Geospace Technologies - Earnings Call - Q1 2025

Executive Summary

• Profitability maintained despite tough comps: Revenue $37.22M and diluted EPS $0.65, down YoY vs the Mariner-driven prior-year quarter, but gross and EBIT margins improved sequentially on product mix and cost control.
• Smart Water strength offsets Energy variability: Smart Water revenue rose 72% YoY to $7.29M on Hydroconn demand; Energy Solutions delivered a $17M OBX sale but fell YoY given a $30M Mariner sale in the prior year and lower OBX rental utilization.
• Balance sheet/liquidity solid; buyback completed: Cash & ST investments $22.07M, undrawn $12M revolver; $7M repurchase program completed early in Q2 FY25 (716k shares at $9.72).
• No formal guidance; near-term catalysts: Additional node sales/rentals (including a $7.6M Mariner award slated for Q3), potential U.S. Border Patrol (Quantum) decision, and continued Smart Water uptake could drive stock reaction.

What Went Well and What Went Wrong

• What Went Well

  • Smart Water outperformed: revenue +72% YoY to $7.29M on Hydroconn demand; CEO: “We see significant future potential in the municipal and multi-family markets… and intend to grow both organically and through potential acquisition.”.
  • Sequential margin improvement: Gross profit $20.15M on $37.22M revenue (gross margin ~54% vs ~45% in Q4 FY24), with operating income $7.84M (EBIT margin ~21% vs ~3% in Q4).
  • Capital allocation and liquidity: Completed $7M buyback; liquidity ~$34M (cash+ST investments plus $12M revolver) and debt-free balance sheet.

• What Went Wrong

  • Energy Solutions down YoY: segment revenue $24.28M vs $39.91M due to prior-year $30M Mariner sale comp and lower OBX rental fleet utilization; Q1 included $17M OBX sale.
  • Higher OpEx: Operating expenses rose to $12.31M (+31% YoY) on personnel, agent commissions (Smart Water growth), and R&D project spend.
  • Government/security revenue timing remains uncertain: Management cited ongoing monitoring of border security opportunities and Quantum/CBP testing, but no near-term revenue commitments; CCUS discussions ongoing with no revenue today.

Transcript

Operator (participant)

Welcome to the Geospace Technologies First Quarter 2025 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rich Kelley, President and Chief Executive Officer. He is joined by Mr. Robert Curda, the company's Chief Financial Officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, press star zero.

It is now my pleasure to turn the floor over to Rich Kelley. Sir, you may begin.

Rich Kelley (President and CEO)

Good morning and welcome to Geospace Technologies Conference Call for the First Quarter of Fiscal Year 2025. As stated, I am Rich Kelley, the company's Chief Executive Officer and President. I am joined by Robert Curda, the company's Chief Financial Officer. In our prepared remarks, I will first provide an overview of the first quarter, and Robert will then follow up with more in-depth commentary on our financial performance, as well as an overview of our recast financials under our new segment realignment. I will then give some final comments before opening the line for questions. Today's commentary on markets, revenue, planned operations, and capital expenditures may be 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, which I invite everyone to browse through and learn more about Geospace, our subsidiaries, and our products. Note that today's recorded information is time-sensitive and may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released our financial results for the period ended December 31, 2024, our first fiscal quarter for 2025. We are pleased to begin the fiscal year with a strong quarter, yielding net income for our shareholders.

For the first quarter, we reported revenue of $37.2 million and net income of $8.4 million, or $0.65 per diluted share. These results show that our focus on driving profitability through strategic decisions continues to generate positive financial performance. This earnings release marks the first time we are reporting financial information since the announcement of our business segment realignment in September of 2024. We updated and reorganized our business segments to better reflect the areas where our technology-driven solutions should produce improved results. As a reminder, our new business segments are Smart Water, Energy Solutions, and Intelligent Industrial. In our Smart Water segment, we reported revenue of $7.3 million for the quarter, an increase from a year-ago period. This is a positive indicator, given that historically, the first quarter of fiscal year shows lesser revenue than other quarters due to both seasonality and government budget cycles.

We see significant potential in the municipal and multifamily marketplace for our water management solutions. We intend to grow both organically and through potential acquisition to realize our long-term vision for this segment. In our Energy Solutions segment, we reported revenue of $24.3 million for the quarter. It is important to view this decrease in context to the same period a year ago. Our quarter of fiscal year 2024 included a large $30 million sale of our Mariner Shallow Water Ocean Bottom nodes. This quarter, we were pleased to secure a $17 million OBX Marine Wireless product sale. Our Intelligent Industrial segment revenue totaled $5.6 million for the quarter. This compared with $5.8 million from the same period a year ago, a decrease of 4%, which we attribute to lower demand in the quarter for our imaging products.

