This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Welcome to the Geospace Technologies first quarter 2021 earnings conference call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Kurta, the company's Chief Financial Officer, and Mark Tinker, CEO of subsidiary Quantum Technology Sciences. 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 open for your questions following the presentation. If you would like to ask a question at that time, please press star then one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.
Rick Wheeler
Thank you, Aaron. Good morning, and welcome to Geospace Technology's conference call for the first quarter of fiscal year 2021. As mentioned, I'm Rick Wheeler, the company's President and Chief Executive Officer, and I'm joined by Robert Kurta, the company's Chief Financial Officer. Also with us is Dr. Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the first quarter, and Robert will follow with some in-depth commentary on our financial performance. After a few last remarks, we'll open the line for questions that Robert, Mark, and I can answer. Some of today's statements may be considered forward-looking, as defined in the Private Securities Litigation Reform Act of 1995, including comments about product markets, revenue recognition, planned operations, and capital expenditures. These statements are based on our present awareness, while actual outcomes are affected by factors and uncertainties we cannot predict or control. Both known and unknown risks can lead to undesirable results or differing performance from what we say or imply today. Such risks and uncertainties include those discussed in our SEC Forms 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 encourage everyone to visit and browse. Note that the information discussed and recorded this morning is time-sensitive, and it may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released financial results for our first quarter of fiscal year 2021 into December 31, 2020. As we noted, despite the negative impacts that the COVID-19 pandemic had and continues to have on our business segments, we were pleased to report that total revenue generated in the first three months of fiscal year 2021 reached $28.5 million. This figure exceeded each of the four quarters reported in the previous fiscal year and, moreover, achieved our highest recorded first quarter revenue in seven years. There were also several notable first-time events that occurred in the quarter. The first of these was our first sale of a large OBX marine nodal recording system. The system, which included 7,500 OBX ocean bottom marine nodes from our rental fleet, along with related central electronics, was purchased by a large international seismic contractor for $9.9 million. The quarter also marked the first occurrence of meaningful revenue from our quantum technology sciences subsidiary, which makes up our emerging markets segment. The revenue was in relation to fulfillment of a $10.5 million contract secured in April of 2020 with the U.S. Customs and Border Protection U.S. Border Patrol for a high-technology border security solution. Products from our emerging market segment utilize proprietary seismic acoustics and data analytics, which provide customers in a variety of markets with actionable real-time information. In another company first, revenue from our emerging markets and adjacent market segments combined to reach the highest figure ever, and for the first time, exceeded revenue generated in our oil and gas market segments. This accomplishment tangibly demonstrates real and true value derived entirely from our disciplined diversification strategy. We believe this strategy will continue to create new value with its clear focus on deepening our technologies and advancing our core engineering and manufacturing competencies into broader markets. In noting yet one more first, the company made its first purchases during the quarter of common shares under the stock repurchase program that we announced in November of 2020. As of December 31, 2020, the company had purchased a total of 117,637 shares on the open market for an aggregate amount of $828,000. Our implementation and execution of this program is just one more way that we are returning value to our shareholders. At this point, I'll now turn the call over to Robert so he can provide some more financial detail.
Aaron
Thanks, Rick, and good morning. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday's press release, our first quarter ended December 31, 2020. We reported revenue of $28.5 million compared to last year's revenue of $17.79. Net loss for the quarter was $1.1 million or $0.08 per diluted share compared to the first quarter of last year's net loss. of $9.3 million, or 69 cents per diluted share. The first quarter of fiscal year 2021 benefited from a $700,000 net reduction in the fair value of contingent earn-out liabilities related to our acquisitions of Quantum and Optisys, whereas the same period of the prior year did not contain a similar adjustment. A breakdown of our oil and gas product revenue is as follows. Our traditional product revenue for the three-month period ended December 31, 2020, was $1 million, a decrease of 58% compared to revenue of $2.4 million last year. The decrease in revenue is due to lower demand for marine seismic products, repairs of customer traditional seismic equipment, and support services provided to our customers. We expect continued low levels of demand for these products and services until seismic exploration activity increases from the historic lows we are