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 Third Quarter 2021 Earnings Conference Call. Hosting your call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curta, the company's Chief Financial Officer, and Mark Tinker, CEO of Geospace 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 be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. 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 for optimal sound quality. Lastly, if you should require operator assistance, please press star 0. It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin.
Rick Wheeler
Thank you, Brittany. Good morning, and welcome to Geospace Technology's conference call for the third quarter of our 2021 fiscal year. Again, I'm Rick Wheeler, the company's president and chief executive officer, and I'm joined by Robert Curda, the company's chief financial officer. Also, Mark Tinker, Dr. Mark Tinker, CEO of our quantum technology sciences subsidiary, should be able to join us a little later on in the call. I'll first give an overview of the third quarter, and Robert will follow with 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 hopefully 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 included 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. I encourage everyone to visit and browse the site to learn more about GeoSpace and its products and our subsidiaries. Note that the information discussed and recorded in this morning's call is time sensitive and may not be accurate at the time one listens to the replay. After the markets closed yesterday, we released our financial results for the third quarter of fiscal year 2021, which ended June 30th of 2021. As mentioned, with the world's aspirations focused on a global wide recovery from the COVID-19 pandemic, it was encouraging to see that revenue in our third fiscal quarter slightly exceeded that of last year's third quarter. It was even more encouraging that combined revenue for the first nine months of fiscal year 2021 reflected an increase of almost 14% over the same period last year. These increases occurred despite the significant reduction in both periods of revenue received from rentals of our OBX marine nodal recording systems. As we've previously reported in our last call, certain follow-on surveys that intended to utilize our OBX systems were delayed or canceled due to COVID-19 restrictions and lockdowns which left these systems underutilized. It's noteworthy, however, that rental revenue in this third quarter more than doubled in comparison to the preceding quarter. This provides some indication of OBX demand improving as new projects go forward. In opposition to the lower revenue from our oil and gas market segment, revenue from our adjacent market segment experienced major year-over-year increases for both the three- and nine-month periods into June 30, 2021. The respective increases over the last year of 84% and 30% can be attributed in both periods to a variety of factors. These include stronger sales of our smart water meter cables and connectors, higher utilization of our contract manufacturing services, and greater demand for our graphic imaging products. When recovery from the COVID-19 pandemic gains additional momentum, we anticipate the demand for these products will continue to trend upward. We believe the steady overall growth exhibited in our adjacent market segment offers tangible evidence that our deep-rooted expertise in innovative engineering and manufacturing continues to bring ever-increasing technological value to an ever-expanding market. Along these lines, our recently announced acquisition of Aquana LLC further demonstrates our strong commitment to deliver state-of-the-art IoT solutions to the diversified yet highly technologically aligned industry of smart city initiatives. The cloud-based controls and data management provided by the Aquana platform and its products help both water utilities and property managers conserve critical water resources and reduce their costs. Our quantum technology science subsidiary, which makes up our emerging market segment, contributed 1.1 million to third quarter revenue, bringing the segment's nine-month year-to-date total to $10 million. The majority of revenue for both periods is the result of completion efforts on the contract awarded to Quantum by the Department of Homeland Security in April of 2020. The contract called for providing the U.S. Border Patrol with a highly effective border and perimeter security solution that utilizes our sophisticated sensor-based systems in conjunction with Quantum's ultra-advanced analytics. Taken together, our adjacent and emerging market segments combined to generate 45% of total revenue in both the three- and nine-month periods into June 30, 2021. Now, just before I turn the call over to Robert, let me remind everyone that in an effort to return meaningful value to our shareholders, we announced a stock repurchase plan in November of 2020. I'm pleased to report that as of August 4th, 2021, we had purchased a total of 553,588 shares of our common stock for approximately $4.7 billion since that program's inception. The company has also authorized an additional $2.5 million for this buyback program. Now with that, I'll turn the call over to Robert for more financial detail.
Brittany
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 third quarter into June 30th, 2021, we reported revenue of $23.1 million compared to last year's revenue of $22.7 million. The net loss for the quarter was $787,000, or $0.06 per diluted share, compared to last year's.
