Rick Wheeler - President and CEO Tom McEntire - VP and Chief Financial Officer.

Joe Maxa - Dougherty & Company Veny Aleksandrov - FIG Partners Joel Luton - Westlake Securities Georg Venturatos - Johnson Rice William Alpaugh - Simmons & Company Hamed Khorsand - BWS Financial.

Welcome to the Geospace Technologies Third 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 opened for your question following the presentation. (Operator Instructions).

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

Thanks Leo. Good morning, and welcome to Geospace Technologies conference call for the third 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, our company's Vice President and Chief Financial Officer.

I'll 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'll then open the line for questions.

Also, as mentioned 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 date one listens to the replay.

And secondly, many of the statements we will make today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. By 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 closed, the company released its financial results for the third quarter of fiscal year 2014. Revenues for the quarter of $40.7 million resulted in net profits of $3.8 million or $0.29 per diluted share.

With the addition of these earnings the company has increased shareholder equity by $42.2 million, almost 15% in the first nine months of fiscal year 2014. However our reduced revenues and net profit compared to last year’s third quarter reflect lower demand for our products across all of our product segments.

In particular our seismic reservoir product segment exhibited the largest increase due to the completion of the Statoil order back in April. Lower revenues from our traditional and wireless products are direct reflection of reduced seismic exploration activities during the first half of calendar year 2014.

Seismic acquisition contractors consolidate and stack their fruits in response to diminish backlog, their needs for equipment drop and while some of our customers forecast improved activity in the second half of 2014, we expect demand for these products to remain soft through the end of the fiscal year as demands for new equipment often lag such improvements in seismic activity.

We are nonetheless well positioned for sales and rental opportunities in this reduced market when contractors look to reduce their costs and gain the efficiencies that our equipment provide over legacy cabled systems.

Our bright spot in this regard is that customer interest, quote inquiries, in-field testing and utilization of our cableless OBX ocean bottom system continue to rise. We continue to hold weekly discussions with Seafloor Geophysical Solutions management team in regards to their capital raising activities.

SGS has been unabated in their effort to secure new backing and financing to proceed with their business plan to deploy our deep-water OBX system. We remain encouraged by their efforts, but have no specific knowledge about when or if a successful completion might occur.

Irrespective of the outcome, we believe this matter will be concluded by the end of the fiscal year. As previously reported, the manufacturing and engineering portion of the Statoil order was completed in April. With no follow up PRM contracts of similar scale in hand, we expect lower revenues from our PRM products in the immediate future.

However, we are aware of a number of operators around the world who are considering PRM systems for their fields. Therefore, we remain optimistic about the long-term prospects for PRM systems.

As the world leader in the design and construction of such systems, we believe that permanent reservoir-monitoring systems both on land and in the ocean will continue to be an intrinsic part of our future business.

Because of our optimism about the future of our PRM products, our plans for construction of a new building at our Pinemont location continue to progress and unfold. Final aspects of the base structural and architectural designs are being made now and are targeted to complete in a few weeks.

Applying a realistic view toward the timing of approval and permitting processes, it is unlikely that any significant construction will be able to take place on the new building in this fiscal year. The current cost estimates for the new building range from $20 million to $25 million, most of which is expected to fall into fiscal year 2015.

Construction efforts to refurbish and remodel a smaller peripheral building on the property which we intend to permanently utilize are in final stages now. To that end, we’re on track from moving operations from one of our rented satellites facilities into this building by the end of September.

I’ll now turn the call over to Tom to provide you with further detail and in cycle commentary on the company’s third quarter financial performance..

Thanks, Rick, and good morning, everyone. Before I begin, I want to remind everyone that while our discussions today may include estimates of future cash flows and other events, we will not provide any revenue or earnings guidance during this call.

As Rick just mentioned, for our third quarter, we reported revenues of $40.7 million compared to revenues of $78.1 million last year. Our net income for the quarter was $3.8 million or $0.29 per diluted share compared to last year’s net income of $17 million or $1.31 per diluted share.

Before we discuss revenues for each of our product segments, I want to point out that we’re now separately reporting rental revenues and rental cost on the face of our income statement. For the quarter, we generated $7.3 million of rental income compared to $1.4 million in last year’s third quarter.

We believe this information is helpful to investors and the additional information increases transparency of our financial results. While we can say that our GSX and OBX wireless products currently generate the vast majority of our rental revenues, we will not be providing a break out of rental revenues for each product segment.