seeing today. Our wireless product revenue for the quarter was $11.7 million, an increase of 31% compared to revenue of $8.9 million last year. The increase in revenue is due to a $9.9 million sale of 7,500 OBX rental nodes and the related central electronic equipment to an international seismic contractor. The sale was partially offset by a reduction in rental revenue due to lower utilization of our rental fleet and the conversion of the rental contract into a sale of the OBX rental notes. We expect lower demand for our wireless products and lower utilization of our rental fleet during fiscal year 2021 due to reduced global demand for oil and gas. As a reminder, we have not recognized revenue in fiscal year 2021 for a $12.5 million GCO product sale delivered in the second quarter of fiscal year 2020, secured by a $10 million promissory note. As of December 31st, 2020, we received $5.9 million in cash for principal and interest payments from our customer. Our customer continues to remain current on all payment obligations The cash payment received and cost of revenue associated with the sale have been recorded on our balance sheet as part of long-term deferred revenue and long-term deferred cost of revenue. We plan to recognize the revenue and cost of revenue for this transaction when we determine the collection of the promissory note is probable. Our reservoir product revenue for the first quarter was $29,000, a decrease of 87% compared to revenue of $218,000 last year. Reduced demand for engineering services and the sale, rental, and repair of the company's borehole tools are responsible for the decrease in revenue. We do not expect meaningful revenue from these products unless and until we are engaged in a contract for the delivery of a permanent reservoir monitoring system. In September of 2020, we received a request to bid on a large-scale PRM system from a major oil and gas producer. We declined to provide a bid on the project due to terms and conditions presented by the customer. We have continued discussions with the customer to resolve these issues, barring us from providing a PRM system. We do not know when or if these issues will be resolved and whether it will lead to the award of the contract. We continue to have discussions with other major oil and gas producers about PRM systems. Moving to adjacent markets product segment, our industrial product revenue for the first quarter was $4.4 million, an increase of 23% compared to last year's revenue of $3.6 million. The increase in revenue is due to higher demand for our water meter connector and cables and contract manufacturing service. We do not believe this increase in revenue marks a recovery from the effects of the COVID-19 virus on the demand for these products and services. Imaging product revenue for the first quarter was $2.5 million equal to the revenue for the same period of the prior fiscal year. We believe these products will continue to counter reduced demand until we see a recovery from the effects of the COVID-19 pandemic. Recovery for these products will not occur until there is a return of large social gathering like conferences, sporting events, and concerts. These gatherings consume or sell products that are manufactured using our imaging products. Revenue from our emerging market segments for the first quarter of fiscal year 2021 is $8.8 million compared to $100,000 for the same period of the prior fiscal year. The increase in revenue is a result of completing most of the obligations related to the contract with the U.S. Border Patrol that we signed in April of 2020. We expect to complete the remaining obligations of the contract during fiscal year 2021, although we currently do not have any additional significant contracts. We believe our advanced seismic acoustic technologies and the innovative data analytics developed by our quantum subsidiary provides customers with capabilities that will lead to future contracts. Our consolidated gross profit for the first quarter was $6.7 million compared to $2.5 million last year. The increase in gross profit was due to the large sale of our OBX rental equipment to the farmer lessee and the partial completion of the U.S. Border Patrol contract. These transactions were partially offset by low utilization of our GSX and OBX rental equipment and lower manufacturing productivity, increasing our unutilized factory costs. The first quarter of fiscal year 2021 operating expenses are $8 $8.2 million. This is a 21% decrease when compared to the $10.3 million for the first three months of fiscal year 2020. The decrease is a result of reduced personnel costs related to our cost reduction program that began in fiscal year 2020, a non-cash decrease in the fair value of contingent earn-out liabilities for our quantum and opti-size acquisitions, a decrease in research and development project costs, and a reduction in general business expenses related to business operations. Fiscal year 2021 cash investments into property, plant, and equipment is $600,000. We expect fiscal year 2021 capital investments into our rental fleet will be minimal unless new rental contract warrants additions to the fleet. Investments in property, plant, and equipment could be as much as $5 million further fiscal year 2021. Our balance sheet at December 31st, 2020 reflected $33.7 million of cash and cash equivalents. We had no long-term debt outstanding, and the borrowings available under our credit agreement was $14.7 million. We own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. That concludes my discussion. I'll turn the call back to Rick.