Rick Wheeler
I apologize, everyone, for the technical difficulties we've had. So we really don't know where we lost you in the call. But let me just begin with what we reported. So after the markets closed yesterday, we released our financial results for the third quarter of fiscal year 2021, which ended June 30th of 2021. As we mentioned, with the world's aspirations focused on a global wide recovery from the COVID-19 pandemic, it was encouraging to see that revenue in our third fiscal quarter slightly exceeded last year's third quarter. And it was even more encouraging that combined revenue for the first nine months of the fiscal year 2021 reflected an increase of almost 14% over the same period last year. These increases occurred despite the significant reduction in both periods of revenue received from rentals of our OBX marine no recording systems. As we reported earlier in our call for the previous quarter, certain follow-on surveys that intended to utilize our OBX systems had been delayed or canceled due to COVID-19 restrictions and lockdowns. which left these systems underutilized. It's noteworthy, however, that rental revenue in this third quarter more than doubled in comparison to the preceding quarter. This provides some indication of OBX demand improving as new projects go forward. In opposition to the lower revenue from our oil and gas market segment, revenue from our adjacent market segment experienced major year-over-year increases for both the three and nine-month periods into June 30th of 2021. The respective increases over the last year of 84% and 30% can be attributed in both periods to a variety of factors. These include stronger sales of our smart water media cables and connectors, high utilization of our contract manufacturing services, and greater demand for our graphic imaging products. When recovery from the COVID-19 pandemic gains additional momentum, we anticipate that demand for these products will trend upwards. The steady overall growth exhibited in our adjacent market segments offers tangible evidence that our deep-rooted expertise in innovative engineering and manufacturing continues to bring ever-increasing technological value to an ever-expanding market. And along these lines, our recently announced acquisition of Aquana LLC further demonstrates our strong commitment to deliver state-of-the-art IoT solutions to the diversified yet highly technologically aligned industry of smart city initiatives. The cloud-based controls and data management provided by the Aquana platform and products help both water utilities and property managers conserve critical water resources and reduce their costs. Our quantum technology sciences subsidiary, which makes up our emerging market segment, contributed $1.1 million to third quarter revenue, bringing the segment's nine-month year-to-date total to $10 million. The majority of revenue for both periods is the result of completion efforts on the contract awarded to Quantum by the Department of Homeland Security in April of 2020. The contract called for providing the U.S. Border Patrol with a highly effective border and perimeter security solution that utilizes our sophisticated sensor-based systems in conjunction with Quantum's ultra-advanced analytics. Taken together, our adjacent and emerging market segments combine to generate 45% of total revenue for both the three- and nine-month periods in the June 30th of 2021. Before I turn the call over to Robert, let me remind everyone that in an effort to return meaningful value to our shareholders, we announced a stock repurchase plan in November of 2020. I'm pleased to report that as of August 4th, 2021, we had purchased a total of 553,588 shares of common stock for approximately $4.7 million since the program's inception. The company has also authorized an additional $2.5 million for this buyback program. With that said, I'll now turn the call over to Robert for more financial details.
Brittany
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 third quarter ended June 30th, 2021, we reported revenue at $23.1 million compared to last year's revenue at $22.7 million. And that loss for the quarter was 787,000 or 6 cents for diluted share compared to last year's net loss of 2.3 million or 17 cents for diluted share. For the nine months into June 30th, 2021, we reported revenue of 75.4 million compared to revenue of 66.3 million last year. Our net loss for the nine month period was 9 million or 67 cents per diluted share. compared to last year's net loss of $15.4 million, or $1.14 per due loaded share. Our oil and gas markets revenue is as follows. Our traditional seismic product revenue for the third quarter was $2 million, an increase of 67% compared to revenue of $1.2 million last year. The increase in revenue is due to higher demand for our traditional seismic sensor products. Revenue for the nine months of 2021 was $3.7 million, a decrease of 33% compared to revenue of $5.6 million for the same prior year period. The reduction of revenue is due to lower demand for our traditional seismic sensor products and marine seismic products. Our wireless product revenue for the quarter was $9.6 million, a decrease of 40% compared to revenue of $16.1 million last year. Wireless product revenue for the nine months was $36.1 million, a decrease of 12% compared to revenue of $41.1 million for the same period last fiscal year. The reduction in revenue for both periods is due to lower utilization of our OBX rental fleet caused by the effects from the COVID-19 pandemic. Offsetting the reduction for the three-month period is a $2.9 million sale of land-based wireless seismic products. The reduction in revenue for the nine-month period is largely offset by the recognition of $12.5 million of revenue related to a land-based wireless seismic product system delivered to the customer in the prior year, a $9.9 million sale of used OBX rental equipment to the former lessee of the equipment, and the third quarter land-based wireless seismic product sale I mentioned before. We believe as worldwide COVID-19 related lockdowns and travel restrictions come to an end, higher levels of utilization of our rental equipment, OBX rental equipment will be achieved as planned seismic projects will be resumed or commenced. Our reservoir product revenue for the three and nine months period ended June 30th, 2021 was 1.1 million at 1.7 million respectfully. This reflects increases of $800,000 for both periods when compared to the three- and nine-month periods last year. The increase in both periods is due to a higher level of performed engineering services. We believe the best opportunity for meaningful revenue from this segment will be from future contracts for the design, manufacturing, and deployment of PRM systems. 