Geospace Technologies - Q3 2023

Transcript

Operator (participant)

Good day, and welcome to the Geospace Technologies third quarter 2023 earnings conference call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by 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, please press star zero.

It is now my pleasure to turn the call over to Rick Wheeler. Sir, you may begin.

Rick Wheeler (President and CEO)

Thanks, Todd. Good morning, again, welcome to Geospace Technologies conference call for the third quarter of fiscal year 2023. I'm Rick Wheeler, the company's President and Chief Executive Officer, I'm joined by Robert Curda, the company's Chief Financial Officer. In our prepared remarks, I'll first provide an overview of the third quarter, Robert will provide more in-depth commentary on our financial performance. After final comments, we'll open the line for questions. Some of today's commentary on markets, revenue recognition, 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 our present awareness, actual outcomes are affected by uncertainties we cannot control or predict. 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 hope everyone will visit and browse to learn a little bit more about Geospace and our products. Note that the information recorded today 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 third quarter of fiscal year 2023, spanning April 1st through June 30th of 2023. It was very rewarding to see our third quarter performance further extend profitability for fiscal year 2023 by an additional $0.24 per share. In fact, total quarterly revenue of $32.7 million represents the highest figure recorded in nine years.

These results serve as strong evidence of the intended positive impact our long-standing diversification efforts and recent cost control measures were designed to achieve. Increased demand for our oil and gas segment products, combined with continued growth in our adjacent market segment, fueled both our third quarter and nine-month results. In the oil and gas segment, our rental fleet of OBX ocean bottom nodes is at near full utilization, reliably collecting high-resolution seismic data for a variety of clients around the globe. This growing demand and our innovations in this product domain were the impetus that led to the recently announced $20 million contract for the rental of our new Shallow Water Mariner nodal system. In today's market environment, we expect demand for our oil and gas segment products to remain strong well into fiscal year 2024, with an occasional up and down, typical of the industry.

On another high note, our adjacent market segment had a great quarter, setting yet another record with the highest quarterly revenue figure ever recorded. In the first nine months of fiscal year 2023, revenue from this segment was just short of last year's entire full total and beat all other prior fiscal year totals. Both the three-month and nine-month periods into June 30, 2023, grew by almost 36% compared to this time last year. The increase is driven largely by water meter cables and industrial sensor products. Also, during the quarter, our Aquana subsidiary announced the release of its Actuator Valve Serial, AVS, a remote shutoff valve designed to reduce the cost of operations and enhance the safety of employees for water utilities.

With the continued adoption and updates of smart water meter systems by domestic municipalities, we believe the long-term increase in demand for these adjacent market products will persist. Our emerging market segment contributed a small but strategic portion of revenue during the three and nine-month periods, primarily related to previously announced government and defense industry contracts. Further efforts are underway to secure additional contracts for perimeter security, as well as the pursuit of new energy transition applications such as carbon storage, geothermal, and mining. There may be more clarity on some of these endeavors in the near future. With that, I'll now turn the call over to Robert to give a little more financial detail on our third quarter performance.

Operator (participant)

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 third quarter, ended June 30, 2023, we reported revenue of $32.7 million, compared to last year's revenue of $20.7 million. The net income for the quarter was $3.2 million, or $0.24 per diluted share, compared to last year's net loss of $6.6 million, or $0.51 per diluted share. For the 9 months ended June 30, 2023, we reported revenue of $95.2 million, compared to revenue of $63.4 million last year.

Robert Curda (CFO)

Our net income for the nine-month period was $7.8 million, or $0.59 per diluted share, compared to last year's net loss of $14.8 million or $1.14 per diluted share. Our oil and gas market segment produced revenue of $17.7 million for the 3 months ended June 30, 2023. This compares with revenue of $9.5 million for the same period of the prior fiscal year, an increase of 86%. For the nine-month period, the segment contributed revenue of $56.2 million versus $34.3 million for the same period last year, an increase of 64%. The increase in revenue for the three-month and nine-month periods are due to higher utilization of our OBX rental fleet and higher demand for our marine equipment and seismic sensors.

