Q1 2020 Earnings Call

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Good morning, and welcome to Geospace Technologies Conference call for the first quarter of our 2020 in fiscal year I'm required or the company's president and Chief Executive Officer, and I'm joined by Robert Curtis accompanies Chief Financial Officer.

I'll start with an overview of the first quarter and Robert will then offer an index.

I'm sorry on our financial performance afterwards, I will make a few final remarks and open the line for questions.

Some of today's statements may be considered forward looking as defined in the private Securities Litigation Reform Act of 1995 and that includes comments about product markets revenue recognition planned operations and capital expenditures.

These statements are based on our president awareness, while actual outcomes are affected by uncertainties and other factors, we can't control or predict both known and unknown risks can lead to undesirable results or performance differences from what we say or implied.

Such risks and uncertainties, including those discussed in our FCC forms 10-K, and 10-Q filings.

And as mentioned for convenience will link a recording of this call on the Investor Relations page of our Geospace Dot Com website note that information discussed. This morning is time sensitive and may not be accurate at the time when listens to the replay.

So yesterday after market closed we released our financial results for our first quarter.

At fiscal year 2020 ended December 30, Onest 2019.

As reported increased demand for our OE ex Marine notable recording systems fuel first quarter results.

First quarter revenue of 25.7 million outperformed last year's first quarter by 44% in fact first quarter revenue.

The highest first quarter figure since our all time record breaking high in the first quarter fiscal year 2014.

In addition, gross profits generated on this higher revenue more than tripled compared to last year, reaching 10.5 million.

Operating expenses in the first quarter increased 13% over the last year.

Primarily as a result of our acquisition of the opto size fiber optic sensing technology, along with an increase in other R&D project expenses expenditures.

Despite the higher operating expense expenses geospace narrowed its net loss for the first quarter compared to last year by 78% to 10 cents per share.

Revenue from our oil and gas market segment totaled 19.5 million in the first quarter, a 77% increase compared to the first quarter a year ago.

The increase was attributed to higher rental deployment of our OPX Marino recording systems as of December 30, Onest 2019, we had approximately 33000.

Next stations in our rental fleet most of which we are actively utilized on performing rental contracts across the globe with multiple seismic contractors.

We're also in conversation with new and existing customers to potentially extend current rental contracts as well as execute future rental contracts for our OPX stations.

We carefully consider these activities in order to gauge the need for potential expansion of our OPX rental fleet and based on current levels of demand, we expect cash investments into our wireless product rental fleet to be 8 million or more in fiscal year 2020.

Our traditional seismic products generated 2.4 million.

Revenue in the first fiscal quarter, a decrease of approximately 15% compared to last year. The lower revenue is a culmination of decreasing demand for our traditional sensor products, partially offset by an increase in demand for our marine seismic products.

Revenue from our wireless seismic product lines totaled 16 point.

9 million, 132% increase compared to last year, driven by higher rental demand and utilization of our fleet of OPX Marine seismic recorders.

In November of the first quarter, we also announced the sale of a land system to essay exploration comprised of 30000 channels of our advanced.

Well no recorder, this 12 and a half million dollar sale was primarily financed with a prompt promissory note due in January of 2023 and delivery of the system occurred in our second fiscal quarter.

First quarter revenue from our reservoir seismic products totaled $218000. This is a decrease of about 70.

7% compared to last year and is attributed to lower demand for our borehole seismic sensing and recording products.

We expect revenue from this product category category to remain low unless and until we are engaged in a contract for the delivery of a permanent reservoir monitoring or PRM system.

We believe that our broad portfolio.

Leo of PRM accomplishments and engineered products, which now includes opto size fiber optic sensing technology greatly enhances our opportunity to win future PR outcome PRM contracts.

While there are currently no open tenders in the industry for our PRM system, we believe a tender offering is likely to come out in fiscal year 2000.

Isn't 20 note that revenue from such a contract if awarded to Geospace would not be expected to occur within fiscal year 2020.

In the first fiscal quarter revenue from our adjacent market segment totaled 6.1 million a decrease of approximately 8% compared to the first quarter last year the decrease.

