion.

Tier one ports have been leading the digital transformation and there is an emerging needs for tier two ports to do so as well to compete new disruptive technologies, such as artificial intelligence Internet of things and block chain has the potential to transform port efficiency. It's an exciting opportunity that is just starting to unfold with immense potential.

Our Marlin smart pilot in the UK is progressing nicely. We recently completed a five year agreement with our portion harbors launch partner in Scotland and have now deployed the latest version of Marlin is the ports daily operations. There is early excitement around our digital solution and we are working closely with them and our eight ws partners to build out a truly transformational offering for them that we can also take to others.

For us it's early days, where this is an exciting milestone on our diversification journey and the fact, we've attracted industrial strength partner like a ws is very encouraging to us.

In the devices group of our operations optimization segment revenues were up 14% year on year, driven by an increase in towed streamer equipment replacements and repairs.

Meanwhile, our devices team is building out nucor seismic capabilities and also adjacent market offerings and I'm pleased to highlight two milestones along that path.

Our first two sealing systems were deployed commercially in the quarter and are performing above expectations seismic surveys are designed in the office and the vessels towing seismic sources are expected to follow a predefined course, when they get to the field.

Well the real World always gets in the way of that our launch partner advocated positioning the seismic sources using sailing to Predefine navigation objectives, and a high current environment and it was very successful so much though they ended up using our technology and production for the entire job and the onboard client recommended using ceiling as the spec for all future jobs, where their company.

Active crew performance was acknowledged by our customers CEO .

This validates our strategy of providing technology that drives efficiency in the grilling ocean bottom marketplace.

We've also been working closely with the US department of defense to better understand the potential defense applications of our technology stack in August we participated in the US navies advanced enabled technology exercise or antics, which demonstrates the potential that emerging maritime technologies can have for the navy in the near future I.

Im delighted to share that we worked with US Navy groups and industry partners to demonstrating integrated port security threat detection and mitigation system that we're going to market to the military and ports around the world.

Marlin served as the multi system mission control and decision optimization tool for various threat detection and mitigation scenarios, we were able to track hostile divers and unmanned underwater vehicles and managed real time mitigation actions in response to operations on incursions, such as smart nets, RV interception and shepherding a friendly assets via unmanned service vehicles.

The exercise demonstrate.

We exercised demonstrate islands strong capability to work with partners and customers on rapid system integration. These are good examples of sorta capabilities and dual use technologies that are important as we move to diversify with that I'll turn it over to Steve to walk us through the financials, and then I will wrap up before taking questions.

Thanks, Chris Good morning, everyone.

Our total third quarter revenues were up 13% compared to the third quarter of 2018.

Revenues in RMP technology, and services segment were up 11% and our operations optimization segment revenues were up 11, 19%.

The increase in revenues within our GMP technology and services segment was driven by imaging services, which reported revenues of 7 million this quarter an increase of 70%.

As we mentioned on last quarters earnings call.

Imaging services backlog at June Thirtyth was at its highest level since 2015.

As expected net increase in backlog drove the increase in imaging services revenues during the quarter.

As of September Thirtyth imaging services backlog was slightly down compared to last quarter as the team worked through projects, but remains at a robust level. This should lead to a continued increase in year over year quarterly revenues in the fourth quarter of 2019.

Our multi client revenues were 33 million a modest increase year over year with a significant portion of third quarter revenues from our Brazil, three D Reimaging program.

And our operations optimization segment, our optimization software and services revenues were $7 million, a 25% increase from the third quarter of 2018.

This was primarily due to increased deployments of and associated engineering services related to our Marlin offshore operations optimization software.

Our devices revenues were 6 million, a 14% increase over the third quarter of 2018, driven by continued uptake and equipment replacement and repairs.

Overall, we reported a net loss for the third quarter of $4 million from 26 cents per share compared to a net loss of 8 million or 54 cents per share in the third quarter of 2018.

Excluding special items in both periods, our adjusted net loss was $3 million or 21 cents per share.

Compared to an adjusted net loss of 7 million or 52 cents per share in the third quarter of 2018.

A detailed reconciliation of the special items in our financial results can be found in the tables of our press release issued yesterday.

Our adjusted EBITDA for the third quarter was $16 million compared to $13 million one year ago.

The improvement in our adjusted EBITDA is result of the revenue increase year over year.

Our cash balance was 28 million at September Thirtyth, our total liquidity defined as the combination of our cash balance and the available borrowing capacity under our revolving credit facility remains strong at $65 million. There were no outstanding amounts under our credit facility at the end of the quarter.

That I'll turn it back to Chris Thanks, Steve before I wrap up I'd like to give an update on our patent litigation with Westerngeco.