So, regarding the performance of our four product segments for the quarter, sales and rental revenues from our traditional seismic products for the third quarter were $9.9 million, a decrease of 8% compared to revenues of $10.8 million last year.

Lower demand for these products is a direct consequence of reduced seismic exploration activities seen in the first half of this calendar year. This decrease primarily reflects lower geophone and marine product sales. We expect sales of many of our lower margin traditional products to be flat or to decline slightly in future periods.

Sales in rental revenues from GSX and OBX wireless seismic products for the third quarter were $12.2 million, a decrease of 24% compared to revenues of $16 million last year. During the quarter we sold almost 8,000 GSX channels with a majority of these channels coming out of our rental fleet.

In last year's comparable quarter, we sold 14,000 GSX channels. The decrease in GSX product demand is a direct reflection of reduced seismic exploration spending across the industry. Lower product revenue in this segment was partially offset by significantly higher GSX and OBX rental revenues. And we are seeing increased interest in our OBX products.

During the quarter we sold 200 OBX stations to a Russian customer, doubling the number of OBX stations previously sold into the market. In addition, we have 3,300 OBX stations currently deployed under a rental contract in Alaska.

While sales of our land and marine systems are expected to be challenged in the near term due to soft market conditions, we believe future demand for GSX and OBX systems will increase as seismic contractors transition to wireless systems to improve efficiencies and to reduce cost in lieu of less efficient cable land in marine systems although we expect this order flow to continue to be erratic from quarter-to-quarter.

Since its inception and through June 30, 2014, we have sold 323,000 GSX channels, and we had 126,000 GSX channels in our worldwide rental fleet. Sales and rental revenues from reservoir seismic products for the third quarter were 13.3 million, a decrease of 70% compared to revenues of 44.5 million last year.

The decrease in revenues was primarily due to previously disclosed completion of the manufacturing portion of the Statoil order in April 2014, which resulted in a substantial decline in our PRM revenues. During the third quarter, we recognized 6.7 million of revenues from the Statoil order compared to 41.7 million last year.

While the manufacturing portion of the Statoil order is complete, we do expect to have very minor amounts of future revenues from the Statoil order for services and support. If no new PRM contracts or turning to the near-term we expect future revenues in this segment to decline in fiscal year 2015 when compared to fiscal year 2014.

Revenues from our non-seismic products for the third quarter were 5.2 million, a decrease of 22% compared to revenues of 6.7 million last year.

The decrease in revenues resulted from reduced demand for our thermal imaging products and lower sales of our offshore cable products which have been constrained during the production phase of the Statoil order.

While consolidated gross profit margins declined during the quarter primarily because of the decrease in revenues from the Statoil order resulting in a less favorable product mix. In addition, our fixed manufacturing costs was spread over substantially reduced revenue base which negatively impacted margins.

Our operating expenses for the third quarter increased by 12% to 9.9 million compared to 8.9 million last year. This increase was primarily attributable to higher stock based compensation expenses related to the issuance of restricted stock awards to our fee employees back in the first quarter.

Our effective tax rate for the third quarter was approximately 30% compared to 32% last year and we expect a full year effective tax rate for fiscal year 2014 to be approximately 32%.

Investments in rental equipment for the first nine months of fiscal year 2014 were 25.7 million and were partially offset by $16 million of proceeds from the sale of rental equipment. We do not expect to add any additional GSX channels to our rental fleet for the remainder of this fiscal year.

Although we do expect to increase the number of OBX stations in our rental fleet to meet existing demand which could push our gross rental fleet investments to $30 million or more by year end.

Our investments in property plant equipment were 5.7 million through the first nine months with total PP&E investments expected to be approximately 8 million by year end. As Rick mentioned earlier, the vast majority of the capital expenditures for our new building are expected to occur during fiscal year 2015.

That concludes my prepared remarks and I will return the call back over to Rick..

Thanks, Tom. As heard from our customers and widely reported in the industry, seismic exploration markets have seen a lull so far in calendar year 2014, meaning all companies are focused on drilling and production unit specially in quick to decline shale plays as well as on solving transportation bottlenecks.

Others appear focused on grooming and trimming their asset portfolios and balance sheets. We are encouraged by the views of our customers who see an improved seismic exploration market in the last half of the year, although we don't any specific timing of how this might unfold.