It was primarily caused by unforeseen delays in production of certain graphics imaging equipment and lower demand for our film and industrial sensor products, but this was partially offset by greater demand for our water meter cable and connector products.

Despite lower first quarter revenue than last year, we believe opportunity to grow revenue in our adjacent.

That segment remains promising and we believe that revenue generated from our adjacent market segment continues to act as a strategic hedge helping to provides stability that offset some of the volatility occurring in the demand for our oil and gas market segment products.

Revenue from our emerging market segment.

Total $97000 in the first quarter. This is an increase of about 10% compared to last year, but has not considered as important or a reflection of any underlying trend. As a reminder, the emerging market segment is comprised solely of products and services offered through our subsidiary quantum technology Sciences.

Specialty products uniquely combined the technologies of seismic acoustics, and highly sophisticated analytics to provide actionable information of potential threats around physical borders and perimeters by way of persistence surveillance and detection.

These products have applications in both domestic and international markets and in both commercial and.

And governmental settings.

We believe this unit that unique technology achievement accomplished through our acquisition and integration of quantum can generate meaningful revenue going forward, we believe contract opportunities for the deployment and utilization of these products are likely to occur in the near future and could lead to ensuing revenue in the.

Current fiscal year.

At this point I'll turn the call over to Robert for more financial detail.

Thanks, Rick and good morning, everyone 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.

Our first quarter ended December 30, Onest 2019, we reported revenue of 25.7 million compared to last year's revenue of 17.9 million. The net loss for the quarter was 1.3 million or 10 cents per diluted share compared to last years net loss of 5.9 million.

For 44 cents per diluted share.

A breakdown of our oil and gas product revenue is as follows our traditional product revenue for the first quarter was 2.4 million a decrease of 15% compared to revenue of 2.8 million last year.

The revenue decline is attributed to lower demand.

For our traditional center sensor products, partially offset by an increase in demand for our marine seismic products.

Our wireless product revenue for the quarter was 16.9 million.

An increase of 132% compared to revenue of 7.3 million last year the increase in.

Revenue is due to growth in the rental demand and utilization of our OPX Marine nodal systems.

Revenue for the first quarter excludes one and a half million of rental revenue not recognized due to the uncertainty of a customer's ability to service it's debts.

Our revenue.

Resin for product revenue for the first quarter was 218000, a decrease of 77% compared to revenue of 937000 last year.

This revenue decrease reflects reduced sales of our borehole tools.

We do not expect meaningful revenue from these products unless and until we.

We are engaged in a contract for the delivery of a PRM system.

Currently there are no open tenders for a PR PRM system, but we believe that tinder offering is likely to be released in fiscal year 2020.

However, provided you with spaces reward awarded a PRM.

Current contract, we do not expect to recognize any revenue within fiscal year 2020.

Moving onto our adjacent markets product segment.

Our industrial product revenue for the first quarter fiscal year 2020 was 3.6 million essentially unchanged for the same period.

The prior fiscal year.

Imaging product revenue for for the first quarter was 2.5 million a decrease of 19% compared to last year's revenue of 3.1 million. This. This decrease is caused by unforeseen delays in the production of certain imaging equipment and a decline in sales.

In our film products. While this revenue decline is larger than we anticipated we do not expect to continue trending lower revenues in the future.

Finally revenue from our emergent merging market segment totaled 97000 for the three months ended December 30, Onest 2019 prior year revenue.

Was 88000 for the first quarter ending December 30, Onest 2008, 2018, while we do not anticipate seeing significant revenue contributions from quantum in the near term. We do believe our ongoing development efforts are creating future meaningful revenue opportunities.

Our first quarter fiscal year 2020, operating expenses increased by 1.2 million or 13% compared to last year's first quarter.

The increase in operating expenses was due to incremental research and development costs associated with our recent acquisition of the opto sites business.

In November 2018, and additional research and development project related expenditures in our oil and gas market segment.

Our first quarter cash investments into our rental equipment in property plant and equipment were 5.2 million at 1.7 million respectively. We.

Thank you to experienced strong demand for our marine OPX rental equipment as a result, we believe our fiscal year 2000 in fiscal year 2020, our cash investments into our rental fleet could be 8 million or more.