I will now turn the call over to Robert to provide more financial detail on our first quarter performance.

Robert Curda (Executive VP and CFO)

Thanks, Rich. 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 31st, 2024, we reported revenue of $37.2 million compared to last year's revenue of $50 million. Net income for the quarter was $8.4 million, or $0.65 per diluted share, compared to the first quarter of last year's net income of $12.7 million, or $0.94 per diluted share. Revenue from our Smart Water segment totaled $7.3 million for the three months ended December 31st, 2024. This compares to $4.2 million in revenue for the same year-ago period, an increase of 72%. The increase in revenue is due to higher demand for the company's Hydrocon cable and connector products.

The Energy Solution segment revenue totaled $24.3 million for the three months ended December 31st, 2024. This compares to $39.9 million in revenue for the first quarter of fiscal year 2024, a decrease of 39%. Revenue for the three months ended December 31st, 2024, included a $17 million OBX Marine Wireless product sale from our rental fleet. However, in comparison, revenue for the first quarter of the prior year included a $30 million sale of our Mariner Shallow Water Ocean Bottom nodes. Additionally, the reduction in revenue for the first quarter of fiscal year 2025 was also due to lower utilization of the OBX rental fleet. Revenue from our Intelligent Industrial segment totaled $5.6 million for the three-month period ended December 31st, 2024. This compares with $5.8 million from the same year-ago period, a decrease of 4%.

The decrease in revenue for the three months ended December 31st, 2024, was primarily due to lower demand for our imaging products. This decrease was partially offset by an increase in demand for our industrial sensor products. The first quarter of fiscal year 2025 operating expenses were $12.3 million. This is an increase of 31% compared to $9.4 million for the first three months of fiscal year 2024. The increase is due to higher personnel costs, related costs, including wages, benefits, severance, recruiting fees, and bonus. Additionally, during our first quarter, we experienced higher agent commissions due to increased revenue from our Smart Water segment and higher R&D-related project expenditures. Fiscal year 2025 cash investments into property, plant, and equipment are $3.2 million, and cash investments into our rental fleet is $400,000. We expect fiscal year 2025 investments in property, plant, and equipment to be as much as $6 million.

Our balance sheet at the end of the first quarter remains strong and debt-free, with $22 million of cash and short-term investments and trade and financing receivables of $41 million. Additionally, we have borrowing availability of $12 million under our bank credit agreement. Thus, as of December 31st, our total liquidity was $34 million. Lastly, we own numerous real estate holdings in Houston and around the world that are free and clear without any leverage. That concludes my discussion, and I'll turn the call back to Rich.

Rich Kelley (President and CEO)

Thank you, Robert. I am pleased to announce the company completed its $7 million stock repurchase program early in the second quarter of fiscal year 2025. Through that program, the company purchased roughly 716,000 shares at an average price of $9.72 per share, and that program is now considered complete. As a final note, I'd like to thank my team for the support they have given me and the company during my first quarter as CEO. Our long-term engineering expertise, manufacturing capabilities, and continued focus on our clients is continuing to drive profitable growth for our valued shareholders in each of our new business segments. This concludes our prepared commentary, and I'll now turn the call back to the moderator for any questions from our listeners.

Operator (participant)

At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. As a reminder, if you'd like to ask a question, please press star one. We will go first to Morris Schimmel. Your line is open. Please go ahead.

Yes. Congratulations on your—I'm wondering if you could comment on what is happening with Homeland Security and if there's any activity that could significantly impact the company?

Rich Kelley (President and CEO)

Thank you, Morris, for the question. I mean, we are monitoring this new administration, trying to understand the direction they're taking it. Obviously, there's a lot of interest in immigration, border protection. As we've said in prior calls, we have a project going on with Customs and Border Protection. We don't have any guidance to provide right now on that, but we are continuing to monitor that and keep our ear to the ground, hoping for opportunities.

One additional thought: is there anything happening on the front with carbon capture that is in the foreseeable future?

Regarding carbon capture, I mean, we continue to talk to our partners, our customers, understand what their needs are. That's, again, an industry that's in transition, really trying to understand what the revenue opportunities are. We've had lots of discussions, but nothing that's actually generating revenue for us today.

Thank you.

Operator (participant)

We'll take our next question from Matt Dhane with Tieton Capital Management. Please go ahead.

