Welcome to the Geospace Technologies’ First Quarter 2014 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Tom McEntire, the company’s Vice President and 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.

(Operator Instructions) It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin..

Thank you, good morning and welcome to the Geospace Technologies’ conference call for the first quarter of fiscal year 2014 and thank you for listening in today. I am Rick Wheeler, the company’s President and Chief Executive Officer and with me is Tom McEntire, the company’s Vice President and Chief Financial Officer.

I will start off the prepared portion of the call with an overview of the quarter and Tom will follow that with an in-depth review and commentary of our financial performance. I’ll then close out the prepared portion of the call with some final remarks and we will open the line for questions.

Also, as a matter of convenience, we will make a replay of this conference call available in the Investor Relations section of our website at www.geospace.com. Let me first caution that the information we will discuss this morning is time sensitive and therefore, may not be accurate on the day one listens to the replay.

And secondly, many of the statements we will make today will constitute forward-looking statements as defined within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

For example, this includes statements about the market for our products, revenue recognition, planned operations and capital expenditures. These statements are based on management’s current perceptions, expectations and knowledge. Actual outcomes are influenced by uncertainties and other factors that we are unable to predict or control.

These and other risks both known and unknown may create undesirable results or cause our performance to differ materially from what we may express or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and Form 10-Q filings.

Yesterday, after the market close, the company released its financial results for the first quarter of fiscal year 2014 after just posting record-breaking annual results for the third straight year; we are pleased that our first quarter of fiscal year 2014, I set the new all-time highs in the company’s history for quarterly performance.

Net income was $24.2 million on the revenues of $101.3 million, earning $1.85 per diluted share. contributing significantly, these results are the orders we announced during the quarter for the large channel counts of our GSX product line.

At the end of the quarter, the number of land wireless channels, we have cumulatively sold or made available to run in the marketplace have reached over 404,000. Our reservoir products segment also had a good showing of revenue contributions coming in at $29.3 million.

this was driven by work completed towards a fulfillment of our PRM contract with Statoil, except for few items landing in the third quarter, the remaining portion of the Statoil contract is expected to be essentially completed by the end of the second fiscal quarter.

In conjunction with these record financial results, there were other newsworthy events that occurred throughout the quarter. We announced that the company entered into a contract to deliver a permanent land data acquisition system, we used in the Middle East.

As the first of its kind, this system leverage is the proven technology of our seabed permanent reservoir-monitoring system and it is on track to be delivered in this or second fiscal quarter.

Another news we announced the receipt of an order from Seafloor Geophysical Solutions by deepwater seabed data acquisition system, comprising 2,300 stations of our OBX mariners. SGS is now requesting delivery of the system in the beginning of the third quarter.

To overall, our first quarter was one that kept us busy and looking ahead and to provide you with more detailed commentary on the company’s first quarter financial performance. I’ll now turn the call over to Tom..

Thank you, Rick and good morning everyone. I will recap our first quarter 2014 results, and then I will discuss each of our four product segments. Finally, I will close with some information concerning our balance sheet and cash flows.

We also want to remind everyone on the call today that while our discussions will include estimates of revenue recognition, cash flows and other factors. We will not provide any earnings guidance during this call.

As Rick just mentioned for our first quarter of fiscal year 2014, we’ve reported required revenues of $101.3 million, an increase of 30% of our revenues of $77.8 million last year.

Our net income for the quarter also a record plus $24.2 million or $1.95 per diluted share, an increase of 10% from last year’s net income of $22 million or $1.70 per diluted share.

Regarding our four revenue segments for the first quarter, revenues from our traditional seismic products for the first quarter of fiscal year 2014 were $20.5 million, an increase of 46% compared to revenues of $14 million last year.

Our traditional product sales increased, because of higher demand for our geophone sensor products, which accompany too large GSX sales, which I will discuss in just a moment.