We estimate total fiscal year 2020 cash investments into our property.

Plant equipment could be up to 5 million.

At December 30, Onest 2019, we had 8.7 million of accounts receivable due from an international customer who is currently leasing a significant portion of our OPX notable equipment.

We have experienced ongoing cash.

In difficulties with this customer throughout fiscal year, 2019, and the first quarter of fiscal year 2020.

In late November 2019, we ceased recognizing revenue from this customer and expect to continue to do so until the customer exhibits and ability to services debts owed to the.

Company.

The unrecognized revenue in voice to the customer in the first fiscal quarter of 2020 was one and a half million.

We have also commenced negotiations with this customer to enter into an agreement requiring the customer to pay a portion of the trade accounts receivables in the near term to pay all.

Payments going forward on our current bases and to convert the remaining amounts owed into a debt instrument secured by certain of the customers assets, we expect to finalize the agreement within the second quarter ending March 30, Onest 2020.

We have excess we have significant.

Earns about the collection of these accounts receivable, but we have not do not intend to provide any additional bad debt reserve towards this customer's outstanding accounts receivable unless and until we believe that it is probable the customer will not be able to pay its debts to us.

Also.

Our current negotiations may not lead to an agreement or the fair market fair value of the customers collateral may not ICSI equal or exceed the balance of accounts receivable owned by the customer.

For the customer may not meet its payment obligations if any of these situations occur we couldn't.

Re could record a significant bad debt reserve as soon as the second quarter of 2020.

Our balance sheet at the end of the first quarter reflected 10.1 million of cash and short term investments. We had no long term debt outstanding and available borrowings under our credit agreement or 20.

4.7 million.

In addition, we own numerous real estate holdings in Houston and around the world that our own free and clear without any leverage.

That concludes my discussion ill turn the call back through.

Thank you Robert.

Within our oil and gas market segment, our traditional exploration and reservoir seismic.

Products remain extremely challenged by very low demand. This directly affirms that historic low levels to which seismic exploration activity in the oil and gas industry has fallen and we see no real indications of improvement for these products on the horizon.

These conditions have similarly impacted our wireless seismic products for onshore.

Sure use although we believe recent sales of our advanced GCL nodal recording system help demonstrate the value that our technology offers to our customers while navigating these down conditions.

On the other hand RVX Marine notable recording systems continue to represent a bright spot in an otherwise den seismic equipment market.

We believe the continued revenue growth and seemingly uninterrupted increase in demand for these products is driven by the renewed focus on offshore reason reserves by many of today's GNP operators.

At the same time, we believe that this increased focus on offshore reserves is creating renewed interest in our PRM systems.

Which could lead to one or more tenders and opportunities for PRM contracts in fiscal year 2020.

That said, we continue to move forward with our diversification strategies for the adjacent and emerging markets in order to help mitigate the volatility we face in our oil and gas market segment.

Based on our technological accomplishments.

We believe the onset of meaningful quantum product revenue could start this year from our border and perimeter security customers.

This concludes our prepared remarks, and now I'll turn the call back over to Tony for questions. Okay. Thank you. The floor is now open for question.

At this time, if you have a question or comment.

Please press star and one on your Touchtone phone.

If at any point. Your question is answer he may remove yourself from the key by pressing the pound team.

Again, we do asset while you pose your question that you pick up your handset to provide optimal sound quality.

We'll take our first question from Bill does Ellen.

With Teton capital. Please go ahead your line is open.

Good morning that said Tiotwo and capital.

Here in the last couple of weeks, we saw an article from the BBC that said that the at U.S. border patrol had found the longest tunnel.

Is that they had ever found along the U.S. Mexican border.

I believe it went from tier wanted to the to the San Diego side.

And it was found back in the August timeframe.

What do you all know about that title and and how that was found.

Okay.

Well Bill I guess.

What I do know about it is it really represents what really faces the border patrol every day.

That tunnel has that was found we're quite aware of it.

There's who knows how much illicit commerce has gone through that tunnel.

Across the border.

And it's a dangerous situation at something the board patrol phases everyday I certainly it's not even appropriate for me to to comment on whether we had any involvement in that find or not I think it's more important just to realize that the this is an important situations at the border patrol needs to address and I believe they fully.

