Geospace Technologies Corporation

Welcome to the Geospace Technologies second 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 Geospace Subsidiary Quantum Technology Services. 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. If you would like to ask a question at that time, please press star and 1 on your touchstone 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, press star 0. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.

Thank you, Brittany. Good morning, and welcome to Geospace Technology's conference call for the second quarter of our 2021 fiscal year. I'm Rick Wheeler, the company's president and chief executive officer, and I'm joined by Robert Curta, the company's chief financial officer. And also with us this morning is Dr. Mark Tinker, CEO of our Quantum Technology Sciences subsidiary. I'll first give an overview of the second quarter, and Robert will follow with an in-depth commentary on our financial performance. After a few last remarks, we'll open the line for questions that hopefully 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. This includes comments about product markets, revenue recognition, planned operations, and capital expenditures. Such 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 differing performance or results from what we say or imply today. These risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings. As a convenience, We will link a recording of this call on the investor relations page of our geospace.com website, and I encourage everyone to visit and browse that site to learn more about GeoSpace and its products. Note that the information discussed and recorded this morning is time sensitive and may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released financial results for our second quarter of fiscal year 2021, which ended March 31st, 2021. Just as the COVID-19 plague worsened in some locations while improving in others, our business segments reflected similar divergence in the second fiscal quarter. Yet, despite the challenges the pandemic has thrust upon us, there are signs of recovery for the overall economy as well as the businesses we serve. In many places, COVID-19 restrictions are being lifted, air travel is ramping up, and businesses are reopening and returning to work. Nonetheless, the pandemic's severe impact is evidenced in the three- and six-month periods ended March 31, 2021. In our oil and gas market segment, gaps in demand for our OBX marine nodal systems continued through the second quarter. This led to much lower rental revenue throughout the first six months of the fiscal year compared to last year. Moreover, as earlier OBX rental contracts ran to completion, many of the planned contracts for follow-on work and new surveys could not be started due to COVID-19 lockdowns and travel restrictions. In consolation, we believe much of this work will resume as COVID-19 vaccines are broadly distributed and recovery from the pandemic gains momentum. Even now, requests for quotes on future OBX system rentals have increased, and some new contracts are already underway or about to begin. On another positive note, lower rental revenue from our oil and gas market segment was largely offset by revenue recognized from the sale of a large GCL land recording system that was delivered a year ago. Since that time, the initial down payment and monthly promissory note payments we've received toward the purchase have been accumulating on our balance sheet as deferred revenue. However, our ongoing due diligence review of this customer, including recent audited financial information, has determined that completion of all remaining payments is probable and that revenue from this sale should be recognized. Despite the negative effects of COVID-19 and in contrast to the oil and gas market segment, second quarter revenue in our adjacent market segment experienced growth of 7% compared to the same three months a year ago. with that growth expanding to almost 10% over last year's first six months. The improvement is mostly attributed to even larger growth from our industrial products and services, which includes our smart water meter cables and connectors and our contract manufacturing. Notably, however, a portion of this growth was partially offset by reductions in revenue from our graphic imaging products, where many of our customers continue to be negatively impacted by COVID-19. But as the pandemic abates, we believe demand will increase for these products as promotions and merchandising for schools, sporting events, and other social gatherings resume. The vast majority of revenue from our emerging market segment was recorded in our first fiscal quarter and is thus reflected in the six-month period ended March 31, 2021, with very little contribution in the second quarter. This revenue is affiliated with the contract awarded by the Department of Homeland Security to our quantum subsidiary in April of 2020. The contract called for providing the Customs and Border Protection U.S. Border Patrol with a novel border and perimeter security solution comprising our unique technological advances in sensors, systems, and data analytics. We're very pleased that the deployment and installation of this advanced border and perimeter security solution proceeded on course. This accomplished expansion and diversification of products and services in our emerging market segment serves as a demonstration that Geospace is, first and foremost, an innovative technology company. Our focus strategy is to push highly engineered-for-purpose products into the hands of customers in other markets as well as in our oil and gas market, and we see even more of this occurring in our future. Before turning the call over to Robert, I'd also like to highlight that as of March 31st, 2021, we have purchased over 275,000 shares of our common stock as part of the stock repurchase plan we announced in November of 2020. This is just yet more evidence of our returning value to shareholders. At this point, I'd like to turn the call over to Robert for more financial detail.