But what we do know in 2013, the increase in global oil production led by the U.S. was less than half the growth of global oil consumption. We also know that amidst record oil prices, production output levels of several major oil companies across the globe have alarmingly gone down.

To correct this requires finding new reserves and maximally managing existing reserves. This bodes well for the future of seismic and the need for our technology products and we continue to strategically plan for this challenge. This concludes our prepared remarks, so, I'll now turn the call back over to the moderator for questions. .

The floor is now open for questions. (Operator Instructions). Thank you. Our first question comes from Joe Maxa of Dougherty & Company..

Good morning..

Hi, Joe. .

Hi, Joe. .

Hi, I got a couple of questions. First I'll ask on the OBX line, I mean there are some indications that this project from SGS could go away.

I mean is that the intent, if they don't get financing by the end of September that, that will not happen?.

Well, if they don't get their financing, I mean they will have difficulty just staying alive to that end. And we'll need to move on with our business model for the OBX as it goes with other customers that are wanting those. So, it's certainly a potential.

SGS is talking to some significant players both in the maritime industry and in the general finance industry, like we’ve said we’re very encouraged but we do think one way or the other we will conclude this at the end of the quarter..

Okay.

So, it sounds like the inventories that you have for SGS, you would be able to use for others, there would be no risk of any type of write-down?.

No doubt, we would be able to use those inventories..

Okay. In general you're talking about OBX seeing increased demand, perhaps additional rentals, maybe somebody wants some of these if doesn't SGS doesn't take them. I noticed that, was it TGS and Fairfield has some type of collaboration agreement.

Can you give us a little more color what you're seeing out there and where these active areas may be?.

Well actually their active areas are all around the globe and you’ve seen that SAE is very aggressive in pursuing of many of these contracts and successfully.

So they are the ones that are utilizing this 3,300 OEMs up in Alaska and we’re discussing with them other options and possibilities that they’re in the midst of, as well as other companies out there. So to that end we do see a lot of activity that is coming to us for quoting..

That 3,300 units being used in Alaska, do you anticipate that for the rest of the quarter or is that a shorter-term duration?.

It’s not clear there maybe some other work for it but at this point we think it’s a fairly long rental..

Okay.

I wanted to ask about the headcount and your opportunities to perhaps reduce your SG&A, given the environment?.

Well we have pretty small SG&A in general as it turns down but there may be some occasions where that might be possible. But we did have some work force reductions back in April which were pretty much what we needed at the time. We don’t see immediate additional work reduction at least of any consequence..

Okay. And I’m just looking at numbers from the year-over-year basis where revenues are half over they've been but SG&A is up, so I just seeing if there are any opportunities to reduce that? Lastly, I just want to just touch based on overall the PRM business you reported 13 million plus of revenue with under 7 million from Statoil.

You have additional revenues, can you just give us some color on what the additional revenues were and is that sustainable?.

Well, we had some of our borehole products were part of the mix this quarter..

So, that's largely the difference?.

Yeah, I would say so..

Okay..

Yes. There are some other products in there as well but it’s a mix of borehole and some other products..

And how does that look going forward?.

Lumpy..

Joe, our visibility in that area continues to be limited, so we’ll take it as it comes..

Okay. Thanks a lot guys. I'll jump back. Thank you..

You bet..

Our next question comes from Veny Aleksandrov of FIG Partners..

Good morning guys..

Hi Veny..

Hi Veny..

My first question is on the operating margins. I understand the change in the revenue mix and that Statoil is winding but the operating margin was significantly low this quarter.

Are there any changes in the pricing for GSX in your high margin products?.

Veny, a lot of that's driven by our gross profit margins which are gaining a lot of pressure because of the reduced volume. And we have a fixed cost structure in manufacturing. And essentially, our operating expenses, we just talked about those a minute ago. Those are unlikely to decline much. We are -- big portion of this is research and development.

And we don't have any plans to reduce research and development. And we will continue investing in our products and in slow periods we may even higher additional engineers as they become available. So that’s an area, we will continue investing in and the margins are going to be lower in periods where we have lower sales..

But it’s not pricing pressure on products that now that come with high margins or it’s just short term?.

No..

Okay.

And my second question is looking forward and I don't want you to give any guidance, but how can we look at the business model from now on? Should we just model the basics and then everything else comes as an upside, as it used to be, or because you're saying that there is a lot going on in the PRM side on the OBX side, but it seems like we’re going back to the lumpiness?.