And to try to address those issues I can say that the.

But we have developed with quantum is exactly suited for detecting these sorts of tunnels.

So we look forward to the border patrols fights and their effort and trying to combat that sort of illicit activity.

Yes, and Rick I'm going to keep going down down this path if I may have.

I guess I'll ask you said you won't you won't comment directly.

Correct.

All your equipment did or did not play.

Curious it seemed like there were two aspects what number one there with the identification.

Of the tunnel and then secondarily there with the mapping of the tunnel.

This does the quantum equipment.

Lends itself to both mapping and and the finding or is it better for one or the other and and why can you help us understand the equipment.

And a little better from that perspective.

I think so I mean, the the detection aspects certainly are something that the quantum.

Technology can do.

The utilization of the tunnel causes seismic activity that is monitored and.

The through that surveillance is what provides the ability with all of the artificial intelligence and machine learning and other aspects that go into the the deep analytics that are performed with the quantum algorithms.

To make those detections and mappings to that extent as well so as long as there is sized.

Missy.

The quantum system is going to do well.

So would it be a correct.

Understanding or interpretation that once you have detected a tunnel that you could you could send some people to walk through the title. The good guys that is and you could you could simply map.

Where that tunnel I went and what what building that was under et cetera.

I'm sure physically that would make perfect sense I mean, we're not involved into in the introduction of any sort of tunnel activity.

What our equipment is designed to do is to detect and and identify those sorts of things.

Right. Okay that is that is helpful. Thank you and then I would like to.

Have some clarification on on a couple of things that I thought I heard that may have been in contrast here on the call.

And Rick you are reading your script and said that.

You do believe.

That mean for quantum revenue could happen this year from that.

Border security.

Robert I thought that we heard you say that you did not expect.

Meaningful revenue from quantum in the near term or those two statements in contrast, or or not and would you help clarify.

For us.

I do think it's possible that we could see some revenue from quantum this fiscal year I think I'm just being.

Just a little bit more careful about those statements, but we do think that that could.

Occur in this fiscal year.

Great. Thank you all let others ask questions.

Thank you and as a reminder that is star in one on your Touchtone telephone if he'd like to ask your question or make a comment.

Meanwhile, we'll move to Chris Centsone Sansone.

Please go ahead your line is open.

Hi, guys. Good morning, Thank you for taking my call accurate warning.

Rick one for you the demand you're seeing on the on the offshore side with the Ocean bottom systems is that coming at the expense or is it or is that does that.

In market share.

Relative to the.

The streamer technologies or is that.

Incremental analysis that they're using.

The ocean bottom stations for.

I think its circumstantial in a sense I think we do believe that certain streamer operations aren't.

Proving though they are not near what they used to be in times past as far as that goes but I think it's the manner in which the oil companies have sort of renewed their interest in offshore.

In many cases.

Quite successfully there they're looking for discoveries nearby their existing infrastructure.

And.

In that sense, where their existing platforms. They are not so keen on those streamers getting too close to those platforms and Moreover, in some cases.

They need to the better imaging that you can get through ocean bottom data, where you can shoot under and you can achieve adds.

So in your and your imaging that that you cannot do even with wide azimut streamers. So I think that the type of refocusing that is going on at this point.

Offshore is sort of driving this additional demand for that additions that broader and.

And more resolute imaging that the ocean bottom nodes or are providing.

Got it thank you and then.

Robert as more of the business shifts to.

[music].

Our rental based business.

Are you guys considering including.

EBITDA adjusted EBITDA yard.

Quarterly earnings releases.

We have not considered that.

That could be something we could add in the future, but Rick and I have not discuss that at this point.

Yes, I think it would help.

Tell the story because that's really.

Anywhere that.

The growth is really going to be seen.

Rental business the cash was out the door day, one and then it comes back to you over the life of.

Of the contract so I think it'd be helpful for investors kind of see how how you guys are driving that growth.

Thanks.

Great. Thank you next we'll move to David Nierenberg, Aaron Berg investments. Please go ahead. Your line is open.

Good morning, guys, Hi, Dave morning.