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 for our second quarter ended March 31st, 2021, we reported revenue of $23.9 million compared to last year's revenue of $25.9 million. The net loss for the quarter was $7.2 million or 53 cents per diluted share compared to last year's net loss a $3.8 million or $0.28 per diluted share. For the six months ended March 31, 2021, we reported revenue of $52.3 million compared to revenue of $43.6 million last year. Our net loss for the six-month period was $8.2 million or $0.61 per diluted share compared to last year's net loss of $13.1 million or $0.97 per diluted share. Our oil and gas markets revenue is as follows. Our traditional seismic product revenue for the second quarter was $789,000, a decrease of 61% compared to revenue of $2 million last year. Revenue for the six months of 2021 was $1.8 million, a decrease of 59% compared to revenue of $4.4 million for the same prior year period. The reduction of revenue in both comparable periods is due to lower demand for traditional sensor products and marine seismic products. Our wireless product revenue for the quarter was $14.8 million, a decrease of 8% compared to revenue of $16.1 million last year. Wireless product revenues for the six months was $26.5 million, an increase of 6% compared to revenue of $25 million for the same period last fiscal year. The three-month and six-month periods both benefited from the recognition of $12.5 million in revenue from the sale of land wireless system delivered to our customer in the second quarter of fiscal year 2020. Excluding this sale, revenue from wireless products for the three and six-month periods was $2.3 million and $14 million, an 85% and 44% decrease in revenue for the same periods of fiscal year 2020. The six-month period is partially offset by the $9.9 million sale of used OBX rental equipment. The decrease in revenue is a result of selling a portion of our OBX rental fleet and lower utilization of the remaining OBX rental fleet caused by COVID-19-related lockdown and travel restrictions globally. We believe as COVID-19 restrictions are lifted or expired, seismic surveys using our equipment will resume or commence, resulting in a higher level of utilization of our OBX rental fleet. We believe the shift has begun. Our reservoir product revenue for the second quarter was 571,000, an increase of 69% compared to revenue of 337,000 last year. Reservoir product revenue for the six months period was 600,000, an increase of 8% compared to revenue of $55,000 last year. The increase for the three-month and six-month periods reflect a higher level of demand for our engineering services. We do not expect meaningful revenue from these products until we are engaged in a contract for the delivery of a permanent reservoir monitoring system. We continue to discuss PRM products with multiple customers but do not expect any significant PRM-related revenue to be recognized in fiscal year 2021. We believe a global recovery from the COVID-19 pandemic will increase energy demands. Increased energy demands will re-inflate demand for oil and gas, and our PRM systems provide the preeminent tool for oil and gas companies to maximize production from existing assets at lower cost and a reduced carbon footprint. Moving to our adjacent market segments. Our industrial product revenue for the second quarter of fiscal year 2021 was $5 million, an increase of 19% over the second quarter of 2020. Industrial product six-month revenue for fiscal year 2021 is $9.4 million, an increase over the same period in 2020 of 21%. Both periods revenue increases are due to higher sales of our water meter cable and connector products and higher demand for our contract manufacturing services. Imaging product revenue for the second quarter was $2.6 million, a decrease of 10% compared to last year's revenue of $2.9 million. The six-month revenue for imaging products for fiscal year 2021 is 5.1 million, a 6% decrease when compared to the same period in 2020. The decrease in revenue for both periods is due to lower demand for our products due to COVID-19 related restrictions on social gathering. We believe when these gatherings resume, demand for these products will increase. Finally, revenue from our emerging market segment totaled $165,000 for the three months and $9 million for the six-month period ending March 31st, 2021. Prior year revenue was $372,000 for the second quarter and $469,000 for the six-month period ending March 31st, 2020. The decrease in revenue for the three-month period over the prior year is due to fewer sales of our specialty border and perimeter security products. The increase in revenue for the six-month period is due to the partial completion of the contract awarded in April 2020 with Customs and Border Protection U.S. Border Patrol. We expect to complete this contract within fiscal year 2021. Our second quarter fiscal year 2021 operating expenses decreased by 2.4 million, or 21%, compared to the second quarter of 2020. The six-month operating expenses decreased by 4.5 million, or 21%, when compared to the same prior year period. The decrease in operating expenses for the three-month and six-month periods is due to reduced personnel costs related to our cost reduction program that began in fiscal year 2020, a non-cash decrease to 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 our business operations. Our six-month cash investments into property, plant, and equipment is $1.7 million. Depending on demand for our OBX Marine Rental Equipment, we expect fiscal year 2021 cash investments into our rental fleet to be approximately $2 million. And investments into our property plant equipment could be as much as $3 million. Our balance sheet at the end of the second quarter reflected $35.1 million of cash in short-term investments. We have no long-term debt outstanding. and the available borrowings under our credit agreement is $18.5 million. In addition, 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, and I'll turn the call back to Rick.