Q3 2020 ION Geophysical Corp Earnings Call
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Greetings and welcome to the <unk> third quarter earnings Conference call.
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Of course.
All the formal presentation.
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Zimmer introduce your host Rachel White, Vice President Corporate communications. Thank you you may begin.
Good morning, and welcome to ions third quarter 2020 earnings Conference call. We appreciate your joining US today I think he's on slide two our hosts today are Chris I sure President and Chief Executive Officer.
Mike Morrison Executive Vice President and Chief Financial Officer.
We'll be using slides to accompany today's call, which are accessible via a link on our website I onto your dotcom. There you'll also find a replay of today's call.
Before we begin let me remind you that certain statements made during this call may constitute forward looking statements.
Statements are subject to various risks and uncertainties, including those detailed in our latest 10-K and other filings, which may cause our results are performing for materially from those projected in these statements.
I'm seeing increasing attraction of our offshore optimization software Marlin outside of our core market displaying the end market diversification of our technology, notably our team is engaged in for trials reports and port the platform logistics and based on the positive response, we believe we are well positioned for several additional trials and tenders. In fact, we were just awarded a highly.
Competitive bid to provide a port management system for a series of UK ports.
We also continue to benefit from our digital approach for example, we applied machine learning for the first time to process large volumes of <unk> three D. Multi client data more efficiently and cost effectively which is key for our year end deals. We are targeting we also deployed new automated source and vessels steering technology using artificial intelligence to improve imaging of reservoir fluid.
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And our E&P technology and services business, we achieved one of our top strategic objectives. This year to enter the three D. New acquisition multi client data market. Historically are they the library was largely to D and exploration focus which limited our revenues to about 3% of an expansive two to 3 billion dollar offshore multi client market importantly, this <unk> portfolio.
First vacation to three D. Further shifts new project investment closer to the reservoir, where capital investment tends to be more consistent and programs have larger scale revenue and earnings potential. We believe we can materially increased our share of this market, even without an improvement in an industry conditions.
The initial phase of our new three D. Multi client program in the North Sea was acquired by a partner Shearwater G. O services safely and ahead of schedule during the quarter, while the majority of the 11000 square kilometer industry supported survey will be acquired next summer completing this initial phase will enable us to finish the entire program by the end of the 2021 season.
The survey covers one of the last under explored sections of the prolific UK Continental shelf, where there is limited modern three D. Data recent play opening drilling ignited interest in this area, which is close to shore an existing infrastructure, making it attractive for investment since the program launched additional acreage was awarded within the survey area reinforcing the value of the asset and good creasing the potential client base for a pro.
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The survey is located in a busy offshore area, where fisheries new wind farm construction M. D. M. P operations are all commingled utilizing our Marlon in Arkansas, where we planned the project using an innovative digital methodology that takes into consideration ocean currents and nearby operations to make better decisions in real time.
This assured maximum data collection during the available 2020 season and more uniform subsurface coverage, we're processing the data for delivery in April and I'm looking forward to the second phase next summer. Besides the aforementioned benefits of our operations optimization software. We're also investigating a secondary use of our seismic data to provide wind farm operators additional G O hazard and <unk>.
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In late June we announced a global to the data collaboration agreement with P. G F to provide E&P companies inefficient way to identify and high great attractive frontier investment opportunities. Since then the partnership has been progressing well and I've been really pleased with the high levels of engagement jointly marketing the nearly 1 million kilometers of data increases both companies sales reach.
<unk> and efficiency, well broadening and diversifying our exposure to date, a library deals globally and the spirit of the agreement. We were also collaborating on multiple license round packages and considering new joy to D programs.
This quarter. We also commercialized are proprietary Gemini extended frequency source technology. Following a successful survey deployment in the Gulf of Mexico the.
The new source technology addresses the need for improved imaging and complex geology to derisk investments, where significant capex is still flowing even in the current market. Some of the most attractive E&P investment areas for a complex geological settings, where accurate imaging is essential for cost effective oil and gas extraction.
We have been pleased with E&P customer support during germanize development and their advocacy now for rapid industry adoption to address challenging prospects in their portfolios by specifying the use of Gemini and a number of tenders, it's important ingredient to enhancing subsurface knowledge differentiates ion as we expand into the larger three D multi client new acquisition market, while maintaining our asset light.
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And our operations optimization group, our client base is seen a reduction in offshore seismic activity compared to a year ago with only 40 per cent of the fleet utilized however activity has started to improve slightly towards the end of the quarter.