The nine-month period increase in revenue is partially offset by a decrease in demand for our wireless exploration products. Our adjacent market segment revenue is as follows: Our industrial product revenue for the third quarter of fiscal year 2023 was $11.7 million, an increase of 56% over the third quarter of 2022. The industrial products' nine-month revenue is $29.3 million, an increase over the same period in 2022 of 58%. Both periods' revenue increases are due to higher sales of our water meter cable and connector products and higher demand for our industrial sensor products. Imaging product revenue for the third quarter was $3.2 million, compared to last year's revenue of $3.5 million.

The nine-month revenue for imaging products was $9.1 million versus $9.8 million compared to the same period in 2022. Finally, revenue for our emerging market segment for the third quarter was $109,000, compared to $135,000 for the same prior year period. The nine-month revenue for this segment for the fiscal year was $393,000, compared to $571,000 for the same period in 2022. Our emerging market segment continues to perform on contracts with DARPA, which was announced earlier this fiscal year, and other governmental agencies, or contractors.

Excluding non-cash decreases to the fair value of contingent earn-out liabilities reported in fiscal year 2022, our operating expenses modestly increased by $300,000 for the third quarter of 2023, and increased by $700,000 for the nine-month period. The increase in operating expenses for the three-month period is due to increased sales expense and research and development costs. The slight increase in operating expenses for the nine-month period is due to higher selling expenditures, slightly offset by lower research and development expense. Our nine-month net cash investments into our rental fleet is $6.2 million, and investments into property, plant, and equipment are $1.9 million. Our balance sheet at the end of the third quarter reflected $27.3 million of cash and cash equivalents.

We are also happy to report we entered into a new credit facility on July twenty-six, which will provide an additional $15 million in liquidity. Lastly, we own 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 return the call to Rick.

Rick Wheeler (President and CEO)

Thank you, Robert. In conclusion, Geospace delivered one of its most financially successful quarters in many years, with quarterly revenue outpacing that of the past nine years. Not only was positive net income achieved for the second consecutive quarter, but we also garnered over $27 million in cash and cash equivalents, further strengthening our balance sheet. We also boosted liquidity to approximately $42 million through a completed credit agreement that Robert mentioned with Woodforest National Bank. However, we don't anticipate a need for borrowing in the foreseeable future. Looking forward, we expect to see favorable performance throughout fiscal year 2023 and into 2024, even though lulls in some elements of our commerce may occur. This concludes our prepared commentary, and so I'll now turn the call back over to Todd for any questions from our listeners.

Operator (participant)

Thank you. The floor is now open for your questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we do ask that you po- while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you. We'll take our first question from Bill Donohue with Teton Capital.

Bill Donohue (Analyst)

Thank you. I'd like to start with the comments in the release relative to the OBX rental fleet being near full utilization, and yet we have the Mariner contract that's coming up. The question that I have is: Is that Mariner contract incremental to OBX being fully utilized, or are some of those OBX contracts ending, and this will be replacing the revenue from those contracts that are ending?

Rick Wheeler (President and CEO)

Hi, Bill. The Mariner contract is actually fulfilling additional demand for our Ocean Bottom Node rentals. The OBX-750s, which are the current rental inventory, are the ones that are currently in near full utilization. There will always be gaps here and there that occur, as these jobs don't necessarily tie one right into the other. The Mariner system is satisfying completely new demand.

Bill Donohue (Analyst)

... And it's, and that's, and OBX, that full utilization is, is maintaining. And, and, and as you said, that quasi full utilization. As a result, as we look forward, there would be revenue upside from the rental part of the business?

Rick Wheeler (President and CEO)

Yes, I think so.

Bill Donohue (Analyst)

Okay, congratulations. That's potentially really significant. Let me shift to Quantum, if I may. I don't recall much discussion in the past about geothermal and mining, and I believe the press release specifically called out near future opportunities for both geothermal and mining, along with carbon capture. Would you dive into to those areas in as much detail as you can, please?

Rick Wheeler (President and CEO)

Yeah, I can't go into too much detail. Those are new developments, you know, that are underway and have only appeared recently. You know, the Quantum team is hard at work, and you, you know the carbon capture issues that, you know, have been popping up here and there. Part of that consortium work up in Canada has yielded a lot of knowledge amongst the energy, energy transition areas of where SADAR can actually play a significant role above and beyond carbon capture. That being said, new discussions have started on some of these other topical areas, including geothermal and mining, and that team is busy trying to work out, you know, and work through those discussions to see what it leads to.