Veny, when you figure out how to model this company, you call us and let us know..

Okay.

My third question is Russia, with the political situation there, any impact on your operations and manufacturing in the country?.

Not really on the manufacturing side, it has not really had an impact. We did have some sales that were impacted by that that was last quarter actually. And we got through that on some of the products by eliminating those components that going to be problematic in the export; in the other case, we really couldn't do that.

But so far, as far as our manufacturing operations go, the sanctions have not intersected the lines of communication and product flow that are associated with that..

Thank you..

Our next question comes from Joel Luton of Westlake Securities..

Good morning, guys. Just a couple of questions here. With respect to the Sea, or SGS contract, you said that if it falls through, you have other customers lined up.

Does that mean that those customers would purchase the stations or is it just potential rental equipment that they use?.

It’s actually both. I mean we still pursue our rent to purchase plants and those are taking advantage of often times. So in reality I think Joel that both of those are right in line with opportunities they could manifest..

Okay.

And could you, if those customers are in fact lined up, could you supply them now with other inventory or do you not have that available?.

We do have some inventory, obviously we are furnishing those are renting to 3,300 now and we have some others that were just came back from a rental, even separately from that that were in the quarter. So overall, we have inventory but we have others that are quoting -- we could not fulfill every quote that we’re getting right now.

I can tell you that much, we could not do it. So that inventory will definitely have a purpose..

Okay.

So, you do see, if it falls through, you see that inventory being either sold or rented out relatively quickly?.

Yes. I mean Joel just to nail this down, we don’t have any sales contracts right now, if we had any large ones we would announce them. But this is a standard product, it's being quoted in numerous other situations to our customers out there it could be used for those deals if they come through..

Okay. And you have previously said on the OBX that you've have had a handful of customers that have expressed interest in potential large orders for the OBX.

Does that continue to be the case?.

It does continue to be the case..

Okay. And one more question.

What was EBITDA for the quarter? Do you have that offhand?.

Sure. We'll get it and announce it in just a minute..

Okay. Thanks. That's all I have..

Our next question comes from Georg Venturatos of Johnson Rice..

Hey, good morning guys..

Hi Georg..

You talked about a little bit on the cost structure with some modest workforce reductions. Just wanted to double check with you guys, expectations on the R&D side looking forward, and also I would imagine you haven't made any changes within the headcount on the engineering side.

Is that correct?.

Yes, it was correct..

Okay, great. As it relates to PRM, obviously, it sounds like you guys are optimistic, but it should be -- potentially a little bit of time before we see something, with start dates uncertain.

Maybe walk us through how you'd maybe possibly envision this tender process working, if someone, a large operator, were to tender a project, how long that typically takes.

And secondarily, I’d imagine given your track record with PRM, having done the majority over the last decade, you still feel very confident in your ability to win a large majority of any potential award opportunities?.

Sure. Well to be quite honest that tender process has significant variability, each one is has its own personality and runs differently. They can be fairly short lift in some circumstances where whether its history, other times vacant even with history there can be six months or even longer in terms of the tender process itself.

So it’s really unpredictable with respect to how that actually manifests with each tender. The PRM is the poster child of lumpy activity with respect to these sorts of things in the contract process and tender process mirrors that to a large extent. But overall yes, we are optimistic.

I mean if you look over the last slightly over a decade it’s represented over $20 million on average per year of what we’ve done, most all of it or the large majority of it towards the latter part of that but it is a viable business for us and as the world leader undisputed with respect to the number of these systems that we put in place and that are operating today, we think that’s a good thing..

Got you. Appreciate the answers, guys..

(Operator Instructions). We’ll move next to William Alpaugh with Simmons & Company..

Hey good morning guys..

Hi Bill..

You obviously have been expanding rapidly over the past couple of years as a result of the large Statoil project, but today in the release, you don't have any other awards in hand right now.

How are you thinking about your cost structure today in navigating the current environment, and also considering, historically before Statoil, the gross margins were in the low to mid 40% range? Is that a reasonable range to expect going forward?.

Well, regarding the gross margins again I think we had this discussion about us as a manufacturer, it's going to be volume dependent and certainly mix has a big impact as well. But lower volume is going to put pressure on it.

It’s going to lower them and you don't have to go very far back I think in 2007, 2008 we had margins up and probably low to mid 30s with lower volumes.