During industry downturns, the majority of our software revenue stems from large multiyear command and control subscriptions in spite of of distress market. We secured extensions of three such contracts this quarter, adding to for earlier this year.
Well, we have been focused on driving adoption of our offerings outside of our core market for some time. It has become increasingly important given the slowdown in seismic activity, we are leveraging our technologies and core competencies across software and devices to optimize decision, making a new markets such as port and cargo transit optimization in Port security Port the platform wind farm construction and.
Other offshore energy logistics as well as real time off shore infrastructure monitoring.
Worse repeatability challenges, we achieved a 50% closer match to the desired positions using fully automated source and vessel steering.
And our devices group, we are progressing to promising adjacent market initiatives that are synergistic with our software business and have the potential to accelerate our diversification efforts across operations optimization. Our initial focus is to develop real time monitoring solutions for the increasing amount of aging offshore infrastructure and decommissioning initiatives. It appeals to MP company.
His desire to improve the safety and reduce the environmental risks of offshore oil and gas operations and aligns with our focus to provide data and analytics to enhance decision making.
Today, most regulators require subsea infrastructure to be inspected periodically which varies from months to years is typically an expensive cursory inspection with high levels of uncertainty with advancements in technology, there is and the opportunity to cost effectively shift from reactive to proactive systems that provide much more frequent accurate measurements to ensure a safe operating environment.
We have advanced one promising concept under our new well alert branding, which has been in development for a year and that is attracting strong interest from the MP companies. We are rapidly developing a prototype and have line of sight on promising operator funding for sea trials and 2021.
We continue to develop interest in our demonstrated port security capability to proactively detect and intelligently manage potential security threats, it's a longer wavelengths business development cycle with defense customers.
With that I will turn it over to Mike to walk us through the financials, and then I will wrap up before taking questions.
Thanks, Chris Good morning, everyone before I cover our third quarter results I'd like to reiterate that we are focused on managing what is within our control as a reminder, we scaled back our flexible asset light cost structure earlier this year by implementing almost $40 million of cost savings through a combination of permanent and temporary reader.
Auctions, we are now fully benefiting from these efforts the significance of which is highlighted in our year to date results.
While our year to date revenues of 95 million declined by $37 million from last year, our year to date net loss improved by $10 million.
Moving onto our third quarter results, our third quarter revenues of 16 million were down 29% sequentially and 70% versus the prior year.
Our MP technology and services segment revenues declined 34% sequentially and 75% year on year, primarily due to lower multi client data library sales some of which were postponed and remain in our near term pipeline. However.
However, our impede technology and services backlog increased nearly 80% sequentially to $18 million reversing several consecutive quarters of steady decline.
We attribute this increase to our strategic shift to enter the threed, the new acquisition multi client market.
Our operations optimization segment revenues decreased 18% sequentially and 53% compared to last year within this segment, our optimization software and services revenues declined 11% sequentially, primarily due to continued reduced seismic activity and associated services demand, resulting from covance.
Team the long term command and control software contracts, we have in place in our core market help to insulate our business and provides stability dairy period, the lower activity, while we don't treat our long term software contracts as backlog. So far this year, we have extended seven key multi year deals worth over 5 million annually.
Devices revenue decreased 24% sequentially due to continued reduced sales of towed streamer equipment spares and repairs.
As a result of our lower second quarter revenue, we expect it to consume some of the cash in the third quarter.
Cash decreased by 11 million sequentially, but it was on par with our cash balances from a year ago, excluding our net revolver borrowings our cash balance was $51 million, including $23 million from our revolver.
Total liquidity defined as a combination of cash balance and the available borrowing capacity under our revolving credit facility was 59 million modestly below the $66 million from one year ago.
We previously disclosed and still expect to close on the $12 million sale of our 49% equity stake in the non strategic Inova joint venture. However, the regulatory review is taking longer than anticipated and will likely extend into 2021.
We continue to work with our banking advisors to develop and execute a strategic plan to proactively address our bond well ahead of its scheduled maturity in December 2021.
We continue negotiating with our largest bondholder and have made significant progress since our last call.
While our focus remains on resolving the up and coming maturity in the near term the process may extend beyond the end of this year.
Lastly, while we do not normally supply forward looking revenue guidance. We believe it's important to provide investors a near term outlook on our business where possible. During these uncertain times we.
We anticipate a substantial sequential improvement in our fourth quarter results.
Typically we expect fourth quarter revenues to be significantly better than our second quarter and under the right conditions could even approach our fourth quarter revenues from last year with that I will turn it back to Chris.
