GEOS - NASDAQ

Welcome to the Geospace Technologies First Quarter 2026 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. [Operator Instructions] It is now my pleasure to turn the floor over to Rich Kelley. Sir, you may begin.

Thank you, Katie. Good morning, and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2026. 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 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 financials. 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, our first quarter of fiscal year 2026. For the 3 months ended December 31, we reported revenue of $25.6 million with a net loss of $9.8 million. This past year was not without its challenges, many of which are reflected in our first quarter performance. We continue to operate in an environment shaped by economic uncertainty. Inflation drove up material costs faster than we could adjust pricing, tariffs impacted margins and supply chain challenges forced us to carry higher inventory costs. With that said, we remain committed to what we can control: serving our customers; running the business efficiently; and making smart long-term decisions that benefit our clients, our shareholders and our employees. Overall, I am encouraged by how our organization performed in this difficult operating environment. We continue to invest wisely in our future, advance our strategic initiatives and leverage innovative technology to further diversify our business. These efforts position us well to drive sustainable growth and long-term value for our shareholders. The Smart Water segment continues to operate in a stable yet increasingly demanding environment. As is typical of the first quarter, revenue was reduced due to seasonal deployment schedules and the timing of municipal government budget cycles. However, long-term demand for water infrastructure, treatment and management services remains strong, driven by population growth, urbanization, aging infrastructure and heightened regulatory and environmental standards. We are expanding the geographic reach of our sales and marketing operations where these pressure points are most acute, where demand criteria exists and our technology offers significant added value. At the same time, the industry faces challenges, including rising operating costs, climate-related variability, evolving compliance requirements and the need for sustained capital investment. These dynamics reinforce the importance of prudent planning, operational discipline and long-term asset stewardship. The environment surrounding our Energy Solutions segment is defined by uncertainty and change. The global energy demand remains resilient, reflecting the essential role that oil and natural gas play in supporting economic activity, industrial production and energy security. We were encouraged by the award of the large Permanent Reservoir Monitoring contract in fiscal year 2025, which reinforces the strength of our capabilities and marketing position. In addition, our Pioneer land node solution continues to drive interest in the market. We have completed several sales and anticipate additional sales later this year. At the same time, the sector faces ongoing volatility driven by geopolitical events, inflationary pressures, regulatory developments and evolving expectations from investors and policymakers. While commodity prices have fluctuated over the past year, these movements reinforce the importance of maintaining a disciplined approach rather than reacting to short-term market signals. The long-term fundamentals of our industry remain intact, but success requires caution, adaptability and operational excellence. Our Intelligent Industrial segment continues to generate steady predictable revenue from our industrial sensors, imaging products and contract manufacturing solutions. As previously announced, we strengthened our security portfolio with the acquisition of GeoVox Security, the exclusive licensee of a human heartbeat detection algorithm developed by Oak Ridge National Labs. Since the acquisition, customer interest and engagement has exceeded Geovox's historical levels, driven largely by the reduced product form factor and the introduction of a monthly subscription model, which simplifies procurement by enabling purchase orders under operating budgets rather than capital expenditures. Combined with the consistent revenue from our long-established industrial product lines, this recurring revenue model positions the Intelligent Industrial segment for growth in 2026 and beyond. Over the past year, we prioritized safe and reliable operations across our company. We manage costs carefully, maintain capital discipline and continue to strengthen our strategic position. Our investment decisions were guided by conservative assumptions and rigorous return criteria, ensuring that capital was deployed where it could generate durable value. Looking ahead, we expect continued uncertainty in global markets. While challenges remain, we believe the company is well positioned due to the quality of our portfolio, the experience and professionalism of our workforce, and our conservative financial framework. We will continue to evaluate opportunities carefully, avoid speculative investments and remain guided by returns, risk management and long-term shareholder value. I will now turn the call over to Robert to provide more detail of our financial performance.