Rick Wheeler
All right. Thank you, Robert. A year has now gone by since COVID-19 began to wreak havoc on the earth, jeopardizing the health of mankind and disrupting whole national economies in the attempts to prevent its spread. The world is anxious yet hopeful that the vaccines emerging today will provide a path to normalcy. A successful recovery will take some time, though, and a true rendering of society's new normal after COVID-19 is still undefined. Therefore, many challenges remain ahead of us in fiscal year 2021, as they do for many other companies, including our customers. The reduced demand for energy that we've seen over the past year is a direct consequence of the reactions to COVID-19, and we believe it is unrealistic that this reduced demand will persist once the pandemic is contained. Renewable energy will be able to assist with some fraction of these near-term needs, However, servicing a full return and subsequent growth in primary energy demand will require a better recovery from existing oil and gas reservoirs and renewed exploration for new resources. The products and services we offer in our oil and gas market segment are ideally suited for these tasks, especially where the required fidelity of seismic imaging demands the highest quality data. As a new normalcy evolves and more facets of the economy ramp up, we fully expect our adjacent market segment to resume the trending growth it experienced prior to the COVID-19 pandemic. In its very essence, Geospace is a technology company, and our adjacent markets products embody innovative solutions that leverage our extensive engineering accomplishments in a broad range of industries. and our deep manufacturing skills give us the means to rapidly bring these products to market with tightly controlled quality and costs. This is very convincingly illustrated by the novel technologies incorporated in the border and perimeter security solution we are providing to the U.S. Border Patrol, the features and capabilities of which have not been seen before. We certainly anticipate challenges ahead in our 2021 fiscal year, And we believe our technical focus, conservative management and strong balance sheet with zero debt and ample liquidity will keep us on a path towards success. That brings us to the end of our prepared statements, and I'll now turn the call back over to Aaron for questions.
Operator
The floor is now open for questions. At this time, if you have a question or comment, please press star then one on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question comes from Bill DeZellum with Taton Capital.
Bill DeZellum
Thank you. I have a group of questions, but I'd like to start with OBX, if we could, please. Would you discuss the circumstances that led to your customer purchasing the rental equipment?
Rick Wheeler
Sure, Bill. This customer had been under a rental contract for some length of time for some significant work and projects using the OBX. Throughout the duration, our contract's offer the accrual of equity towards that purchase and in fact that's an incentive that we embed in our rental contracts to facilitate those sorts of sales. This particular customer had rented them for a length of time and had expectations of extended rental times that it made sense for them to go ahead and exercise that option within their contract and purchase these units. Given the larger amount of projects that we have been seeing probably for three years now where the OBX has taken a more dominant role in some of the marine exploration and reservoir monitoring, this is not completely unexpected and we may see some more of that going forward. But that is in essence what led them to buy these units.
Bill DeZellum
And how does the 7,500 nodes that they purchased, how does that compare to what this contractor has been using on many of their projects?
Rick Wheeler
They're using more than that overall, and they have more than one crew that's also utilizing OBXs. So this is just one of those contracts and one crew that is still renting some other units as well.
Bill DeZellum
Great, thank you. Let me shift, if I may, to PRM. Relative to the bid that you noted in the press release that you did not, I guess I said bid RFP, that you did not bid on, did anyone else bid on that piece of business?
Rick Wheeler
I'm really not at liberty to really discuss that just based on our NDA with that particular oil company. But certainly we entered into our decision based on its own merits and our own position.
Bill DeZellum
Let me ask the question in a way that might be answerable for you. Do you feel as though there is still an opportunity with that customer and that's why your conversations are continuing with them?
Rick Wheeler
Yes, we certainly believe that there's still opportunity there and is exactly why we're having these conversations.
Bill DeZellum
Great, thank you. And then relative to your comment in the release about other PRM contracts or fields that you are under discussions with, would you talk to us about the level of those conversations and how they compare relative to when a when an oil company really is genuinely close to either an RFP or making a decision?
Rick Wheeler
Well, I think that as we see it, you know, the fields that are being examined here would not expect to see these sorts of systems deployed until probably 2022 at the earliest. So these are looking forward, but these discussions, as you well know, take quite some time to come to terms with and to get the systems designed and suited for the fields that they're going to be deployed in. The discussions are of high interest. We're not just randomly having these discussions. We're being solicited to have these discussions, and so that's always an encouragement. But we don't anticipate any contracts to happen imminently here based on these discussions.
Bill DeZellum
Great. Thank you. And then let me jump to quantum, if I may. The press release specifically states, and I believe Robert's opening remarks made reference to the fact that this will lead to additional contracts. will is a pretty definitive statement, so I'm hoping for a little more commentary around that, please.
Rick Wheeler
All right. Well, actually, let me let Mark speak to that. I'm sure he's chomping at the bit to get some words since he's very excited about what we're doing for the Border Patrol.
Mark
Good morning, Bill. Good morning, Mark. Yeah, we're tracking this closely, so we're excited about what we've deployed so far and we're right on cost, right on schedule for that effort. We're looking at how FY21 appropriations is shaking out in this time of new administration and in light of a global pandemic. But I think what we're able to do and the value that we're adding from a security standpoint is going to be extremely well received, and I'm pretty confident that downstream from this, as we work through these budgeting cycles, we'll see follow-on work.