On August Thirtyth, the district court granted us a new trial to determine what lost profits if any western chico's entitled to for foreign surveys that are customer for farm. This was a great outcome for ion the ruling wiped out 100 million dollar judgment that has been hanging over head for the last seven years and I was delighted to be present in the court room for this milestone for ion when the judge ruled on the bench.

And this long running case.

And the new trial will only face exposure for one patent claim is that a five and that remaining claim in our view was the least important for the performance of the surveys. The appellate Court also made clear that we are entitled to seek apportionment of any lost profits, but very behind Westins Yukos lost profits damages was the western Chico would have been awarded the foreign surveys, but for the infringement.

And that they would have made $100 $100 million and profits on the surveys apportionment means for lost profits the stem from anything other than that sold remaining patent claim whether it was data processing vessel rates payment of personnel, where the myriad of other factors for the seismic survey encompasses would not be recoverable paints a very different landscape than we have face for the last decade, and we're looking forward to make.

In our case.

Okay, let's shift gears to our outlook for 2019, we still believe 2019 will be an improvement on 2018 subject to fourth quarter MP spending levels that we anticipate will depend heavily on end of year budgets and company strategies around their success or not in recent license round such as Brazil Im pleased with the progress we've made year to date executing on strategy to deliver euro over year financial improvement.

And to predict progress key initiatives that position the company for future success in both core and adjacent markets. In summary, Multiclient sales are up Weve sanctioned eight new survey programs. This year and made progress preparing our entry into the multi client opn market, we've seen growth in both our imaging services and software businesses, we're continuing to expand and enhance our.

Arlon software for both MP and adjacent markets. We've also successfully commercialize several technology offerings, we developed over the last years Im looking forward to sharing even more progress next quarter with that will turn back to the operator for today.

Thank you we will now be conducting a question and answer session.

I would like to ask questions. Please press star one on your telephone keypad a confirmation so indicate your line is in the question Q.

You mean for start to if you like to remove your question for the Q for participants using speaker equipment, maybe Mr to pick up you had said before person the starkey.

Please ask one question and one follow up question and then re queue for additional questions.

Our first question comes on line of Andrew Mclin.

With Western <unk> Company. Please proceed with your question.

Hey, Chris.

On the you'll be in progress that you mentioned can you just help define the timing and the potential revenue and profit from these initiatives.

Sure Yes.

Andrew good due to heavy on the line and who are you asking some questions. So on there'll be entrant, yes, I think you're referring to the.

The large scale threed ERP and plants that we have to kind of step us up into a new product offering for our multi client business and yes.

As I said in the.

In the prepared notes.

The next quarter, two we plan to be able to announce that.

These surveys are quite large they tend to be near infrastructure kind of things and there.

We'll be end is one of the more expensive types of marine acquisition compared to hope streamers significantly more but adds tremendous.

More in terms of the quality of the data. So this is why the in the industry is looking at this and it's not just us as many of our peers. So the typical project would be the $60 million to $80 million range.

Depending on how much acreage, we're actually trying to cover in the number of underwriters are trying to bring into fit with the program.

It's it's maybe not the high level of return we see in our Threed reposting, but we're talking about something like a 1.8 to two point fivex kind of return over the life of the project with a view that we would be pretty highly underwritten coming into these as well so.

And again in the next quarter to we'd like to be really embarking on movies.

Does that answer your question Andrew.

No thats great. Thank you.

Our next question comes on line of Colin Rusch with Oppenheimer and company. Please proceed with your question.

Thanks, So much guys can you talk a little bit about the portfolio technology that you have right now are there opportunities or needs to augment that as you look out at the landscape growth over the next three to five years.

Kolon, yes, Thats a good question. So we think we have a pretty a pretty.

Appropriate technology stack for stepping out into these.

Expanding our core market, but also stepping out into some of these new markets that we talked about but clearly we don't have everything covered in the world of digitalization and digital transformation across the marine industries. They were looking at Theres, a whole host of other things I mentioned some of them like the.

While the kind of sensors that are part of the internet of things and some of these applications certainly that block chain. We don't have capability there, but we are looking at the whole ecosystem in these areas, where we're playing like working harbors and also offshore logistics around oilfields.

And there are other small players who complement our marlin platform in those regards and we would certainly look at partnering with them. We actually are partnering with several smaller companies as we are right now and we're also working with a ws as I mentioned this kind of a platform partner and they've been excellent work with actually I spoke at their NP.

Day in Houston early biogas, just to stay last week and.

Kind of talked about on the road, we've been going down in terms of digital transformation and we'll give our patent Harbor example, there but.

Working with NWS as a platform there also working with lots of other providers and as a great way for us to kind of start defining what that ecosystem is and the people that were going to plug and play with with our Marlin solution.

Okay and that's it that's helped with that these are typically smaller software companies that might be.

During the block chain kind of.

Revenue tracking and transaction tracking or might be people doing the the manpower handling things like that that we we need to plug into marlin that we don't necessarily want to develop ourselves.