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 31, 2025, we reported revenue of $25.6 million compared to last year's revenue of $37.2 million. Net loss for the quarter was $9.8 million or $0.76 per diluted share compared to the first quarter of last year's net income of $8.4 million or $0.65 per diluted share. First quarter revenue from the company's Smart Water segment totaled $5.8 million for the 3 months ended December 31, 2025. This compares to $7.3 million in revenue for the same period a year ago, a decrease of 21%. The decrease in revenue is due to lower demand for the company's Hydroconn cable and connector products. The Energy Solutions segment revenue totaled $14.6 million for the 3 months ended December 31, 2025. This compares to $24.3 million in revenue for the same period a year ago, a decrease of 40%. Revenue for the 3 months ended December 31, 2025, included $10.6 million of Pioneer and related equipment for an order to Dawson Geophysical announced in August of 2025. However, in comparison, revenue for the first quarter of the prior year included a $17 million OBX marine wireless product sale. Additionally, the reduction in revenue for the first quarter of fiscal year 2026 was due to lower utilization of the OBX rental fleet. Revenue for the company's Intelligent Industrial segment totaled $5.1 million for the 3-month period ended December 31, 2025. This is compared with $5.6 million for the same year ago period, a decrease of 8%. The decrease in revenue for the 3 months ended December 31, 2025, was primarily due to lower demand for industrial sensor products. This decrease was partially offset by an increase in demand for our contract manufacturing services. As of December 31, 2025, the company had $10 million in cash and cash equivalents. Additionally, the company's working capital was $52.2 million, which includes $25.4 million of trade accounts and financing receivables as of December 31. The company continues to own unencumbered property and real estate in both domestic and international locations. In fiscal year 2026, management anticipates a capital expenditure budget of $5 million and does not anticipate additions to the rental fleet given current market conditions. This concludes my discussion, and I'll turn the call back to Rich.

Thank you, Robert. This concludes our prepared commentary, and I will now turn the call back to the moderator for any questions from our listeners.

[Operator Instructions] Our first question will come from [ Martin Lorentzon ], private investor.

Can you talk about the strategic importance of the heartbeat installed base? Specifically, when should we expect a meaningful portion of those contracts to come up for renewal? And if that installed base were fully subscription-based today, which I realize it's not, but just hypothetically posing, what would be the implied annual recurring revenue for us?

Thanks for the question, Martin. So I'll break it into two pieces. The first one is that we have reached out to the historical installed base. The prior system was designed to last for many, many years. However, that equipment is aging out. And there is obviously interest in replacing their legacy equipment with the new subscription model. However, that base is pretty diverse and it's international in nature. We've not really run the numbers if we did 100% replacement, knowing that really wasn't possible. So I don't have a good answer for you. But that clearly would be -- there's several hundred installed bases, so you can sort of imply what that might be. That's a good question.

[Operator Instructions] Our next question will come from Bill Dezellem with Tieton Capital.

I have a group of questions. First of all, on the government's -- the U.S. government's website, there is a reference to Homeland Security doing an RFP for persistent surveillance detection system for 15 miles. Did you all bid on that?

Bill, thanks for the question. So even though that's out there, if you also look, they actually did a direct award. We followed up with that. And this administration in order to expedite contracts has taken the mindset to do direct awards where applicable. And so in the areas of interest, they did direct awards. We were not direct awarded in relation to that. So there is no expectation of a further RFP.

Okay. And then shifting to Petrobras and that contract win. Would you discuss the time line for the deployment of that and how you anticipate revenues will be reflected over time?

Do you want to speak to the revenue recognition?

The revenue recognition will be an overtime model, which will be very similar in nature to percentage completion. So as we accumulate cost against what our total anticipated cost, we'll recognize revenue proportionately.

And we anticipate recognizing revenue for the first time in Q3.

Yes, beginning in Q3.

And that project is slated to -- as you remember, Bill, in prior discussions, the goods contract, which is our portion of that, is expected to be completed in Q1 of 2027. So we'll have revenue recognition through that. And then on the actual installation, that's the consortium that we're partnered with in Brazil, and there'll be a small other portion of revenue recognition later in 2027.