While we experienced higher than normal traditional product revenues during the first quarter, we continue to believe that market to certain of these products will be challenged throughout fiscal year 2014.

Revenues from our wireless seismic products for the first quarter were $45.5 million, a decrease of 3% compared to revenues of $46.9 million last year. During the quarter, we sold 77,000 channels, compared to 47,000 channels last year.

First quarter 2014 sales included the delivery of 49,000 channels to Mitcham Industries, 27,000 channels to Dawson Geophysical.

While the quantity of channels sold during the quarter increased over the prior year quarter, a slight decline in GSX product revenues from the first quarter is due to the sales mix containing a large quantity of three-channel stations, which have lower – which have a lower price per channel, compared to our single channel stations.

A high demand for GSX channels in the first quarter was in part due to demand for channels for the Canadian seismic winter season.

We believe demand for our GSX systems, although erratic from quarter-to-quarter, we’ll continue to grow in the future reflecting the seismic industries’ acceptance of our wireless systems in lieu of less efficient legacy cable-based systems.

Since its introduction in through December 31, 2013, we have sold 315,000 GSX channels and we had 89,000 GSX channels in our worldwide rental fleet. Revenues from our reservoir seismic products for the first quarter were $29.3 million, an increase of 162%, compared to revenues of $11.2 million for last year.

For the current quarter, we recognized revenues of $28 million from the Statoil contract, using the percentage of completion, revenue recognition method. Also during the quarter, the Statoil’s contract value was increased to $168 million, leaving approximately $31 million of unrecognized revenue in the Statoil contract.

We expect to recognize approximately $25 million of this revenue in the second quarter of fiscal year 2014 with any remaining revenue being recognized in the third quarter. Revenues from our non-seismic products for the first quarter were $5.9 million, an increase of 8%, compared to last year.

The increase in revenue reflects higher demand for our industrial products. Our gross profit margins for the quarter were influenced by several unfavorable factors, including higher than normal discounts offered to customers on two large GSX disorders, manufacturing inefficiencies related to the used multiple facilities in the outsourcing.

the increased depreciation expense for our growing GSX rental fleet and increased inventory obsolescence expenses. Despite these pressures, our gross profit margin for the first quarter was 46.5%, which is on par with the gross profit margins we experienced in the last fiscal year.

The most of these factors are considered normal and are expected to exist in future periods; we expect our facility expansion plans will reduce many of the inefficiencies we currently experienced with multiple manufacturing facilities and outsourcing.

In November 2013, we issued 194,000 shares of restricted stock to various key employees throughout our organization. Estimated value of these restricted shares was $17.3 million and this cost will be amortized into our earnings as these restricted shares vest over a four-year period.

For the first quarter, we’ve recognized $723,000 of expense related to the grant of these restricted shares. Our operating expenses for the first quarter increased by 27% to $11.4 million compared to $9 million in the last year.

The increase in operating expenses primarily reflect higher personnel costs, including the stock-based compensation we just mentioned, increased legal expenses and other general expense increases associated with our increased sales business, expansion and internal organization growth, including additional investments in our R&D personnel and new product development initiatives.

Our effective tax rate for the first quarter of fiscal year 2014 was 31.9% compared to 30.6% last year. we expect our effective tax rate for the remainder of fiscal year 2014 to be between 32% and 33%. We ended the first quarter with $206 million of working capital, $44 million of cash and no long-term debt on our balance sheet.

Our $50 million credit facility remains untapped at this time, resulting in total liquidity of $94 million at December 31, 2013. We believe the strength of our balance sheet puts us in a good position to make the opportunities ahead. As we look forward, we plan to continue making investments to expand our operations.

During the quarter, we invested $17.7 million into our Canadian and Colombian rental fleets. If market conditions allow, we are prepared to further expand our rental fleet at the $30 million in fiscal year 2014.

As in prior years, we expect any cash investments in our rental fleet will be partially or entirely offset by cash proceeds from the sales of rental equipment.