Again, we, we won't know more until the future because these, these are rather new developments.

Bill Donohue (Analyst)

If Mark is on the call, would he be able to walk us through, on the geothermal in particular, what the problem is that the system would be solving for?

Rick Wheeler (President and CEO)

Well, in general, it's all microseismic activity. All of these things, you know, and, and in geothermal, too, you're, you're trying to inject water and heat it up, and so you need to make sure you're, you're leaving all structures in place without, you know, interfering with their integrity. There's, you know, considerable things and some of the new mining techniques that are underway, where you similarly want to monitor this precise microseismic activity to know how things stand. That's essentially, you know, the problem statement that SADAR can solve.

Bill Donohue (Analyst)

Rick, kind of taking that one step further. The, the geothermal in particular, would be similar to a water reinjection well with oil and gas drilling, wanting to monitor what's happening when, when you're putting fluid back into the earth.

Rick Wheeler (President and CEO)

Certainly by analogy, I think.

Bill Donohue (Analyst)

Yes. Okay, great. Thank you, and congratulations on a really nice quarter.

Rick Wheeler (President and CEO)

Thanks, Will.

Robert Curda (CFO)

Thank you.

Rick Wheeler (President and CEO)

Happy birthday.

Bill Donohue (Analyst)

Thank you.

Operator (participant)

Once again, if you would like to ask a question at this time, please press star one. We'll take our first sorry, our, our next question from Michael Melby with Gate City Capital.

Michael Melby (Founder and Portfolio Manager)

Good morning, gentlemen, and congrats on the, the good results.

Rick Wheeler (President and CEO)

Hi, Mike.

Michael Melby (Founder and Portfolio Manager)

Hey, I was hoping you could expand on your industrial products segment or subsegment within adjacent markets. It had a really good quarter, and it's had a really good year, and you've described it as industrial center, industrial sensors and water meter cables. Can you give the audience a little more color on what's involved there, the size of the market, the growth potential? My take is the Quantum has not contributed much yet. I think it would be helpful for your investors to understand more about the potential here and what's led to the really good results so far this year.

Robert Curda (CFO)

Yeah. The largest portion of that growth is related to our water meter sensors, water meter cables and connectors. You know, that, that growth is what we're seeing as a result of, of the expansion of smart meters as a result of, smart city initiatives within municipalities. You know, as far as the size of that industry or that market, we expect it to continue to expand going forward and continue to grow. It, you know, we just think that, that, that smart city initiative is just gonna get larger and larger in the future. The seismic sensor portion of the business, this year has been a very good part, part, has seen some growth, but as far as that being a continual business, it's a little bit harder for us to measure and to determine.

Many times the orders we receive are, are something not, that we haven't necessarily planned for or expected.

Rick Wheeler (President and CEO)

I think in some cases, Mike, you know, the industrial sensors, see some lobs. You know, a lot of, a lot of our business is lumpy. I think you already know that. Certainly, they are subject to that, too. You know, these sensors are used in vibration monitoring of all sorts, including, you know, monitoring for equipment, vibration aspects, and also, for making semiconductors. There are some special pieces of equipment and shake tables and isolation tables that are very important in the fabrication of some of these, ICs and silicon-based products, and they're used there. In addition to that, and some government actually uses a vibration monitoring, I think that drove, you know, this maybe a little higher than we would necessarily expect in any given case.

That's exactly what Robert's alluding to with respect that sometimes they're just not planned in the forecast or understood until they happen. As it relates to, as it relates to Aquana, you know, Aquana has certainly had some sales, but most of these are pilot sales, so they're, you know, they're really a precursor to some of the larger orders that are anticipated from these municipalities.

You can well imagine, you know, when, when you've got thousands of meters that you as a municipality are managing, and you've got, you know, an innovative product that's, that's meant to and can seriously demonstrate savings with respect to their operational costs of having to roll trucks, send people out, as well as just give them a, a better safety footprint for those employees, there's going to be some pilot programs where they, you know, try these out and, and make sure that, you know, they're doing what is proposed. The majority of sales have been in these programs, and I believe are precursors to what will be larger orders.

Michael Melby (Founder and Portfolio Manager)

Got it. Within water meters, the cables and connectors business, is, is this something you have very high market share in, or, sole source in any OEM jobs?