Thanks, Mike in summary, I'm pleased with the strategic achievements. We've made this year in spite of a challenging market backdrop combined with a 30% reduction in our cost structure. As described both business segments are singularly focused on diversifying into larger markets. We entered the Threed new acquisition Multiclient market and have demonstrated traction with our Marlin software business.
Looking ahead, while we expect the market will remain challenging in the near term. We are seeing a number of positive developments oil prices have stabilized and clients are settling into their new roles with more clearly defined budgets to high grade offshore reserves based on high levels of engagement on specific deals for the current quarter, including deals pushed from Q3 as Mike mentioned, we are expecting a substantial.
A question on improvement in our fourth quarter revenues. However, our visibility into 2021 remains limited due to the uncertain and fluid covered disruptions.
The NP industry is in a state of flux us companies digests, the energy transmission evaluate us impact oil and gas and carve out diverse strategies accordingly within oil and gas the MP companies will seek to rebalance their portfolios and geographies with lower cost barrels better fiscal regimes and lower carbon footprint.
These diverse strategies, along with associated M&A activity will create opportunities for new entrants and for us to license data to a new set of clients and there is a clear focus on reducing crop cost across the sector augmented by real benefits from digitalization initiatives.
We believe long term oil and gas fundamentals are strong and the significant exploration and development will be required to meet the worlds energy needs for some time in fact, given the pandemics potential impact on peak oil timing. It may accelerate some GNP majors returned to more active exploration to capture the best assets.
The MP industry will remain important to ion and we're continuing to develop relevant solutions more broadly across the MP lifecycle, leveraging technology to improve decision, making and efficiency, we see operations optimization solutions, such as our Marlin sweet becoming increasingly important were reducing risk minimizing environmental impacts and improving efficiency are driving value creation and seismic.
Energy logistics imports.
We're venturing outside of BNP, where our technology and capability of the potential to create value. While also adapting our MP based offerings to the anticipated needs of the MP market as we see it evolving.
With that I will turn it back to the operator for today.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad.
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Our first question comes from the line of Mitch.
Ill with H.C. Wainwright. Please proceed with your question.
Thank you good morning, everyone.
Just beginning with the outlook for the fourth quarter.
One of the factors that could bring you to levels.
We saw maybe in Fourq you 19 is.
Is there any particular deal that.
I mean thats needs to close to help you get to the future 19 levels.
Any color on that front.
Thank you.
Yes. Thank you so much for joining yes.
Yes, I think we have a I think two things I think we had the part of the pipeline from Q3, just shift into Q4, which Mike mentioned.
Which had some significant deals in it that we that's.
That's been missing all year long as we're talking to people in deals keep moving but there's there's focused interest on certain parts of our data library for their for their strategy. So it's a question of when budgets free up for the for those those teams.
So so we have that and then we have new ones in Q4 that we've also been nurturing that it really kind of come live in Q4, which will also be subject to those companies releasing budgets are key trigger.
For all of the all of those deals will be.
Basically an extra spare budget being released giving their outlook. They have for next year, So and what they have not spent this year. So you know and that's a huge a normal Q4 phenomenon anyway, and I think we have we have a sense that that could happen this year from talking to our array of customers.
And we have a couple of chunkier deals in the pipeline that we've been nurturing for some time with that are tied to data availability in Q4, which is around our pecan, yeah, Brazil, Threed data set which drives a lot of our sales annually anyway.
So so those are kind of the key drivers there.
Is that sort of us indication on what you know.
Activity like you mentioned in your prepared remarks picking up.
For your end markets and customers.
Do you think this momentum potentially continues borrowings sort of any.
Severe disruptions from mimicry surgeons, Yeah, I think it's I think it's it's a it's a muted improved and I think what's happening is the people strategies are setting in the new world.
And they are then they put budgets in place and have been cautious it spending them. So for the through the end of this year. Some of that budget may actually get be be freed up to be spent particularly on data.
And then going into 2021, it's hard to say, obviously, but I do think that if oil price stabilizes.
Then I think you're going to see people sticking to budgets and I think one of the things is happening as people realize that.
Through the pandemic impact that the maybe peak oil has even move closer and which means that.
If you are going to change your strategy and find the right. The right reserves in the right places the lowest cost barrels and all that that you need to do that pretty quickly, which means you need to spend on data and exploration in general to make sure you can find those reserves and get them align and produce them as demand is still increasing up to the peak so to make the best of that bad macro scenario.
So I think we're hearing that from some oil companies that have the balance sheets. They are thinking about moving exploration.
Up next year and an.
An accelerating their search for these new heartlands are new locations.
Understood and as a part of this outlook Chris.
