Rick Wheeler - President and CEO Tom McEntire - VP and CFO.

Bill Dezellem - Tieton Capital David Nierenberg - Nierenberg.

Welcome to the Geospace Technologies' First Quarter 2018 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He's 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's now my pleasure to turn the floor over to Mr.

Rick Wheeler. Sir, you may begin..

Good morning and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2018. I'm Rick Wheeler, the company's President and Chief Executive Officer and I'm joined by Tom McEntire, the company's Vice President and Chief Financial Officer.

I'll start the call with the prepared overview of the quarter and Tom will then follow with an in-depth commentary of our financial performance. Next, I'll close out the prepared portion of the call with some final remark, and we'll open the line for questions.

For everyone's convenience as mentioned the recording of this call will be linked in the Investor Relations section of our website at www.geospace.com. Be aware that the information we discuss this morning is time-sensitive and may not be accurate on the date one listens to that replay.

Also, many statements made today can be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. This includes comments about the market for our products, revenue recognition, planned operations, and capital expenditures.

All such statements are based on our present knowledge and perception, while actual outcomes are influenced by uncertainties and other factors that we're unable to predict or control. Related known and unknown risk, can lead to undesirable results or cause our performance to materially differ from what we may express or imply.

These risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings.

After yesterday's market close we released our financial results for the first quarter of fiscal year 2018 ended December 31, 2017 and as noted revenue in the fourth quarter totaled $14.6 million which represents a decrease of 4% from last year's first quarter.

Despite the lower revenue including $3.8 million in reduction in rental revenue compared to last year and $0.3 million portion of one-time termination expenses added to our cost of revenue. Our first quarter gross profit significantly improved.

The improvement over the last year resulted primarily from the sale of 14,000 single channel GSX stations from our rental fleet to an international seismic contractor, and was further aided by $2.7 million reduction in inventory obsolescence expenses.

Revenue from our traditional seismic products in the first quarter totaled 3.8 million an increase of $1.2 million when compared to the first quarter of last year. The higher revenues are a direct result of the sale of geophone sensors from our rental fleet.

Albeit lumpy sales in recent quarters have demonstrated we nonetheless expect an overall improvement in revenue from our traditional products if seismic exploration activities increased and if oversupplies of these products are consumed. Our wireless seismic products generated $3.6 million of revenue in the first quarter.

This is a decrease of 2.7 million from the same period a year ago. Last year, first quarter revenue was boosted by our performing rental contract for our marine OBX products whereas the first quarter of this year did not have any significant OBX rentals.

However, the difference was partially offset by the sale in this quarter of the 14,000 single-channel GSX stations. We believe that recent sales of our wireless products in an otherwise very tough seismic market are a testament to the optimum utility they can provide for our customers.

Total revenue from our reservoir seismic products in the first quarter was $0.6 million compared with $0.5 million for the same three-month period last year. Revenue for both periods was primarily driven by the sale, repair, and rental of our borehole seismic tools.

The differences in revenue across these periods are within typical variations of an overall flat demand for these products. Revenue from this segment is expected to remain essentially unchanged absent any revenue from PRM systems, which is not expected in the foreseeable future.

Our non-seismic business segment produced $6.5 million of revenue in the three months ended December 31, 2017. This is an increase of 13% compared to last year’s first quarter. Within this segment, the largest increase in revenue over the last year came from our industrial products, which grew to $3.7 million.

Year-over-year revenue from our imaging products in the first quarter also increased modestly to $2.8 million. Compared to last year’s fourth quarter, revenue from our non-seismic segment decreased by 9%, which can partially be attributed to a certain level of seasonality impacting our industrial product revenue.

However, we continue to expect revenue from these products to incrementally grow as their use within the industry expands. And now I'll turn the call over to Tom for more financial details..

Thanks Rick and good morning everyone. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during this call. In yesterday's press release for our first quarter ended December 31, 2017, we reported revenue of $14.6 million compared to last year's revenue of $15.3 million.

Our net loss for the quarter was $9.5 million or a $0.72 per diluted share compared to last year's net loss of $11.7 million or $0.89 per diluted share. The breakdown of our seismic product revenue is as follows. Our traditional product revenue for the first quarter was 3.8 million, an increase of 47% compared to revenue of 2.6 million last year.