As you and others on the call no.

Long been supportive shareholders, who have company.

We're impressed by your survival instinct.

Preservation of cash should occur when competitors were going out of both move.

We are delighted to see.

Continuing investment in innovation.

Gaining market share offshore and starting to good orders onshore in your core business.

And we share you're hopeful of.

About the prospects for.

Continued strength in offshore exploration and for.

New orders for the PRM both.

We do have too concerned neither of which are new to you or two goes on the call one is.

We would sure like to see.

Quantum generate orders and revenue.

It's been a long time.

Well that has not happened and we've been incurring operating losses and investments.

But our single greatest concern today.

Is about accepting credit risk.

To repeat.

Yes.

The land and offshore.

Domestic and foreign.

And the risk to the straight through the balance sheet, which results from that we do not want for fee. This company, becoming a borrower and I imagine you don't either.

During the time, we've been shareholders.

Cash balance we've gone from close to 50 million to narrow about tab.

We really don't like.

Oh lender, because our perception of both management and board of this company lack relevant banking experience lack asset based lending experience lack of vendor leasing to.

And you're dealing with risky customers.

Risky business.

I've been and are likely to continue to be a large losses from time to TARP.

And now with this new 12, and a half million dollar contract most of which if and when it's great for is going to be extended out the January.

2023.

Not really concerns us so our concerns or is this a prudent business strategy.

This be prudent financial strategy is your accounting and auditing doing the right things in terms of revenue recognition establishment of loss reserves and we.

Realization of those reserves.

Why is it a good business if we have to accept this kind of risk from shaky customers and so I think if a good card for shareholders to be asking you and the board to do a thorough review.

This company strategy.

And the F.

It is right for this company to continue to remain an independent public company or whether or not you should partner or consider some of the parts transactions because the pieces maybe worth more than the whole. That's so uncomfortable and troubled I am about the credit risk that you were accepted.

Well, we can certainly.

Great that David I think that in general.

We do feel relative that were on sound footing with respect to do for example, the 12 and a half million dollar.

Contract that you're referring to there I mean that the note that we're discussing is certainly a secured note.

That also represents an order that we.

Received upfront cash payments and we basically operate our business and that sort of manner, even on our rental.

Fitment.

To ensure that our base costs.

Have have representation in terms of the cash that begins those contracts. So I think we're.

Where we're doing our.

Our best and putting in due diligence and ensuring that our financial footing on these sorts of contracts.

Start out.

Very solid.

To that extent you know as a security if that equipment were to come back to us I mean, it would be certainly something that could generate.

Great revenue through its rental op opportunities.

We do examine our cash outlook at the board level every quarter and we do quite a forward look on all of that and we examine how it matches up.

What has happened.

There are risks involved in this particular business any oil and gas related particularly in the services side. There are risks and you see those represented absolutely.

In this.

In this offshore case of the OPX rentals.

Clearly, we own all of that equipment.

So that asset is ours, it's not in jeopardy in any respect and we have a every indication that so far that that so we.

Believed that that debt will be able to be paid and that the opportunities for that work exist, but we are having to work through some.

Some difficult issues with that particular company to get this on proper footing.

There is risk there I can't deny that and that's exactly why we have made it so well known and tried to give a complete and utter disclosure of what the issues are there that were.

There were facing.

But for right now we believe that.

Our ability to react to ring that end and and bring it into a better circumstance certainly has high probability, but that could change and thats exactly what we've tried to make.

Clear.

I remain concerned about.

Granting credit risk.

In a companywide question, whether it up the management during the board of relevant credit granting.

And oversight expertise I guess I'm going to follow up on this call bye.

Carbon conversations with the shareholders I know to see whether or not are concerned.

Our shared by others and then we'll come back to with our findings, but I'm sorry to have to register this today, but the numbers are so big.

It's a serious concern for us.

Alright sounds great.

[music].

Thank you next excuse me. Thank you next we'll move to Michael Cox with TPG. Please go ahead. Your line is open.

Yes, Hi, I just wanted to.

Talk little bit of that.

The the current what those credit did you are concerned about.

This operator.

