Geospace Technologies Corporation (NASDAQ:GEOS) Q1 2024 Earnings Call Transcript

Geospace Technologies Corporation (NASDAQ:GEOS) Q1 2024 Earnings Call Transcript February 8, 2024

Geospace Technologies Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Geospace ‘24 Earnings Conference Call [Technical Difficulty]. Today’s call [Technical Difficulty]. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Rick Wheeler: Alright. Thanks, Natalie. Good morning and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2024. I am Rick Wheeler, the company’s President and Chief Executive Officer, and I’m joined by Robert Curda, the company’s Chief Financial Officer. In our prepared remarks, I’ll first provide an overview of the first quarter and Robert will then follow up with more in-depth commentary on our financial performance. After some final comments, we will then open the line for questions. Today’s commentary on markets, revenue, planned operations and capital expenditures maybe considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on what we know now, but actual outcomes are affected by uncertainties beyond our control or prediction.

Both known and unknown risks can lead to results that differ from what is said or implied today. Some of these risks and uncertainties are discussed in our SEC Form 10-K and 10-Q filings. For convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website and I encourage everyone to visit and browse the site to learn more about Geospace and our products. Note that today’s recorded information is time sensitive and may not be accurate at the time one does listen to the replay. Yesterday, after the market closed, we released our financial results for the first quarter of fiscal year 2024, which ended December 31, 2023. We were gratified to start the new fiscal year with our fourth straight quarter of profitability.

Along with improved industry demand for products in our oil and gas market segment, we believe our streamlining of operations over the last year and our attention to financial discipline were instrumental in carrying over profitability to the new fiscal year. First quarter revenue of $50 million represents the highest quarterly figure achieved in nearly 10 years. And net income exceeding $12.7 million solidly demonstrates the type of value we strive to deliver to our shareholders. The sale and delivery of our newest technology ocean bottom node known as the Mariner was the pinnacle element in delivering our first quarter performance. As we previously announced, a $20 million rental contract for the Mariner system was converted to a $30 million sale in late December.

This brought a significant amount of revenue forward into the first quarter that would have otherwise been received from incremental rental payments over the course of the year. Given that we don’t anticipate another such sale in the imminent future, this transaction serves as a stark reminder of how commerce in our oil and gas market segment can be very lumpy from quarter-to-quarter. Navigating these ups and downs is familiar territory for Geospace. And despite the volatility, we are encouraged by industry reports of major energy companies investing more broadly in conventional seismic exploration and 40 time lapse monitoring. Those endeavors are known to benefit from our latest technology offerings such as our Mariner and our Aquanaut ocean bottom nodes.

This leads us to anticipate healthy utilization of our ocean bottom node rental fleet during the second half of the fiscal year. The first quarter reflected a modest decrease in revenue from our adjacent markets segment compared to last year. We believe that reduction is the result of customers working through inventory purchases made earlier in quarters before to stay ahead of their supply chain concerns. Despite the slightly lower revenue, we expect continued growth overall from this segment to remain strong into the foreseeable future. We believe our strategy of cultivating and delivering stable, predictable and profitable revenue from this segment is working. Our confidence for continued improvement is supported by an ever-expanding commercial demand for smart infrastructure solutions, both domestically and abroad.

This is further evidenced by the recent signing of a modest contract in the international market for our Aquanaut smart water valves, which should begin contributing to revenue in the second quarter. Revenue in the first quarter from our emerging markets segment was generated through existing contracts between Aquanaut subsidiary and the U.S. federal government. Note that the opportunity for future contracts with the Customs and Border Protection Agency is solid, but those government decisions are not expected until later in the calendar year. Progress toward meaningful revenue contributions from this segment has developed more slowly than desired. However, quoting inquiries from energy companies for carbon capture monitoring projects as well as other new and unique applications for Aquanaut’s analytical methods are increasing.

But despite high public interest in carbon capture utilization and storage, these projects seem to move slowly as country requirements and industry commitments still evolve. With that, I’ll turn the call over to Robert to give a little bit more financial detail on our first quarter of 2024.