So, that answers that question and I can't remember your, what's your first question was?.

Actually, how you're thinking about your cost structure today and navigating the current environment with no awards after the Statoil project?.

We work conservatively as best we can with what we do but you have to look at our history I mean our history is a function of technology products and grow through innovation of new products. We're still continuing on that.

We have other products that are in our R&D group right now that we're putting final touches on we will be introducing new products over the course of time that’s just our DNA. So, fundamentally as Tom said, it's an issue of bringing those new products and then introducing volume production into our facilities on those products..

Okay. Here a second one. In GSX you sold 8,000 channels. When we try to back into the price per channel, it looks like it was maybe $400 to $500.

First, is that accurate and second, is it lower because they're out of the rental fleet or is that how we should be thinking about this long-term with current market?.

Well primarily, I don't know what the exact number is, I don't have it here with me. But yes, these are older channels out of our rental fleet and so because they are experienced, they come with the discount..

Okay.

Since they are rentals and just lastly, I just want to clarify, was all your rental revenue, was that all in the wireless segment?.

Well, I’ve mentioned that we're not going to break it out by each of our segments, but yes the vast majority of our rental revenues for the quarter were from our wireless segment. Also I want to put a plug in back to Joe and let him know that the EBITDA was $11 million for the quarter. Sorry about that Will..

Yes. No problem. Thank you..

Okay..

And we have a follow-up question from Veny Aleksandrov, FIG Partners..

Just to clarify again.

I know, in fact, you don't have these numbers, but on the SGS order, they have made some advanced payments, right?.

Right..

And if the order is canceled, you are going to get to keep these?.

That's right..

And did you give out the number or it's not a number that you're willing to?.

I think we've talked about it before, it's around $3 million Veny..

Yes. That's a lot. Yes. Okay. Thank you. Thanks. I appreciate it..

Sure. .

Our next question comes from Hamed Khorsand of BWS Financial..

Hey, good morning.

Just want to start off with are there any plans right now for inventory level? It seems high for the revenue run rate you're operating at?.

Well the large portion of that is tied up with our OBX and rental fleet, so yes there is plenty of intent that’s to rent and sell it..

Its Tom and just to add to what Rick said, yes we were caught a little bit by surprise with this market and we’re sitting on a lot of inventory that didn’t move out from the SGS order and we’re trying to anticipate the market for OBX and GSX and we got caught a little bit short.

So yes we are healthy with our inventory we don’t see it growing much from here and we’ve got plenty and we’re slowing and down our purchasing and slowing down the factory. So it should level off where we are at..

All right.

And what do you think a good inventory level would be for you right now, I'm just trying to forecast how much cash flow that you could generate off of the inventory in a reasonable time frame?.

Yes, if you could tell me what my future sales are going to be I could give you an answer. But yes, it’s high right now and that’s kind of where I like to leave it..

Okay.

And is there any update as far as your operations in South America, I know you guys opened the sales office there and were trying to ramp things up over there?.

Yes we had significant rental activity operating out of that office just recently and actually there are some underway even as we speak. So that office is really getting some traction down there. So it's been very beneficial to us..

Okay.

And my last question here is that, given the market dynamics, is there any change to those seasonality you guys go through, given what happened in fiscal Q4?.

Not sure, I understand what you mean. But as far as the -- if you are just talking about the overall cyclicality that we see in seismic, I think this is something we are seeing now. I mean it goes up and down all companies focus on different things, particularly when they're all in sync as they were in North America on shale plays.

So, you see sort of an alignment there purpose, but in general it just goes up and down, but we don't expect to stay that away..

And Hamed, the last couple of fiscal years, we've had a fairly soft Q4, because we haven’t had any big transactions following that quarter, but we've had a ball in others quarters that are around Q4, like the first quarter or even the second and third quarter.

So, it's kind of odd that happens, but really depends on where some of our bigger sales opportunities land and I think that could fall in Q4 or any other quarter..

Okay. That's it from me. Thank you..

Okay. It appears that we have no further questions at this time. So, I'll return the conference back over to Mr. Wheeler for any additional or closing remarks..

Alright. Well, thanks Leo. And I want to thank everybody for joining us and listening in and participating on our call today. And we hope you all join us for our fiscal year 2014 fourth quarter conference call, which currently we expect to be on Friday November 21, 2014. So, thanks again and good bye..

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