Yeah, you're seeing more success I guess this year with international opportunities do you think next year, there's going to be more pickup in sort of your us business.
Well to be honest most of Thats, where were offshore focus there except for the Gulf of Mexico, where we don't have a huge like we we only have a two d. like library footprint. We don't have a three d. library footprint per se you know our exposure to U.S. is pretty pretty low.
We have a lot more exposure in our library to BMS Southern you know.
I don't Hemisphere, Americas, and West Africa, and Europe, now with our mid North Sea high so.
We're less dependent on the U.S. activity, but we do partner with people in the in the Gulf of Mexico, and we do have our Mexican Gulf of Mexico.
Asset jointly with Westerngeco, so, but that's been given the Mexico situation there with a hiatus on exploration there. So there hasn't been a lot of activity on that part of the library for sometime.
So, it's really going to be the or the international piece and if as activity does pick up in the Gulf of Mexico, which I do think it will the ability to work through partners there with our Gemini seismic source you know we have been successful trial and.
In the <unk> in the quarter and one of our peer companies large larger data company did mentioned the success of that approach and the need for that kind of approach.
Going forward. We are those are you know we would partner with companies like that to deliver our Gemini source as part of the equation. So we could participate that way as well.
Okay.
Positive surprise I guess would be.
Here was this 5 million in software. This is that you are already generating on an annual basis I.
I just wanted to clarify this is not part of your operations optimization segment order or additional services you offer.
Under that segment could you clarify what this is yeah, absolutely. So I mean, that's not current $5 million. That's line of sight on tenders and pilots we can convert to revenue. So we are looking at the things were participating in right now through the end of the year. We think there's there's we have visibility on $5 million of recurring subscription rate.
If we were to land tender, a b and C and convert this certain trial, we have going here.
Into revenue, we got a trial going with a large part port and East Africa, and we're getting exposure to other large ports in East Africa. So those were the kind of subscription rates, we see for large port Marlin revenue that you know that would be pretty significant and then yes.
On the tenders, we're participating on in the middle east around optimization non seismic so outside of our core market.
Vessel optimization is our significant to their other kind of million dollar level kind of opportunity. So so we have line of sight and then you know for a pipeline of things we can convert so it's my existing revenue yet.
But were at work.
Yes, given the award we had just it just the other day with actually beginning this week with the UK a UK ports I mentioned you know that's a that's.
You know, that's giving us encouragement that we have something that I absolutely fit for purpose right now and as tenders come in the fact that people are tendering for Port management solutions also indicates that worked the right place at the right time, because that wasn't really happening before so people are realizing the need for these kind of sophisticated software solutions to improve performance supports so it's.
It's kind of getting close to crossing the chasm situation.
So two follow ups to that Chris one is.
Could you give us a sense I'm going to be it's going from loved to potentially 5 million.
And is this five minute then you are hoping to alert in sort of the next 12 to 18 months.
Yeah, I think the latter is what you just said is true with <unk>. So we have very very little revenue in that space now it's all been as we've said on prior quarters. It really we only started we only went live with our first the first port with the solution.
In the early in the first half of this year.
And then it's been the digital outreach through the pandemic phase 2000 ports, where we joint Webinars, we join Port associations, we have digital outreach to all the ports in the world to help them operate remotely through covered and we got a heading up a handful you know of significant trials out of that outreach, which have all gone very well.
We've got one that is.
There is more related to port the platform logistics and Port management, Although it's got Port management in it that has gone extremely well we've had our team in the <unk>.
By groups team engaged every week you know with you know five to 10 people on each side engaged on different use cases, and we're at the point now where we're talking commercial conversion about.
With them and I'd be a significant a significant account so.
We've gone from at the begin this year really having one small port.
Low level of revenue to.
Because of small.
To a bunch of trials and participation of tenders now winning a tender being close to converting a trial account and plenty of other good trials underway. So yes. So I think the key thing is the the next 12 to 18 months trying to get to that $5 million or less.
All of subscription revenue.
Yes.
Just one last question.
This spending seal to the drugs in dollars are expected to see I mean is this just.
Your credit facilities or is there anything else that is.
So we're seeing this out.
Yes. So that's that's simply bureaucratic it's it's actually getting the filings done for for anti Trust for you know for the buyer so and that's just on really slowly and I'm not sure. The pandemics help but it's it's pure it's bureaucratic from the China side and it's a it's also just getting those things done there's actually I keep in touch with us.
The the buyer run a regular basis and they're still very active.
I know the business is actually going surprisingly well given the pandemic.
And that that its land seismic it's probably been better than the last three years than it did in half a decade before that in a better market. So in a poor market or they are performing better and.