They still have they have not made payments obviously in some time because youve registered this now on two calls in a row, but are they still operating the rental equipment that they did they secured for me.

That is correct they are still using our equipment on on jobs today.

As there have been any thought too.

It seems that your equipment and they're not making payments in your commentary is incredibly negative around it I'm going to follow up in the second within the discussion to not did not.

Have a bad debt expense around this but you're basically it sounds like what you're saying is that you don't expect to get any money I guess why are you letting them continue to use your equipment.

Right now for going on almost six months no payment.

Well actually as part of the equipment. Some of the equipment is is returned in our hands, but.

To your point.

And then certainly an option there would be a complete cessation of any cash flows.

If.

The equipment was.

Not continued to be used and.

Honestly, if any of the new demand comes about and that equipment is better placed in other circumstances, we would certainly do that but at this point in time, we and the private.

Discussions with the company.

We see the forecasted opportunities that can bring this back into line and so we believe it's in our best interest to let this right at the present time.

Okay. You said it sounds like you you made an agreement with them in November and the immediate.

Lee.

Didnt follow through on the agreements so.

Hi.

You know pull me once Shimon you've only twice shame on me Europe, you sound a little bit more optimistic this time around but really what how what gives you the confidence to suggest that round two of negotiations with them, we'll end up any better than onboard.

That is a very fair observation and I can tell you that the agreement that was made in November there were circumstances that occurred very nearly immediately thereafter, they caused some delays and those forward opportunities beginning.

That we're going to correct those measures.

Those have subsequently begun but they because of those delays the initial payments on that plan, we're not able to be made we recognize that we know what the circumstances are they cause that certainly not anything that was our fall during our control.

But were circumstantial and now that those are more on the original.

Plan of execution, we believed that this new plant, which will also involves some asset securities will put us in a better position.

Okay, and one way or than other your.

Jason is that by the time, we're talking again in the next quarter this will be.

Substantially decide whether it's at least it's you'll either have collected some cash and be able to feel more confident about this or you'll be you'll likely be.

Recording a big.

Bad debt expense correct.

I think we completely agree with the yep okay.

And then turning to the balance sheet per second.

Obviously love a substantial increase in accounts receivable and other receivables this quarter is.

Is this related to essay exploration.

Oh or what is what is driving that that we had.

Normally your balance sheet, I'd say is pretty inclined toward positive free cash flow and this obviously with the bad quarter from that perspective. So could you just kind of walk through the pieces there.

So.

The increase in accounts receivable does not have to do with.

Esa exploration.

We were notified by one of our.

Our.

Other OPX nodal customers that they were.

Going to be delaying some payments subsequent to two that.

Started paying right is when right when they.

Indicated that they would have cash flow coming towards us in and the.

Cash flow has been received and were our receivables reflect that as of today.

Okay.

No no no no incremental concerns there just that just happened to be right around the ended the quarter right that was the timing a timing issue yet.

Okay, and then finally, and then I'll I'll shut up and turn it back to everybody else.

On the PRM side I know the decision.

Boy I'll be almost punishing for being willing to take your neck out at all but.

Going back and we do quarter after quarter of your your commentary surrounding hopefulness or things moving.

Yes, it sounded like.

Like there was it a tweaking the wording.

That you made it little bit more you feel like 2020 is a year, but we'll be seeing a tender as opposed to we the near term et cetera.

Could you just maybe talk a little bit more in depth around the nature of those conversations and.

Either growing confidence or not growing confidence about something happening in the.

10 months.

Sure.

We're very bullish on the on the.

Efficiency and efficacy of PRM. The science is well known it's just been they capital investments by the oil companies have been very much withheld and particularly withheld from offshore work until Barry.

We recently here.

The the reason were more hopeful is because the discussions we're having which were are under non disclosure. So I can't really give you lots of information on any of that detail.

But.

In those discussions it it is being reference to us and has been for.

Even some time of when a tender might come out and even though there have been delays that have occurred there.

We feel more confident based on what we're told and based on the discussions in the way that were that.

We're being.

Fed information in these.

Discussions from the oil companies that there is the likelihood this year of such a tender coming out now, even having said that and I want to make clear that the execution of that award when it takes place based on our confidential understandings of when deployments would occur and all that don't necessarily.