The increase reflects the sale of specialty sensor products as well as sale of geophones from our rental fleet. Our GSX and OBX wireless products revenue for the quarter was $3.6 million a decrease of 43% compared to revenue of $6.3 million last year.

This decrease primarily reflects revenue that we have from a large OPX rental contract in last year's first quarter, which generated $4.3 million of rental revenue. There were no such similar rental contracts this year.

Offsetting the decline in rental revenue in our first quarter was the sale of 14,000 of our GSX wireless recording stations from our rental fleet. Reservoir product revenue for the first quarter was $618,000, an increase of 20% compared to revenue of $513,000 last year.

The increase for the periods was primarily due to higher demand for our borehole products and reservoir monitoring services. And we reiterate that this segment will continue to contribute insignificant levels of revenue until we're engaged in a contract for the delivery of PRM systems. Moving on to our non-seismic products segment.

Our industrial product revenue for the first quarter was $3.7 million, an increase of 19% compared to revenue of $3.1 million last year. While year-over-year revenues were up, revenues are down sequentially due to an expected seasonal decline and demand for water meter products during the winter months.

Imaging product revenue for the first quarter was $2.8 million, an increase of 5% compared to revenue of $2.7 million last year. We believe this increase relates mostly to the timing of customer orders and does not really reflect any particular trend in our customers' demand for our imaging products.

We recently announced an initiative that reduce our factory and operating cost by $6 million. These cost reductions are expected to result and improved operational performance and cash preservation as we go forward.

However seismic product demand continues to remain low and as a result our gross profit margins will remain under pressure due to the underutilized factory capacity that we have and from non-cash charges for rental equipment and obsolescences.

Until we see significantly improving seismic industry market conditions and increase factory utilization, we expect our seismic product gross profit margins to be challenged. Our first quarter operating expenses increased 8% from last year.

Excluding the impact of bad debt expenses in both periods our operating expenses declined by $200,000 or 2% primarily resulting from reduced stock-based compensation expenses and were partially offset by $400,000 of termination cost. Cash investment in our plant and equipment were 218,000 for the first quarter.

We estimate fiscal year 2018 cash investments and our property plant equipment would be approximately $3 million. We made no cash investment into our rental fleet during the first quarter, although we do expect and approximately $2 million of cash investments into our rental fleet to replenish rental equipment recently sold to customers.

Any additional investments into our rental fleet will be based on future demand for our OPX and GSX systems. At the end of our first quarter our balance sheet remains strong with $46 million of cash and short-term investments. We had no long-term debt outstanding and borrowings available under our credit agreement were $26 million.

in addition, we reiterate that our various real-estate holdings in Houston and around the world are owned free and clear without any leverage. That concludes my prepared remarks and I'll turn the call back over to Rick..

Thanks, Tom. As we noted oil prices have substantially risen from their $30 low point two years ago and the volatility seen in the past has for now mostly embedded. As a result, many oil companies have recently reported at least an intention to increase capital spending, although rather conservatively in most cases.

This is certainly a positive sign that examination shows that a majority of stated increases are air mark for production related expenditures and not directed towards new exploration efforts.

As such the seismic industry will continue to face struggles because the amount of services and equipment available in the marketplace to acquire seismic data far exceeds the amount that current levels of exploration work can sustain.

In those respects, this translates to an existing over supply of seismic equipment and instrumentation which in effect reduces demand for many of our products. We believe that the current low level of exploration being funded by oil and gas companies is insufficient to provide them with a sustainable future.

The implication is that exploration efforts will eventually have to increase even though there is no real clarity regarding the timeline of improvement.

We believe there our genuine commitment to our customers and our dedication to embed quality, innovation and efficiency into our products helps cement a position of leadership and preference in our industry.

These fundamentals in conjunction with our strong balance sheet and cost-conscious management give us a sound putting to both endure the current market conditions and to benefit in their recovered. And this concludes our prepared remarks, and I'll now turn the call back over to Leo for questions..

[Operator Instructions] Our First question comes from Bill Dezellem of Tieton Capital..

I actually have a group of questions. Cut me off when I have overstate my welcome.

First of all, the inventory obsolescence expense being down, would you explain how that works? And the reason I asked the question as I have understood it to be somewhat formulaic and since the activity level does not appear to have picked up its revenues are essentially flat, that seems to me as though it would lead to a very similar level of inventory obsolescence.