Investments in Property, Plant & Equipment are currently planned to be $30 million including $13 million for in-progress construction expenditures relating to the expansion of our Houston manufacturing and engineering facilities.

In addition, we plan to replenish portions of our GSX inventories and to continue building OBX inventories to meet anticipated customer demand. We expect to fund these investments from our internal cash flows and available borrowings under our credit facility, which we believe will be sufficient to fund our capital needs throughout fiscal year 2014.

I’ll now turn the call back over to Rick for his closing remarks..

Thanks, Tom. As have been the case throughout fiscal year 2013, the first quarter of 2014 continue to put a strain on our plant facilities. In fact, it became necessary early in the quarter to enter into another lease for even more space for our manufacturing operations.

So in addition to our main Pinemont facilities, we now have three satellite facilities in Northwest Houston supporting our needs. Needless to say, the situation continues to eat away at our efficiencies and add to our operational costs.

Fortunately in 2013, we secured the necessary adjacent land to expand our Pinemont facilities into a research, engineering and manufacturing campus that can address our current needs, as well as accommodate our foreseeable growth.

We have made notable progress in the environmental management, municipal planning and initial design considerations for the addition and buying any interruption in the related activities, permitting for initial phases of construction could occur in April.

When it comes to expanding our facilities and consolidating our resources, as we say here in Texas, this is not our first rodeo. This will be our fourth plant expansion since going public in 1997. Our last plant expansion was completed in 2007.

Our story has always been one of managed organic growth, and we now find ourselves entering into yet another chapter, innovative products like our wireless OBX marine system are poised to change the dynamics in marine seismic operations and we are encouraged with the level of OBX customer inquiries at the potential impact of this product that have on our fiscal year 2014 results.

Other products like our PRM systems have reigned undisputed as the highest and reliability, image quality and project success for over a decade. We were in continuous discussions with customers about potential PRM projects and we are performing related activities with multiple clients.

We must reiterate that we have no explicit indications on the timing of when another large PRM will occur. Moreover, if a PRM order were to be placed soon, it is unlikely at this juncture that any such order would have a meaningful impact on fiscal year 2014’s financial results.

But we continue to remain bullish about the future prospects for this product and a high value it brings to our customers. Overall, we see bright futures for the products we have introduced in the markets we have opened and we see even more growth for them, as well as new product introductions on the horizon.

With that, I’ll now turn the call back over to the moderator for questions..

Thank you. The floor is now open for questions. (Operator Instructions) And we’ll take our first question from Veny Aleksandrov with FIG Partners. Please go ahead..

Good morning, Rick, Tom..

Good morning..

Good morning..

My first question is on the OBX line of products. You touched based on that you are building inventory for it.

Without going into details that you don’t want to share over the phone with your competitors, can you talk about the line of inquiries? Do you have more inquiries lately, more interest? What results are your clients seeing from the OBX product?.

We do have more inquiries, Veny. We’ve had some that started quite sometime ago, and many are getting more serious. All of these are really negotiating the jobs with their clients. so that they could put OBXs to immediate use on jobs, but yes, the list is definitely getting longer. many we can’t disclose, but we’re completely encouraged by what we see..

All right, I understand that you cannot disclose. And my second question on the borehole. So you had $29.3 million in this whole segment, $28 million was going to the Statoil, so there was $1.3 million borehole revenues in the quarter.

Is this correct?.

Yes, that’s about right..

Okay.

And what’s happening on this side of the business? Interest picking up again? Can we expect some more orders for the rest of the year? What’s your take on this?.

On the borehole side?.

Yes..

We’ don’t have anything of significance that we see there. there is interest that is always there in developing, but nothing that we would comment on as significant..

Okay. Okay, the last question.

The marine, what was the revenue contribution from the marine side of the business?.

Hi, Veny. This is Tom..

Yes..

We’ve disclosed the....