Okay. That's helpful. And then as you think about the investment cycle. This is internally is there are there reallocation of resources towards some of these are there other opportunities.

Yes, and technology developments or do you feel like Youve got to add some new expertise or.

Invest a little bit more on the R&D side, obviously, you got your optimize the operations just want to get a sense.

Thats spend and then how targeted ads and why we might see some of it.

Hello.

Yes, the great question, because we're trying to balance the tension between a pretty lumpy recovery in our core business and the resources, we have allocated to that to drive growth as the if the environment improves and also to go tackle.

The new markets, which are typically look and healthier than they are the oil and gas sector. So ideally we would have I want to go maybe accelerate some of the the development of those new markets, but given the world. We live in what pays the bills right now we need to be a little bit cautious so, but we have added some resources on the Marlin side for ports of harbors for example.

With dedicated team there and some of that's reallocation of resources from Corp, traditional products over into the.

Into the ports at Harvard Development. We've also found that by working with a partner like Amazon and all the tools. They have for development much more modern tools than the industry any of the industry saw 10 years ago, we are able to develop new functionality much faster in the cloud environment cloud native environment. So so thats, helping as well, we're getting more bang for our boss.

Our the development resources.

And on the sale side, obviously as we enter new markets.

Where we don't know the customers like we do in oil and gas we are bringing on business development of sales resources that have specific subject matter expertise important harbors and logistics.

And Thats, a modest investment you're talking about.

Ones and twos as we get traction.

We developed we demonstrate we get we're getting value.

With the customer like imports and harbor customer than we add.

BD resource to start taking that forward.

Out into the market.

Welcome to bump at a modest investment.

In an eye on the bottom line.

That's super helpful. Thanks, So much guys.

Yes.

Once again, if you will like to ask questions. Please press star one telephone keypad. Once again, if you would like to ask questions. Please press star one on your telephone keypad.

Our next question comes on line of engine Mcmullen would was this can company. Please proceed with your question.

Hey, Chris.

One more question I had you mentioned in your prepared remarks at the imaging services given kind of the backlog.

Should drive improvement in the fourth quarter year over year.

As it relates to just kind of activity levels that you're seeing and some of the Brazil exposure that you have can you talk about announced the new venture and the data library portion embedded within technology and services do you anticipate that being up year over year in the fourth quarter.

And maybe you could just discuss just some of the drivers that you see within the new venture in the data library portion.

Sure, Yes, well obviously.

The hallmark of our of our Brazil focus is our per Konya Threed Reimaging that I talked about which covers 100000 square kilometers our data posting guys are of course.

Creating that wonderful dataset.

And we do think Brazil is going to be the thing that really helps carry the.

End of the year and I as I said, we're cautiously optimistic about the year end, finishing well.

That is due to the fact that we're well positioned in Brazil.

Money in the market is flowing into Brazil tremendous interest from operators there. There's the SEC successful around the just was carried off.

Within the last three weeks Theres two more licensing rounds.

Coming up in November so, there's a tremendous level of activity and very focused and well understood activity. That's the Brazilian governments managing their that is driving this so again well positions more licensing rounds coming up.

A lot of the people that are going to be bidding in those routes have already access data and thats driven some of the data sales we had in the current quarter.

But there is going to be winners and losers was ramping and people that have lost or could have spare budget to come and look at where they go next and they will buy still be in the broader Brazilian.

Region or.

The South American margins there when it margins so we're well positioned there with our data.

And of course, you always have the end of year budget effect in general so.

I think I think we're pretty optimistic about that.

Got it so on the existing library side it sounds like that's.

Pretty well positioned on the new venture activity front do you expect that to be.

In improvement year over year.

Well, we already we're in terms of sales, it's hard to say I mean, we've got.

As I already said.

First sentence out of the boxes were a little bit disappointed with the the level of activity on the new venture side compared to what we wanted to have occur.

It's running a little bit better year on year in terms of the number of projects started but as you've probably noticed some of those are repricing projects rather than putting.

Vessels in the water on Nuti programs. So in a lot of that's just timing we've got a.

Project essentially awarded.

In the eastern Hemisphere that have just hasn't gotten underway at due to permitting we've had.

Hot area like Yana slowed down.

So.

It's can be modestly better it's.

Hard to say at the moment.

Okay. Thank you.

This is no further questions left in the queue I would like to turn the call back over to Mr. Christopher for any closing remarks.

Yes. Thank you everyone for taking time to attend the conference call. We look forward to speaking to you on our fourth quarter call and.

Yes, thanks for that compared to some other things you were asking today.

Again, ladies and gentlemen, thank you for your participation. This does concludes today's teleconference. You may now disconnect. Your lines at this time and have a wonderful day.

Okay.

Okay.

Okay.

Yes.

Okay.

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