Early means that the revenue would be recognized in this fiscal year, even though eve.

A tender, possibly even an award might come out in the fiscal year.

Very honored I think yes beyond that there's other opportunities that are brand new that are coming up.

The new discussions that we have not had that are that have had been on set new requests for information.

Towards that thing so.

The good news about that is it sort of confirms I think what many in the industry that analyze what's going on in the industry I'm.

Not the only one that has a has seen this.

The sort of new interest as it were and the offshore World. We noted the shale aspects are changing the investment strategies are changing there and we see many oil companies.

Going back in examining.

What they can achieve offshore sometimes using some of the new techniques. They've now developed having been very cost conscious as it were so we believe all of that is driving things in the right direction.

Thank you very much.

Great. Thank you and next we'll move to a follow up.

Bill does element. Please go ahead your line is open.

Thank you I'd actually like to continue down the PRM path, if I may the yet.

The reference in the press release with that.

The same.

Prospective customer that you had been a or same prospective.

Under that you had been talking about or is it different than the one that you expected in the past and I do know you did say that you had some some new request from new new perspective customers, but it sounds like that's a little bit different.

More ancillary than the one that you referenced in the release, while they're there certainly are some new wins and.

The press release is trying to reference those too, but I can say that longer standing wins that we've been a discussion with are also included in that commentary.

And head you previously been under and be a or is that.

A a forward step in that process, that's always a forward step in that process and.

And.

A consideration that we're always.

Meant to follow.

And when did you go under ending.

Probably the day, we started talking.

Understood, Okay and then.

I do want to.

Come back if I may to the border security business that last quarter I think the press release made reference to the fact that you don't expect significant revenues from border security in the near term.

This quarter the press release, and the same ER and the same paragraph.

Said that near term opportunities.

Exist. We would you please talk about what changed for that more positive tone in the in the press release, yes, just to be clear the near term opportunities are four contracts, but that does not necessarily mean revenue would be recognized at the onset of that contract, but with within those opportunities that we.

Think do exist in the near term from a contractual point of view I think it's it's quite possible that they would lead to revenue recognition before the end of the fiscal year, there's going to be a timing issue there.

Okay and did something change in the last three.

On or since the last call I should say.

That.

You're you're receiving more positive indications from prospective customer I think so it's just timing has passed in some of the the steps and necessary actions that needed to be taking by those involved.

And have have progressed and so that just puts it further down the timeline.

You know towards reaching an endpoint right and.

And I'm going to relate this same question back to PRM with.

With that border security products are you anticipating.

Revenue recognition on a percentage of completion or on a shipment.

Or is all that change with assay six six.

Yes, it has changed and it would be.

More likely over a period of time, we would have to examine the car.

Contract and determine what those measurable.

Uh huh.

Points of time would be to recognize revenue but.

It is not exactly the same as percentage completion any longer.

And and yet you do think that the the border security probably would be recognized over time.

Rather than in a one.

Yes.

Once that yes that would be my expectation.

And how about with the PRM.

You are.

A tender that you are referencing would you expect that if you were awarded that that that would be.

Recognized over time.

Or or more upon delivery.

Again, it wouldn't be it would depend upon the particulars within the contract but.

I do expect that we would recognize the revenue overtime.

And so our experience historically with PRM.

Is that the.

Smaller.

Contracts.

Or tenders you recognized upon shipment and then larger we're over time.

So would it be fair to infer that the tender that your that you're talking about how would be a they have a more meaningful size and.

And that's why yet recognized over time.

I think so but there are some other opportunities certainly within our discussions that might fall into a shorter timeframe.

In that regard, but we'll just have to wait and see how those might manifest. Okay. So said another way you have both small opportunities.

And big opportunities in the PRM Arena, I think Thats a fair statement.

Okay. That's a that's helpful. And then one one additional question before I stepped back.

The.

Incremental revenue.

Or incremental margin on your incremental revenue.

We're somewhere in the neighborhood of 95% this quarter.

Is that the sort of.

Incremental.

Profitability.

That that we should anticipate as the rental business grows and granted coming back to earlier point about getting paid that's an important piece of of.