Robert Curda: Thanks, Rick. Good morning. Before I begin, I’d like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday’s press release for our first quarter ended December 31, 2023, we reported revenue of $15 million compared to last year’s revenue of $31.1 million. Net income for the quarter was $12.7 million or $0.94 per diluted share compared to the first quarter of last year’s net loss of $100,000 or $0.01 per diluted share. Now our oil and gas product revenue. Traditional product revenue for the 3-month period ending December 31, 2023, was $1.8 million compared to revenue of $2.8 million last year. The decrease in revenue is due to lower demand for seismic sensors.

Our wireless product revenue for the quarter was $38.1 million, an increase of 121% compared to revenue of $17.2 million last year. The increase in revenue is due to the sale of our newest ocean bottom node called the Mariner. The increased revenue is partially offset by lower utilization of our OBX rental fleet. We do not expect this level of revenue to continue in the remaining quarters of this fiscal year. Moving to the adjacent markets product segment. Our industrial product revenue for the first quarter was $6.4 million, a decrease of 19% compared to last year’s revenue of $7.9 million. The decrease in revenue was due to lower demand for our smart water meter connectors and cables. Imaging product revenue for the 3 months ending December 31, 2023, was $3.4 million, an increase of 17% when compared to $2.9 million from the same prior year period.

The increase in revenue is due to higher demand for our thermal film products and imaging equipment. Revenue from our emerging market segments for the first quarter of fiscal year 2024 is $234,000 compared to $93,000 from the first quarter of fiscal year 2023. The emerging markets segment has a backlog of approximately $1.8 million, which is expected to be recognized during the current first fiscal year. Our consolidated gross profit for the first quarter of the fiscal year 2024 was $22.8 million compared to $10.5 million last year. The increase in gross profit is a result of the gross profit from the sale of the Mariner Ocean bottom nodes, which was partially offset by lower utilization of our OBX rental fleet and lower demand for our water meter cables and connectors.

The first quarter’s operating expenses were $9.4 million. This is a decrease of 13% when compared to $10.8 million for the first 3 months of fiscal year 2023. The decrease is due primarily to lower personnel costs attributable to our workforce reduction in the first quarter of the prior fiscal year. Fiscal year 2024 cash investments into our property, plant and equipment was $779,000, and cash investments into our rental fleet is $2.6 million. We expect fiscal year 2024 capital investments into our rental fleet to be $5 million. Investments in property, plant and equipment could be as much as $2 million for the fiscal year. Our balance sheet at the end of the first quarter reflected $34 million of cash and short-term investments and we maintained additional borrowing availability of $15 million under our bank credit agreement.

Thus, as of December 31, 2023, the company’s total liquidity was $49 million. We currently have no debt and own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. That concludes my discussion, and I’ll turn the call back to Rick.

Rick Wheeler: Thank you, Robert. Our first quarter represents a great start to the new fiscal year. And although gaps in rental contracts for ocean bottom nodes will likely cause unevenness in our oil and gas markets revenue in the near term we believe greater demand for these products will rebound later this fiscal year. Meanwhile, we intend to continue nurturing the growth of our adjacent and emerging markets as well as build on our successes and operational efficiencies. Combining our leadership in technology innovation with our strong balance sheet and financial discipline, we believe we have the necessary tools to meet these challenges. This concludes our prepared remarks, and I’ll now turn the call back over to Natalie for any questions from our listeners.

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Q&A Session

Operator: [Operator Instructions] Thank you. Our first question comes from Bill Dezellem from Tieton Capital.

Bill Dezellem: Then I’ll begin.

Operator: Please go ahead.

Bill Dezellem: Thank you. So British Petroleum is doing a 4D survey in the Azeri field that was recently announced. How does that relate to Geospace? And potentially, how does that relate to the comments that you made in the press release relative to 4D?

Rick Wheeler: Well, we did not reveal any of the information with respect to the purchase of this Mariner system, but certainly, we are aware of these opportunities that are manifesting out there in both 4D monitoring and in greenfield exploration as it relates to the ocean bottom type systems. So that plays well for us, Bill.