So, I hope I'm not too far in the region and maybe there is an easy explanation..

Bill this is Tom. Your explanation is pretty accurate it is a formula approach it is based on activities within our inventory items that are on our shelf and ready to be sold. So, I think it's a good sign.

We've taken a significant amount of inventory obsolescence charges in the past and this perhaps is a sign of that level of charges may not be appropriate going forward. And we are kind of getting down to our core inventory that seems to have some movement. So, I would explain it that why..

So, thinking out loud then in the past, the inventory write-downs have not been across the board but on the slower moving parts on the shelf.

What this number is telling since you're dealing with the formulae is the slower moving parts are cleaned up to a very reasonable level and the inventory that we do see is that the move is at a more comfortable pace..

Yes, maybe stating it a little bit differently the slower moving items or obsolete items have enough reserve against them or do not need as much reserve as what we've had in prior years..

Keep in mind too Bill that in the last quarter of the prior fiscal year we took an accelerated amount of reserves on our PRM related inventories too which somewhat move those aside..

Actually, both of those comments helped to clarify. And then let's move to the rental fleet for a moment I think there is a comment that you'll be spending a couple of million dollars with the rental fleet investment in this quarter. you said due to sales that have taken place.

Are those due to sales that we will see in the March quarter or those due to sales otherwise?.

These are past sales we had a fairly large sale of I think 45,000 channels of our GSX 3 component system back in the fourth quarter of 2017 and then again here in the first quarter of 2018 we sold 14,000 channels. So, it's kind of bolster back enough channels to meet demand from our customers..

So, your comment wasn’t giving us a great insight into something here in the March quarter that has taken place already then..

No these are channels previously sold in prior quarters..

And then relative to OBX what's the prognosis for additional meaningful rental contracts here in this fiscal year?.

Well, we certainly have a customer base that is seeing more request for quotes and are fulfilling those requests so the quote side is certainly higher but it's all going to be a function of how many of those manifest into real contracts in the future..

But the quoting activity is going up?.

It is the quoting activity is an encouraging aspect of what we see from our customers and as a result that puts a plus side tick on that OBX product line..

And is it your sense is that multiple customers are quoting on the same piece of business or these a wide variety of pieces of business?.

It's sum of both there are certain customers that are bidding on similar surveys out there and despair surveys too so it kind of crosses all borders there..

And then relative to PRM what are you sensing in terms of a likely that there will be a contract put out for tender sometime in this calendar year?.

I think there is some reasonable chances if that may occur but again you've seen this business for many years Bill, and it's not predictable with respect to that how those awards or those tenders are put out. Nonetheless we are in those phases of discussions that would imply the possibility but that's really all I can truthfully tell you..

And how many different oil entered [ph] organizations do you sense could be in a position to put a contract out this calendar year. .

Well, there are all capable but they are not doing it. So, I mean it's a short-list. I mean if you look at the space of those that have taken advantage of permanent reservoir monitoring and all the benefits it affords, the list is rather short.

As we've said before they all do reservoir monitoring but they don’t know to take advantage of the return one gets on an investment in a permanent system as much. So, the list has always been and still remains to be a story..

[Operator Instructions] And we do have a question from David Nierenberg of Nierenberg..

Given that you've mentioned even with the price of oil more than doubling off it's the bottom that we are in a situation where there is an acceptable amount of new and used seismic equipment inventory in the market.

Without asking you to share anything of proprietary nature which you wouldn’t answer anyway I would like to get a sense of what you can do through your R&D spending to deepen the moat in the hope that, that may accelerate the ops and essence of some of that competitive overhanging inventory and perhaps enable you to generate new revenues faster?.

And the answer is that we can continue to in product new potential efficiencies that the contractors maybe able to gain either in the deployment side and or the data preparation side from our equipment and that's exactly you've sort of the front phases of what our R&D effort tend to focus on is providing some higher levels of efficiencies in the use of the equipment so they can get more done with it comparatively.

And then also to fold in any new technology that might be out there that still works into increasing those efficiencies. For example, we've got new products that we've introduced that can send data through the cloud and to an extent that contractors learned how to make that an effective tool for themselves, we can fight that effort in that way too..