Rick Wheeler (President and CEO)

I think we have a good market... Well, go ahead, if you wanna finish the second half of that question.

Michael Melby (Founder and Portfolio Manager)

Yeah, I, I guess, was trying to understand if the revenue gains you've seen are share increases or just benefiting from the overall growth of the market?

Rick Wheeler (President and CEO)

That's really hard to pinpoint, the latter half there. I mean, the fact is, that the smart city movement is absolutely in escalation mode. I, I don't think anyone that, that keeps up with that industry would say otherwise. You know, there are a lot of municipalities that are only now beginning to get into the smart meters to any large extent, and others have been into it for some time and deeply engaged. The entire industry in and of itself is growing, that adds, you know, to an increased demand. I think from a market share point of view, I think that we have a very big piece of the market share.

Keep in mind that there's competitive products out there, and in fact, some of our customers have some products, but they still buy ours because of the quality that they represent, and they're very cost effective for them. In reality, you know, as smart meters came out in the initial days, they had to have some way of trying to get them connected and hooked up. It's just that we've come up with much more innovative and reliable ways of doing that, and I think that does help us in the market share.

Michael Melby (Founder and Portfolio Manager)

How do you plan to bundle, as Aquana is rolled out? Is it an entirely separate product set? Given your strong share in the cable and connector business, is how you plan to roll out Aquana alongside that?

Rick Wheeler (President and CEO)

There, there is some overlap, but I believe that it's going to have its own independent movement. The fact is that, with the Aquana valves, and, you know, some of the other things we're working on, downstream, they do need to have, you know, electrical connectivity, to the radios and, and other components, you know, that are associated with smart metering and now these smart valves. They will use our connectors, certainly in that regard, and there is that overlap. It's also nice, too, because much of the customer base, for, for these products is going to, have significant overlap. But I think Aquana is gonna really demonstrate its, its own value, independent of the water meter cables and connectors.

Robert Curda (CFO)

Keep in mind also, Aquana has a valve that is, is positioned for the property management, multifamily property type, installation. You know, that's something different than the utility market.

Rick Wheeler (President and CEO)

That's true, too.

Michael Melby (Founder and Portfolio Manager)

Can you speak to how significant, Aquana's revenues could, could be within the segment?

Rick Wheeler (President and CEO)

Well, I mean, we, we wouldn't have bought them if we didn't think there was significant opportunity there. You know, really, it's a matter of just how fast we can, you know, increase and get that developed market going. That's what these pilot programs are intended to do. That's what all our sales efforts and marketing efforts are intended to do in the way of getting the word out. No, we don't give guidance in that regard and won't in this case either.

Michael Melby (Founder and Portfolio Manager)

The operating margins in the segment are, are attractive. Were there one-time things maybe you alluded to, that positively impacted that, or, can margins remain strong and, and get better from there?

Robert Curda (CFO)

I think part of what contributed to that, we recently had a price increase for water meter cables. I, you know, I think that's obviously gonna continue, but I don't think we're gonna see any significant growth in improvement in operating margins going forward.

Rick Wheeler (President and CEO)

Mike, you know we're a manufacturer, so I think the more that we put the factory into, into a working state, then we absorb our overhead, a lot more effectively. I think that had a lot to do with margin increases.

Robert Curda (CFO)

Yeah.

Rick Wheeler (President and CEO)

irrespective of other things, simply because the factory's being put to work at a higher level as it relates to those parts of the organization that make those, those cables.

Robert Curda (CFO)

That's absolutely correct.

Michael Melby (Founder and Portfolio Manager)

I think I missed today, I think the Mariner contract starts in fiscal Q1 of next year. How long does it run for?

Robert Curda (CFO)

It, it's a one-year contract.

Michael Melby (Founder and Portfolio Manager)

That's for the $20 million, and that includes the options you suggest in the press release, too?

Rick Wheeler (President and CEO)

Yeah, the $20 million includes the options that they have of extending that contract and even purchasing, the equipment.

Michael Melby (Founder and Portfolio Manager)

And I guess the options, if those are included, then, then it's one year in total as well?

Rick Wheeler (President and CEO)

I'm not sure I understand what you're saying.

Michael Melby (Founder and Portfolio Manager)

Should we think about the $20 million being over one year, or is it over more than one year?