Bill Dezellem: And so is it your – well, I guess I’ll ask relative to that Mariner system sale, did that go to an oil company or did that go to a contractor?

Rick Wheeler: No, that went to a contractor.

Bill Dezellem: And are you anticipating that it will be used in traditional seismic or some of this 4D activity?

Rick Wheeler: I suspect it will be used in both as a matter of fact.

Bill Dezellem: Okay. Thank you. And then in the press release, you also referenced that quoting activity was picking up in the energy arena, would you talk further to that point, please?

Rick Wheeler: Yes. It’s related still to the emphasis that they are putting on to their marine production facilities and their marine reservoirs offshore. We don’t see just a whole lot progressing in the land environment as it relates to generating commerce for us. Some of that may occur later in the year because if you think about it, all of the land equipment that’s out there, a good portion of it has reached end of life, it still functioning, but there is new technology out there. So most of these quotes that we are seeing are with respect to new ocean bottom surveys, where the OBX and/or the Mariner would be the items of interest that would be performing those.

Bill Dezellem: And that’s both 4D and traditional 3D then?

Rick Wheeler: That’s exactly right. I mean, the greenfield exploration still seems to be highly oriented towards determining if there are reservoirs nearby some of the existing production facilities they already have without having to construct more. There are some that are greener fields than others, I guess, where there is some of that infrastructure would have to be built out. But it is going to be for both 4D and new exploration.

Bill Dezellem: And taking this a step further, I think that Schlumberger had indicated that the final investment decisions in the deepwater, shallow water for the next couple of years are going to be massive. But is that really what you are talking about here is basically the same thing that Schlumberger is saying. It’s just that you’re benefiting on the quoting activity.

Rick Wheeler: Yes. I think it’s the same industry reports that we read and are privy to with respect to how those activities are going and the needle is pointing in the direction of more capital investment, which is required for this sort of exploration activity and seismic projects to go forward.

Bill Dezellem: And then I’d like to jump, if I could, to Aquanaut and then after that, the quantum. So quantity you referenced an order, and it’s going outside of the U.S., if we heard correctly, would you please expand on your comments there?

Rick Wheeler: Yes. This is an order that has an international destination outside of the U.S. We – it’s a modest order as that turns out and not one that we necessarily felt was warranting any sort of independent release of its own with respect to news, but it’s certainly worth mentioning. And it’s sort of the ramp up, the first fruits of that sort of product, and we’re really anxious to see that get out.

Bill Dezellem: And then relative to Quantum, there’s, I think, $1.8 million in backlog was referenced. What is that backlog from? Are these orders that you’ve already talked about?

Rick Wheeler: Yes. These are like the – we have the DARPA contract, which we did announce and some other activities going on and potentially even some follow-up work, we will say, with some of the border patrol things.

Bill Dezellem: And then relative to the border patrol, there is a reference in the release to the later in this calendar year. Is that tied to a new budget? Is that tied to an evaluation period? What’s leading to the view that later in the calendar year is the right time to be thinking about that?

Rick Wheeler: Right. No, this comes from a publication that the government provided not that long ago, but with respect to what the intentions were of the government, is it the government accountability office that presented that pros. And it was their indication that the systems that are currently in place, ours being a premier example of that are going through an examination and that additional decisions on new deployments would not come until sometime late in 2024. So that’s really where that comes from.

Bill Dezellem: Understood. And then I think that the 10-K references that Quantum revenues are anticipated to increase this year, would you kind of bring that comment in and tie this all together for us?

Rick Wheeler: Yes. I think first off, completion of these existing contracts are going to be contributors to that. But I did mention that there are some new applications of the analytics that Quantum has developed in some other areas. And it certainly looks like those are going to manifest some additional revenues as well. Carbon capture is taking a while. There’s definite interest. We have multiple discussions with those involved with that. But it doesn’t – it seems to move at a snail’s pace in many respects.

Bill Dezellem: Okay. Rick, I thought that was going to be my last question, but you hooked me with your reference to other areas in energy. Would you please talk a little bit more about that?