There is interest continued interest at that level and that of that deal with the with the buyer that they're getting frustrated it's taking so long as well.
Okay.
Thank you, Chris and I have my pleasure I mean, thank you for joining.
As a reminder, it is star one to ask a question. Our next question comes from the line of Colin Rusch What Oppenheimer. Please proceed with your question.
Hey, guys. Its just along for calling in this morning.
Can you provide a little bit of color on how that pipeline of multi client programs. This is changing in terms of total number maturity process cancellations things of that nature.
Sure.
Well I think one of the things that's changed in the recent quarters, just given the pandemic and everything else is and the lack of demand you know.
Kicks off by that is that the oil companies have or however, you know <unk> looked at their strategies revamp them. So there are you know they are trying to do what they can around the exploration as we talked about on the other question, but they've also the bigger ones you know the customers that have bought our data over the last 10 15 years of them are the majors and.
They you know in a lot of them are changing their strategy to have to have a play on the energy transition as well so as such they have rejig. Their organization. So we've had to reconnect with who are the stakeholders, who by the data who who are the procurement guys that we deal with C to land the deals and.
And so that that's that went on through the second quarter and third quarter and then I've seems to have settled down we used a lot of new Jersey digital tools to see who's moving leaving and joining and moving around and then reengaging. So thats been successful and we think that the conversations we've had with the different things since pre pandemic is the conversations around asset there's there's less activity for sure.
But the conversations seem to be more meaningful and they continue on a regular pulse and we seem to be just waiting for the budgets to be freed up by you know higher levels to let those buyers get the data. They want so they seem to have decided they want our data and these particular provinces geographical provinces.
[noise], rather than just kicking tires and seeing if they can get the best deal for between us and our competitors they've decided they like that where our data is.
The value proposition of the data how you know how we designed it how it's been image to and when its available as well so.
So those seem to be more genuine conversations that we are maturing and that's the promising thing and the other one is that there has been general discussion about we will buy this data if our budgets are released in some and some of those deals are going through I mean, the budgets are already there and we're getting and they're moving others were waiting others are pending us delivering large volumes of data, which is just uh huh.
High performance computing get it done get it shipped to customers for recognition. So so a variety of things there.
And I took to characterize Q4 versus Q3 and even Q2.
We have a.
The number of deals in the pipeline some have slipped from some of the ones that slipped from Q3, so they're still active and then you have the ones. We we were nurturing for Q4. So you put those together and its stronger than we had initially thought for Q4 in our plan and.
And then we have some other ones that if that we're nurturing that are big.
Big ones that are out there that are in the upside. So you got up either we have more upside coverage than we had last quarter and the quarter before as well so if something slips out in the in the forecast them you have stuff from upside that we're nurturing as well.
So we're happy to see that that upside come back as in lean times, you know the upside part just pretty much goes away and you're you're stuck with with optimizing what we got in the base based part of the forecast.
Sure that's great.
And then finally can you just give an update on any potential M&A targets that can augment the existing portfolio.
Well, Joe that's a good question, if we have the balance sheet I'm I'm sure on the software business we could.
There's a whole host of small partners in the ecosystem a lot of a lot of what we're doing around ports in harbors and ports to platform are around you know.
Little little software companies or data companies that are part of a piece of that whole ecosystem. It's a very very large ecosystem from the vessels transiting to the port activity to the onshore logistics and we could easily roll up you know tuck in.
A couple of little little companies that already have revenue and earnings and they'll be a wonderful story I think we need to be at the point, where we are we have the liquidity to do that or else. Some other creative means to do it but but at the moment, we're nurturing that through partnerships. So up a wide range of connections there on the data side I don't anticipate I don't see us or even a would you know I see us more.
Generating the right the right programs in the right place like our mid North Sea high three D. I'm working with partners partners, who are willing to take a shot at some of the risk in the program and.
And obviously working with customers that want to underwrite that data so that so I don't see a bunch of M&A on the on the on the seismic data side, unless I unless its consolidation in a broader sense and where part of that consolidation, but I don't see us driving that.
That's interesting thanks guys.
Thanks.
There are no further questions in the queue I would like to hand, the call back to Chris' answer for closing remarks.
Well. Thank you everyone for joining us today I'm, a very dynamic week out in the world with earnings and elections et cetera, and the U.S. So I appreciate your time and your interest in.
Yeah, and look forward to seeing you on the next call and hope to show you. Some talking about some a good success in Q4 and some further progress on the ports and harbors <unk> Marlin side. Thank you so much.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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