Okay..

...marine portion of our business, it’s included in our traditional products. it is a sizeable piece of it, but it’s not something that we segment out..

Did it have a better quarter than last quarter, kind of the same?.

It was slightly less than last year..

Thank you so much. I really appreciate it..

And we’ll go next to Joe Maxa with Dougherty & Company. Please go ahead..

Thank you. Good morning guys..

Hi, Joe..

Regarding the OBX and your potential customers, you did indicate they are negotiating with their customers.

What are you hearing? Have any of these guys had awards so far, and then you need to finalize what products they are using and whether it is the nodes and cables, or is this more once they get the order, they are coming to you to get the nodes?.

Well, actually they’re coming to us prior to getting some of the awards. So that they can establish that we will be able to meet their delivery needs. So it’s kind of a mixture of that. On occasions some smaller jobs may come in with inquiries after awards, but the large ones are really having to kind of work with us in advance..

I see. You have given some indications I believe in the past that you were pretty comfortable, or feeling good about a possibility of a couple of large awards coming yet this year, besides the one for SGS.

Is that still what you are expecting or anticipating?.

We still see those on the horizon. but again, we don’t know whether the clients, what the timing would be on performing those surveys. We are kind of once removed from that discussion..

Okay. And then how about a little more color on the PRM side. you have indicated discussions with multiple customers.

Maybe just give us a little more color on what you are seeing, and perhaps, what the needs may be there going down the road with Statoil and others?.

We’ve had these discussions. We are continuing to discuss issues with Statoil and what their needs might be. Some of those are meant to stay in our four walls. But in essence, we do not see the timing of when we would have an expected new order, it would come along and impact this fiscal year.

So to that end, it’s just not much more that we can really say on that..

Right, right.

Lastly, when would you anticipate to have your new facility up and running?.

Well, that will take a while. if we get started that we’re not going to finish it in fiscal 2013, so it’s going to spill over into fiscal year 2015 before we can have a structure finalized and completed..

Okay. Thanks a lot guys..

And we’ll go next to Georg Venturatos with Johnson Rice. Please go ahead..

Hey, good morning, Rick, Tom..

Good morning..

Just wanted to talk a little bit more about the PRM side. Obviously, you have been in ongoing discussions with Statoil.

Have you seen any new customers come into the fold that you are in discussions with as well with the products?.

Well, we have existing customers and they are the ones that have the experience. So realistically, most discussions are with those that have had that experience, or been directly related in those experiences..

Okay. And you mentioned expectations that you wouldn’t have any PRM impact in fiscal 2014.

In order to see based on the capacity you have now, in order to see something impact early fiscal 2015, when would we likely need to see a contract announced on the PRM side?.

To see something in 2015, probably before the end of 2014..

I guess I’m talking about in terms of timing.

If you were going to say Q1 fiscal 2015, what’s kind of the lead time that you would need that contract secured?.

Probably now..

Okay..

We’ll go next to Bill Dezellem with Tieton Capital. Please go ahead..

Thank you. It’s Tieton Capital. Thank you. A group of questions. First of all, continuing down the Statoil path. Given some of the papers that have come out relative to the significant increase in reserves and revenues associated with your system.

Is it almost fair to say it’s our plan, not yet pay reordered?.

I’m afraid I did really understand the question..

[Indiscernible] And the reason I pose the question is there seems to be a significant data and papers out there that indicate a lot of value that you are bringing to Statoil?.

Understand now. In our mind, it’s a win. But of course; we’re making the decision. There is value this brings; I think you’re absolutely right. it has become clearer and clearer as time goes on that that is the case. So in our minds, we’re sufficiently encouraged to where for us it’s when, not if..

That’s helpful, thank you. And then next, would you provide a little bit more detail relative to the OBX order to Seafloor Geophysical and not necessarily on the timing change, that doesn’t matter.