[Operator Instructions] And we do have a question from Ken [indiscernible]. Your line is open..

What about this idea from the major shareholder about the using some of the excess cash and barrowing power because you have so much to buy in stock that would help stockholders, your equity owners when the recovery does come with much better earnings? Or not?.

Well as it turns out I mean the amount of cash that would be available to put into the stock repurchase would not really be essentially very effective in its change. So, you're not going to see a great number of shares it would be capable of being purchased.

We would, furthermore we are putting ourselves at risk with respect to the uncertainties that we face, and more over the strength that have allowed us to maintain a balance sheet of such integrity that we have now..

Well I have been listening to you guys for a couple of years and you often sound more like [notations] and visionary management. I know it's been a rough period.

But there would be incremental gain for shareholders as the last caller except the oil prices has doubled and you said yourself sooner or later oil companies must reengage in exploration just to replenish the reserves..

Yes, and the thing to do for prudent management is to make sure that one can achieve that endurance to where they can make those benefits. And without clarity of the -- beginning to find as is appropriately needed the expiration side of their businesses then you're still playing with risks that aren’t necessarily tractable risks. .

And it's also worth mentioning that in the last two fiscal years we received over $30 million of income tax refunds that have helped bolster our cash position and without that we would had a huge cash burn in those years. And so, we don't have any more income tax refunds going in and the market hasn’t improved yet.

So, we're still in a cash burn situation. And we feel like it's best for us to keep as much dry powder as we can until we tangibly see a market turned..

I imagine from what I've read of the letter that you publicly published, whether they have, the major shareholder disagrees with this.

Speaking of taxes are there any ramifications from the new tax bill for the company?.

No, we don't see any right now, most of our tax assets are fully reserved with a valuation allowance. So, any changes there would've been offset but internationally we do not see a problem that would result in any additional taxes to us..

The problem or an opportunity..

Yes, we are still looking into it but right now we think we are going to be okay..

Back to that major shareholder what sort of relationships you have, since they are coming the table on the idea of the stock repurchase and you are adamantly saying that it's too risky for your taste what sort of dialogue is being hammered out between you two?.

I think we have a very good dialogue as a matter of fact. It’s a very valued shareholder and we respect the opinion as it relates to that. And the discussions we have are very earnest and I think bring up forth information that is useful to know. .

And when you speak -- you are speaking of management, the board I would gather a separate entity?.

Yes, the board is a separate entity from management altogether..

He has met with our members of our Board of Directors as well..

And the board echoes management in this case, so 100%..

Yes, they do..

So, well I guess until that changes this is the status quo?.

Well, I think for now it is..

Alright gentlemen no more questions may the price of oil keep rising and may the oil companies finally look for more oil..

Well, exactly that's the crutch right there..

I don’t dispute what's you are seeing from the owners of the commodity in terms of their behavior at exploration. .

Honestly, it's almost hard to really digest because it doesn’t make rational business since but then again, I mean it's their decision to make..

And like any commodity it's self-correcting and so this is mathematically inevitable, essentially given the demand that’s declining from all over for world for oil for whatever usage with or without cars that there is going to come a day or reckoning. .

I believe you are right. I believe you are absolutely right..

[Operator Instructions] We have a follow-up from Mr. David Nierenberg..

We've also expressed to you our point of view about the repurchase which is different from the point of view that you just heard.

We would prefer given the unknowability of the timing of the recovery of your business that you maintain a fortes balance sheet because we view that as a critical part of your competitive advantage at a time when some of your competitors are in bankruptcy proceedings.

Rather than seeing a vital cash deployed on financial engineering we would prefer instead that you continue investing in technology that deepens your moat and the only kind of engineering that might possibly be of interest to us it might be opportunities that could arise from time to time for taking advantage of the distress of a competitor to take it over and destroy its inventory.

But other than that, we want you guys to be the last man standing and to get all the business and to have the kind of recovery that you have five years ago, that would make you worth waiting for what worth waiting for?.

Thank you, David. Yes, we appreciate that. And at this time, I'd be happy to return the call to Mr. Rick Wheeler for any concluding remarks..

All right, well thank you, Leo, I think that concludes our call and I thank everyone who joined us today. We look forward to speaking with you for our second quarter conference results in May. Thanks, and good bye..

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