Matt Dhane (Portfolio Manager and Principal)

Great. That's Tieton Capital Management. I want to delve into the R&D projects for specific client projects, I guess, that you referenced earlier on the call. What more can you reference around that, or what more can you tell us around that? Yeah, I'm just curious to hear a little bit more about that, if you could.

Rich Kelley (President and CEO)

Good morning, Matt. Thanks for the question. Yeah. Some of our projects can be fairly capital-intensive and have long lead times, depending on the size and scope of the project, require R&D investment before we can actually capitalize that or get a return on investment. We have got a couple of opportunities that we have spent some additional R&D resources on. Also, with the transition to our new market segments, we are looking at opportunities to make investments in R&D projects and trying to find future revenue streams. We have made some additional investments in R&D in the recent quarter.

Matt Dhane (Portfolio Manager and Principal)

Is there a specific segment that most of these R&D dollars have been directed to, or anything there?

Rich Kelley (President and CEO)

Nothing specific that we can provide guidance for today.

Matt Dhane (Portfolio Manager and Principal)

I also want to talk about your Smart Water momentum. If you could add some color around both Aquana and Hydrocon, what you're seeing there, how we should be thinking about that going forward. You folks have been doing great here and just wanted to get a little bit more color on future expectations here?

Rich Kelley (President and CEO)

Great question. I'll start with Hydrocon. Hydrocon's been a product that was organically developed by Geospace a number of years ago. We continue to see year-on-year improvement in market uptake, interest. As municipalities continue to adapt and adopt to automated meter reading and automated meter instrumentation, a continuing need to upgrade their meters, which use our connector as part of that. Again, we had a great first quarter, unexpected, just because the market, the continued uptake in the market of the product offering. We expect to see that same sort of interest and uptake in business in future quarters. Same is true of Aquana. We had our first commercial deliveries last year. Great feedback from the customers. We were able to capitalize on that by taking that to our other potential customers, trying to shorten the pipeline on that.

We've seen an order increase for our product offerings there. We expect that to grow in about the same range. We're very excited about both of those. The other thing that's exciting about Aquana is we mentioned that we had our first international sale last year. The customer has been very excited about that, and we're in early discussions about future projects, additional projects overseas as well. We expect opportunities both domestically and internationally for that product offering. We're very excited about it.

Matt Dhane (Portfolio Manager and Principal)

Great. Thanks for the help.

Operator (participant)

We'll go next to investor John Elliott. Your line is open. Please go ahead.

Good morning, gentlemen.

Rich Kelley (President and CEO)

Morning, John.

With the new administration, is there some optimism that Quantum will benefit from border security and other developments?

That is a good question. I mean, clearly, as I said earlier, focus on border security, immigration control, drug and trafficking enforcement. We really think there's opportunities there. Now, there's been no clear indicators of how that money is going to be dispersed. We are monitoring that closely. We've had our solution on the border for a couple of years now. As we stated earlier, we expect Customs and Border Protection to make some determination on that solution in the coming months. I think overall, we're positive. Again, until they actually determine how they want to spend the money and that money's allocated, we're sort of at the mercy of the federal government.

I believe in the past, the focus has always been on the Mexican border, but has there been any discussion about deploying the Quantum technology along the Canadian border?

Not specific to that, but we've obviously had internal discussions about other types of borders. You think about other countries around the world that are concerned with border security. I mean, it's a solution that lends itself very well to those sort of applications. We are trying to figure out a way to monetize that and market that in other spaces, other areas of the world.

What about PRM? Have there been any developments with it?

Yes and no. I mean, there's still a couple of reservoirs internationally that lend itself to PRM technology. We obviously have conversations with the companies that would consider putting PRM in. There's obviously the ongoing competition with ocean bottom nodes. It really comes down to a financial decision with regards to reservoir managers. As it stands right now, there's not a hard drive or any pressing opportunities for PRM.

It's safe to say you wouldn't expect a PRM tender in 2025?

You just never know what might develop. It's going to be interesting to see the dynamics in the energy field with this administration and how that impacts the global energy industry. If you look at that with the long-term supply and demand curves for oil and gas and how that's going to play out with these reservoirs.

I appreciate you taking my questions.

Thank you, John. You have a good day.

Operator (participant)

As a reminder, ladies and gentlemen, if you'd like to ask a question today, please press star one.

Rich Kelley (President and CEO)

If there's no more questions, we can end the call.

Operator (participant)

I'm showing no additional questions at this time.

Rich Kelley (President and CEO)

Thank you, everybody. Thank you, Angela. Everyone, have a good day.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may disconnect at any time.