All this too but.

But assuming that you are paid that that's the right. That's the right way to be thinking about about margin or is there something special this quarter, where that that incremental margin was was higher than normal.

No there is not nothing unique or special about.

This quarter in relation to our rental revenue and the margins, we we expect to see from the.

Those rental equipment has primarily of fixed cost in nature and as you have more of that equipment out being utilized in generating revenue we see a.

Higher level of profit from the.

And essentially your depreciating that product whether it is whether you're recognizing revenue whether the product is being used or not so any any.

Rental revenue really becomes margin.

That's correct. In addition to depreciation we have.

Maintenance costs for for equipment. That's Unutilized also so those costs don't go away.

Right.

Great. Thank you both.

Thank you and next we'll move to a follow up from David Nierenberg. Please go ahead. Your line is open.

Hello.

Hey, David Thank you.

This question is probably for Robert.

I noticed the.

Past quarter, there was a 1.42 million dollar income tax charge.

So which will go way beyond the operating profit was.

Good, which I think was only about 170000.

Could you please explain to us what weve going on with taxes.

In this quarter that made that number pop up so large.

Yes, those taxes are associated with withholding tax in foreign.

Foreign countries, where.

Our rental equipment is used our OPX new nodes reviews.

Our.

Rental revenue contemplates that tax and that taxes remitted honored by half our customers.

And do.

We wind up having to pay that tax regardless of whether or not we get paid for the rental of the equipment.

Well our in situations, where we have withholding tax the tax is actually committed to the taxing authority by the customer.

Mhm unclear about why it appears on our PML.

Well it appears on RPL, because we have increased our rental revenue to include that tax and they are paying us a lesser amount.

They are paying us net of the.

Tax.

Hi, food.

Okay. Thank you.

Welcome.

Thank you next we'll move to Michael Melby Lucky City capital. Please go ahead. Your line is open.

Hi, Good morning, My question was answered thank you.

Thank you.

Next we'll move to Damon Benedict with the three please go ahead. Your line is open.

Hi.

I thought I heard you mentioned in response to David's question about the GTL order that you had received some cash upfront.

How much was that and how much of your cost to produce those.

GCL.

Units.

How much of your cost to produce with offset by that cash is already received.

Actually there was a great question, but we don't reveal what costs.

All right on those units a I mean, our competitors would love us to do that but.

We're not willing to do that.

Without giving.

Dollar number could you just let us know roughly what percent of your cost was already recovered and de risked.

No I'm afraid I couldn't but I believe the downpayment on that was something like 10% or something along those lines if I'm not mistaken.

Okay, and with the cost sorry, sorry weird.

Scott was the.

Well I'm sorry, Robert just corrected me instead it was 20%.

Okay and was the cost.

Already reflected in European L. in this past quarter or is that going to be reflected in the upcoming quarter and the cost to produce that sorry I missed it.

Yes delivery did occur into.

Until our second quarter. So we would not reflect any cost until we recognize the revenue okay and on the promissory note.

Is there any payment in the meantime, or is it all just one bullet and 23.

No they will they'll make scheduled payments monthly.

Payments throughout the life of though.

Okay.

And then last one on the 8 million of projected.

Capex related to the rental fleet for this year, how much was already in the fiscal first quarter versus how much for the next three quarters.

I mean.

That Bob that 8 million includes 5 million, we incurred in this quarter and and I'm not real sure I know the timing on a quarter basis through the rest of this year for the rest of those.

Okay. The only 3 million more over the next few quarters.

Yeah.

Okay. Thank you.

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Thank you and at this time, we have no further questions I will turn the floor back over to Mr., Rick Wheeler for any additional we're closing remarks, alright, well. Thank you Tony and thank you, everyone, who joined our call and we definitely appreciate the very valuable in good questions, you've asked and hope we've been able to give you some.

Yes. Good answers. So we look forward to speaking to you again in our conference call for the second quarter fiscal year 2020 in May so thanks, again and goodbye.

Okay.

Thank you. This does conclude today's Geospace Technologies' first quarter 2020 earnings conference call. Please.

An actor lines at this time and have a wonderful day.

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