Bill DeZellum
And so I believe yesterday the new head of Homeland Security was confirmed. Is that relevant to, I guess, those of us on the outside, our hope that you would have another contractor that would be awarded when this one is completed, or is that not a disruptive factor that having now a permanent head of Homeland Security removes that distraction and disruption and in fact be favorable? I'm trying to understand the significance of that.
Mark
Yeah, it's a good question, and I'll try to give you a thoughtful answer. It has two perspectives. The first is we can have a stable leadership within the department. I don't mean of the individuals themselves. I mean of them coming and going. Working with acting secretaries and what's underneath them can be challenging for Customs and Border Protection and the Border Patrol because it's such a fluid environment, and that ultimately can trickle down to us. So having something stable will, I think, be of benefit to The second one is with the Democrats coming into office, they favor more heavily border security technologies. And the type of security that we provide, we have found to be perfectly bipartisan. We've never met with anybody who doesn't favor the security value that we offer. So what that means is FY21... has about $188 million so far that we're tracking on for appropriations. There might be, and this is kind of the key point, and I say might, there might be additional reallocation from border wall as the administration is looking to stand that down. That's going to be a lengthy process. There's legalities involved, but we're tracking that as well. So, Those are the two perspectives when you get stability into the department, and then the department wants to make sure that there is the appropriate balance of how you provide border security between physical and between technological.
Bill DeZellum
I know I've already taken up more than my allotted time, but Mark, you just said 188 million of allocations that you are tracking. When I compare that to a $10 million order you had last year, That's a pretty big difference. Would you talk to us about what that actually means, the $188 million?
Mark
Yeah, that's a good – and I'm glad you brought that up. It's overall for border security technologies. So the Department and Border Patrol will decide how they allocate that. And so we are a technology. We are not the only technology, as you might imagine. That can go to facilitate things. like further cameras being deployed or radars being deployed. It's a step in the right direction for how we make the environment along the border be something that's complementary to the physical security that's currently there.
Bill DeZellum
So when I think about the billions that generally we talk about when we think about federal budget, 188 million... actually seems pretty small in that scope. Are there other pieces that are relevant to the quantum business?
Mark
That's the place that we'll start. And your assessment of that proportion, I agree with. It does seem rather small, and that's why when we start to look at what aspects of the law are now going to be stood down and reprogrammed, it's a significant amount of money. And so we want to make sure we're there advocating for where some of those funds can go and make sure they're aligned more along the technology standpoint. And also keep in mind, as our current contract is coming to a close, part of that is its full test, if you will. And so I have a lot of confidence, complete confidence, but we're in a... planned understanding that the Border Patrol uses for introducing any new technology as a security in which you step through this process of test and evaluation. So I have confidence that we'll come out the other side doing rather well and that we can see if and when those security funds start to elevate.
Bill DeZellum
Are you under or in conversations already for that next order once you've completed this installation?
Mark
I can't say that at this time.
Bill DeZellum
And then lastly, is your equipment installed in such a location that it would give you an ability to identify illicit boats? Meaning that if you were installed in Arizona, that doesn't give you access to pick up anything in the Pacific Ocean, but if you were still on land but in Southern California right on the edge of the ocean, you would be able to do that. Are you in a position to do that?
Mark
Bill, that's a fabulous question, but I'm not allowed to say where we currently have been installed.
Bill DeZellum
Great. Thank you.
Operator
Once again, if you do have a question, you may press star then one on your touchtone phone at this time. We'll continue to pause for any additional questions. And we do have a follow-up from Bill DeZellum with Titan Capital.
Bill DeZellum
Mark, I actually want to continue down that same path that I was just on. The reason for the question is that we did see where there was a boat that was picked up, and I think the guy had a criminal record in the U.S. even though he was a Mexican citizen. And so theoretically, if you had your equipment on land, there in the U.S., but right next to the ocean. Would you be able, is the system capable of identifying boat traffic offshore in the ocean to the Coast Guard and Border Patrol that way?