Robert Curda (CFO)

The $20 million is over the minimum rental period of one year, yes.

Michael Melby (Founder and Portfolio Manager)

Thanks. In terms of CapEx or your investment in rental equipment, it's gone up, and I was wondering what we should expect in Q4 for the full fiscal year now?

Rick Wheeler (President and CEO)

Well, I mean, certainly the Mariner is gonna probably fall into next fiscal year.

Robert Curda (CFO)

No, part of our increase this year is related to components we had purchased in expectation there could be a Mariner contract. Now that we've signed that contract, we know we're gonna be assembling those components. We're actually assembling them now into units, and they will ultimately be part of our rental fleet.

Rick Wheeler (President and CEO)

Right.

Robert Curda (CFO)

That, that, you know, we kind of preemptively included some of that in, or what we've spent in cash so far into the rental fleet this quarter. We'll do some more next quarter and, and end it in the first quarter of next fiscal year.

Michael Melby (Founder and Portfolio Manager)

Yeah, I might have missed it in the guidance, but I think before you guided towards how much you plan to spend on CapEx in the fiscal year and then in rental equipment. Do you have an update there for, for investors?

Robert Curda (CFO)

No, I don't have an update right now. Sorry.

Michael Melby (Founder and Portfolio Manager)

Okay.

Rick Wheeler (President and CEO)

I think it's in line with what was already mentioned, though, so really no major changes in that regard.

Robert Curda (CFO)

Yeah.

Michael Melby (Founder and Portfolio Manager)

That's it for me. Thank you.

Rick Wheeler (President and CEO)

All right, thanks, Mike.

Operator (participant)

Thank you. We'll take our next question from Scott Bundy with Moors & Cabot.

Scott Bundy (Senior VP and Investments)

Good morning, guys. A couple quick questions. Rick, the AVS product that was introduced or released, is that a pilot program, or are we actually making sales?

Rick Wheeler (President and CEO)

The, the, the pilot programs are sales, but they're not large quantities, as it were. So, you know, I, it, I have to say it's a sale.

Scott Bundy (Senior VP and Investments)

Look-

Rick Wheeler (President and CEO)

You know, and it's a, and it's a new product that extends the markets they can serve.

Scott Bundy (Senior VP and Investments)

You answered the question. I'm confused in your press release with the statement, "The increase in the revenue is attributable in part to a recent decision to increase manufacturing capacity to meet demand for the water meter business." Were we constrained? Can you elaborate-

Rick Wheeler (President and CEO)

Yes, we were.

Scott Bundy (Senior VP and Investments)

on what's going on there?

Rick Wheeler (President and CEO)

No, we definitely were constrained. Our, our backlog was continuing to grow, and that was affecting our lead times, making it, harder for us to serve the needs of our customers, which were growing, in, in terms of quantities, in the orders. We definitely enhanced, our manufacturing capabilities there, adding new equipment, so that we could, increase that capacity. There's, there's likely gonna be more that we do, in that regard, even so.

Scott Bundy (Senior VP and Investments)

Lastly, Robert, roughly speaking, where, where are the loss carryforwards of the company?

Robert Curda (CFO)

They're significant. We've got, you know, many years of loss carryforwards that we have accrued, but they're fully reserved on the balance sheet. We won't, you know, we won't reverse those reserves or valuation allowances until we string many, many months of income together, and it starts to see that those losses are valuable to us.

Scott Bundy (Senior VP and Investments)

In your 10-K in the past, that number has exceeded $100 million, correct?

Robert Curda (CFO)

Yeah, I believe it has.

Scott Bundy (Senior VP and Investments)

Thanks, guys. Nice going.

Rick Wheeler (President and CEO)

Thanks, Scott.

Operator (participant)

Thank you once again. To ask a question, please press star one. We'll pause just a moment. At this time, we have no further questions in queue. I'll turn the call back to Rick Wheeler for any additional or closing remarks.

Rick Wheeler (President and CEO)

All right. Well, thank you, Todd. Many thanks to all of you who joined our call today. We'll look forward to speaking with you again on our conference call for the fourth quarter of fiscal year 2023, which will occur in November. Until then, thanks and goodbye.

Operator (participant)

Thank you. This does conclude today's Geospace Technologies third quarter 2023 earnings conference call. Please disconnect your line at this time, and have a wonderful day.