And so as we shift into Q3, what is your anticipated revenue level that you would experience in that quarter and then in Q4?

We're not really speaking in actuals at this time, Bill. But if you can imagine, I mean, the portion of the contract, if you divided it over the next 3 quarters, roughly, it will be slightly lower in the first quarter as we build up production capacity, full capacity in Q4 going into Q1 and then downgrading at the end of Q1. So you can think about the revenue curve being kind of a curve versus a fixed number.

Got it. And literally, you do think it will be over 3 quarters that this will be recognized?

The expectation is that we ship this equipment out in Q1. So yes, I mean, the goods portion should be completed in Q1, possibly depending on the customer's final schedule in Q2 of 2027.

We'll continue to recognize revenue on the services contract as services are performed...

Afterwards.

Afterwards, yes.

And Robert, roughly how large will that be?

The total value of the contract, which we've announced in the past is in the $90-ish million range.

With the vast majority...

We've never announced what the difference is between the goods and the services, Bill.

The services is a much more insignificant portion in comparison to the goods.

Okay. That is helpful. And then let's shift, if we could, to GeoVox. Would you provide a detailed update on the deployments that you have experienced to date and on the pipeline of the -- on essentially the pipeline?

So we've just started shipping the units this quarter. So we'll have revenue recognition in this quarter, which we'll announce at the next call, the next release. We anticipate a couple of hundred units in this year and then that building over the subsequent periods. There is a tremendous amount of interest, both domestically and internationally in that.

And so if you think about the pipeline, what's the magnitude or what's the size of it? You mentioned you have a couple of hundred units that will be deployed, it sounds like, starting next quarter?

The first deliveries are this quarter, ramping up into next quarter. As far as the pipe, I mean, we anticipate -- we've talked about this in the past. I mean, the overall market size is in the thousands, it's not tens of thousands. And so we anticipate over the next couple of years, reaching a saturable -- close to saturable level.

And is the market continuing to be prisons and jails, essentially incarceration facilities?

Short term, yes. And then, of course, border crossings, and then we are trying to expand into secured sites like nuclear power facilities, power transfer stations where you want to protect the egress and ingress on the site.

Yes, that's really the new market we'll be moving towards as we develop that product line.

And relative to the border, where does the Border Patrol's interest lie in this product? And how large could that be?

They're definitely interested in the technology. I mean they utilize a couple of different technologies today. They're obviously looking at ways to make it more efficient and effective. As we've said in the past, the number of trucks that are checked coming across the border are in the single percentiles. They would obviously like to increase that. And they do like the efficiency as far as the timeliness of the system. There are 300-ish border crossing points in the U.S. alone. So if you talk about multiple units on each site to build -- check multiple trucks, it could be 1,000-plus units for CBP.

That's helpful. And then two additional questions. You did increase the contingent consideration on one business here this quarter by, I think, $196,000. Which business was that?

It's related to Heartbeat Detector.

Okay. And then lastly, what's the prospects for the rental fleet seeing activity levels pick up a little more on the deployment front?

So overall, the ocean bottom node business as of last year, expected this year is still to be flattish. We have seen a number of requests for quotations going into the summer season, but none of those are developed into orders yet. So the volume has increased as far as requesting information, but we've not seen any actual impact on orders yet.

[Operator Instructions] We do have a follow-up from Martin Lorentzon.

Just on PRM, could you disclose the number of parties you have ongoing discussions with, excluding Petrobras?

No, due to confidentiality, we're not able to discuss which parties. There's a couple of other companies we're talking to, but we're not allowed to disclose those discussions at this time.

And just a number of those? Is it one additional party? Or is it two or three, without going into...

It's multiple.

I would say it's multiple, Martin.

At this time, this concludes our question-and-answer session. I'd now like to turn the meeting back over to management for any final or closing remarks.

Thank you, Katie, and thanks to all of you who joined our call today. We look forward to speaking with you again on our conference call for the second quarter of fiscal year 2026. Thank you, and have a good day.