Mark
Bill, you're a real problem for me, you know that? laughter Thank you, Mark. laughter What I'll say is before we were acquired by Geospace, Quantum had a deep relationship with a number of R&D organizations within the U.S. government. One of those functions that we performed was doing exactly that, having land-based sensors tracking boat traffic. So this is a proven capability. Our government knows about it. We, of course, are in constant conversations about where the next application might be for which we could add that value. Having GeoSpace now being a part of the GeoSpace family and their ability to make submarine data acquisition systems really gives me A lot of kind of street cred now when I go in and have these conversations of what we're able to do next and where that might apply. I want to be clear. I'm not specifically referring to any location such as the one you're mentioning. It may not even be with the Border Patrol. But it is a capability. It's one we've worked on. It's one we've refined. And it's one we look forward to trying to add value to for the government.
Bill DeZellum
Thank you. I appreciate the theoretical answer. Relative to the equipment that you have installed, I'm guessing by now that there is a level of operational capability. And if that is the case, have you had any success, I guess I'll say generically, nabbing bad guys?
Mark
You won't hear about any success we don't have, obviously. It's hard to report on a non-event. But when successes do occur, you will hear about it through proper channels coming out of the Border Patrol.
Bill DeZellum
Mark, thanks for taking all my questions.
Mark
You're welcome.
Operator
And our next question comes from Glenn Kukla with Kukla Capital Partners. Your line is open.
Glenn Kukla
Gentlemen, good morning. How are you? Good. How are you? Let me start by saying that I feel like a broken record, but great job again on cash management and conservative stewardship of the balance sheet. I see that cash and cash equivalence has trended slightly up from $32 million last quarter to $33.7 million this quarter. I wanted to ask, does any of that trend up or change include that customer's partial pay down of the $10 million note? I know you classified it as non-cash. current deferred revenue, but is that listed elsewhere on the balance sheet or is that listed as part of the cash and cash equivalents?
Aaron
Yeah, the cash we receive for them for their payments is included in that increase in cash. The offset is to the deferred portions on the balance sheet.
Glenn Kukla
Gotcha. Okay, very helpful. Do you have any prediction where you see cash and cash equivalents trending in the next 12 months, even with the stock buyback?
Aaron
Yeah, we don't normally provide that kind of information or we don't provide that information going forward.
Glenn Kukla
Fair enough. Next question. I noticed that the bank credit agreement dropped a little bit from $17 million to $14 million. Any reason for that?
Aaron
Just the normal changes within our balance sheet that are subject to adjustments in our borrowing base um you know we collect cash receivables go down and as a result the amount we can borrow changes along with that gotcha okay so they review that once a quarter and we make that a assessment once a quarter yes okay great um uh wanted to jump over to headcount
Glenn Kukla
Six months ago, headcount was reduced. Again, plays well into your good stewardship and knowing how to manage expenses well. Has headcount trended back up, or do you feel that it's plateaued?
Aaron
Yeah, I would say our headcount is, it continues to be down at a similar level as it was when we did our cost reductions.
Glenn Kukla
Okay, great. Last question about the imaging sub-segment. Any thoughts or any color on if that sub-segment is profitable, or if not, do you think it'll be profitable? And let me add that I miss going to concerts. I miss buying t-shirts, and I know that's one of the things you guys do. Looking forward to spending a lot of money on concert t-shirts and hopefully some of it goes back to Geospace, but is that sub-segment, would you say, is it profitable or not, or you don't have that level of detail available?
Rick Wheeler
Well, I mean, we do show cost of goods in the various segments there, which you can look at in our financials that we've published, but certainly we enjoy that business. It is good for the company, and It's part of our overall strategy of making sure that our footprint extends into more than just the oil and gas sector. To your point, it certainly has been impacted by the restriction of all the social events, a very vast number of them, including schools. School events and things of that nature are also part of all of that. So our customers of those products are the ones that provide benefits you know, the merchandising and other things for those sorts of events. And, you know, we're looking forward to, you know, the recovery that will occur after COVID-19 because we think that will go back to a more normal demand.
Glenn Kukla
Great. Even if demand returns, any thoughts of ever spinning that subsegment off?
Rick Wheeler
I guess we're always open to all things, you know, but we're going to Anything of that nature, we would have to examine what the return would be to our shareholders and how it would impact our business.
Glenn Kukla
Great. That's all I've got for today, guys. Again, great job and stay safe.
Rick Wheeler
Thank you.
Glenn Kukla
You do the same.
Operator
And there are no additional questions at this time. I'd like to turn the program back over to Rick Wheeler for any closing remarks.
Rick Wheeler
All right. Well, thank you, Erin. And I certainly thank everyone that's joined our call today. We'll look forward to speaking with you again on our conference call for the second quarter of fiscal year 2021 in May. So for now, goodbye.
Disclaimer