I am more interested in understanding the role that they are looking for that to play, and more specifically the problem they are trying to solve with your equipment?.

I think they are trying to be leaders in that, in that market. They will be initial ones to jump in with us on this and we had long discussions with them prior to that. They’re busy negotiating surveys to use the equipment. What they expect to gain is some significant production benefits, such as they can, at lower cost perform these surveys.

With PGS having a vested interest in what they do, they’re going to have considerable exposure out there to where some of this work can transpire..

And then lastly. For now, the GSX revenues were quite high in the first quarter.

Are you anticipating that this will be the highest revenue quarter for GSX in fiscal 2014, or that is not necessarily the case?.

And honestly, that would be impossible to predict. I couldn’t tell you now..

Fair answer. Thank you for the time..

And we’ll go next to Hamed Khorsand with BWS Financial. Please go ahead..

Hi, good morning. Just wanted to first touch on the comment that you made earlier about the discounts.

Will that be an ongoing incident, or was this just one-time because they were large orders?.

If we get larger orders of the sizes that we announced for the Dawson order and Mitcham order, yes, we are willing to discount there’s a lot of economies that we gain by having large orders like that.

And so to bring a customer like that on board with our equipment and our technology, we’re willing to offer discounts like the ones we gave in the first quarter..

Okay.

And then can you split – provide a split as to what was North America and what was the outside of North America?.

Our most of the channels were destined for North America, but there were some that went to South America..

Okay.

You can’t give any more detail on that?.

No..

Okay.

I am just trying to get an understanding as to if the competitive environment is moving more and more international? How is that going to move the needle as far as product costs and margins, and really a competitive factor?.

Well, it’s a competitive space out there, internationally. and we’re prepared to compete in that market. It is a tough market out in the international community, but we fully intend to make our presence now..

All right, great. Thank you..

(Operator Instructions) We’ll go next to Joe Maxa with Dougherty & Company. Please go ahead..

Yes, hi. I just wanted to ask again on GSX.

What is your outlook, I know you can’t give numbers, but what are you hearing right now? Are we going to see a lull in some of these orders for a couple of quarters, or do you have activity that may come through and benefit Q2, Q3, versus being the big seasonality at typically the end of the year?.

Well, Joe, as you know, these are lumps that we see oftentimes on the GSX. And we don’t really have extreme visibility of what happens throughout that – those periods of time. although we’re – we believe in our product, our customers believe in our product and that’s what creates the demand for what we have..

And Joe, we keep a fairly substantial amount of inventory, GSX systems in our stockroom. So like the orders that we got for Mitcham and Dawson, we were able to deliver those very quickly and we don’t have the lead time discussions like we would on OBX, or anything like that.

so these things can come up at a moment’s notice, and we’re prepared to deliver them as quick as we can and they get the systems pull together and get them out the door. also in Q2, it’s traditionally a very high rental season, especially in the Canadian market.

And so we’re going to be very busy in Canada this winter season with the rentals, as well as we have some other international rentals going on just coincidentally in Q2. So it will be a good rental quarter like it always is and their sales will when they fall..

And speaking internationally, are you seeing more opportunity to have sales versus rentals, and if so, what locations seem most likely?.

Well, we have activity going on in over – in the area of Russia and we have stuff going on in South America. And we’re in discussions with potentials elsewhere as well. so there is no really hotspot that I can see.

I mean I think we believe South America is a certain potential hotspot, and so we’re focusing some attention down there specifically as well..

Okay. just to put you on the spot one more time.

As far as activity in GSX or OBX, where do you see the most activity and potential, most opportunity this year?.

I think OBX is – has real high potential..

Okay. Thanks a lot..

And we currently have no further questions. I’d like to turn it back over to Mr. Wheeler for any additional or closing remarks..

Well, we certainly appreciate everyone from listening in on the call and asking these great questions. And I guess with that, we will see you next time. thanks, bye-bye..

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day..