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. Moving to our adjacent markets segment, our industrial product revenue for the third quarter of fiscal year 2021 was $6.5 million, an increase of 90% over the third quarter of 2021. Industrial products nine-month revenue for fiscal year 2021 is $15.8 million, an increase over the same period in 2020 of 42%. Both periods' revenue increases are due to higher sales of our water meter, cable, and connector products and higher demand for our contract manufacturing service. Imaging product revenue for the third quarter was $2.9 million, an increase of 72% compared to last year's revenue of $1.7 million. Nine-month revenue for imaging products for fiscal year 2021 is $8 million, a 13% increase when compared to the same period in 2020. The increase in revenue for both periods is due to increased demand for our thermal imaging products. Finally, revenue from our emerging market segment totaled $1.1 million for the three months and $10 million for the nine-month period ending June 30, 2021. Prior year revenue was $88,000 for the third quarter and $557,000 for the nine-month period ending June 30, 2020. The increase in revenue for both periods over the prior year is due to partially fulfilling the contract awarded in April of 2020 with Customs and Border Protection, the U.S. Border Patrol. We expect to complete this contract within fiscal year 2021. Our third quarter of fiscal year 2021 operating expenses decreased by 2.6 million or 24% compared to the third quarter of 2020. Nine-month operating expenses decreased by 7.1 million or 22% when compared to the same prior year period. The decrease in operating expenses for the three and the nine-month periods is due to reduced personal 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 optosite acquisitions, a decrease in research and development project costs, and a reduction in general business expenses related to our business operations. Our nine-month cash investments into property, plant, and equipment is $2.5 million. Our cash investment into our rental fleet is $1.5 million as of June 30, 2021. We expect fiscal year 2021 cash investments to our rental fleet to be approximately $2 million and cash investments into our property, plant, and equipment to be about $3 million. Our balance sheet at the end of the third quarter reflected $30 million of cash and short-term investments. We have no long-term debt outstanding, and the available borrowing under our credit agreement is $17.7 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.
Rick Wheeler
Thank you, Robert. While recoveries from the effects of the COVID-19 pandemic have made great progress, emergence of the Delta variant and increasing case numbers in many areas give some pause and caution to any hard optimism on the timing of recovery. Nonetheless, we are encouraged by the results that were achieved in the first nine months of our fiscal year. The demand for our OBX system shows incremental improvement, even though some project opportunities have moved further out in time. Also, progress continues in our discussions with major oil and gas producers for permanent reservoir monitoring or PRM systems. And we believe a new tender for a PRM system could be released before the end of our fiscal year. The growing interest of oil and gas producers in using our PRM systems to better manage their fields has never been higher. And the depth of investigative inquiry brought about in these discussions reflects very serious opportunities over the next several years. Meanwhile, we continue to expand our growing profile of advanced products and services offered in our adjacent market segment. We believe the integration of Aquana's innovative products with our existing technology catalog creates multiple opportunities for future growth in this segment. And in our emerging market segment, we believe additional contracts will follow for our quantum subsidiary as the deployed systems for the U.S. Border Patrol begin to demonstrate their profound value. In light of these opportunities, in conjunction with our strong debt-free balance sheet and our outlook on the future remains positive and optimistic. This concludes our prepared commentary and now I'll turn the call back over to Brittany for questions.
Operator
The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we ask that while you pose your question, you pick up your handset to allow for optimal sound quality. Thank you. And we will take our first question from Bill Desim with Titan Capital.
Bill Desim
Thank you. I have a group of questions, and let's start with PRM, if we could please. I think this is the first time that I have heard you reference serious opportunities or maybe just said very serious opportunities. So with that in mind, do you have more, I suppose, or fewer interested PRM parties today than you did one or two quarters ago? Or is it the same group of prospective customers? Their level of interest is just increasing.
Rick Wheeler
I think it's essentially the same group of customers, Bill. Some of those discussions were perhaps earlier on in their initial forays of investigative work, but have absolutely progressed since that first and second quarter. But it's essentially the same group. And they are serious because while we're not revealing the nature or scope of some of these efforts, they do involve some significant fields.
Bill Desim
Would you like to characterize the size of what a significant field means in terms of revenue?
Rick Wheeler
No, really can't do that. I mean, that's just giving too much advanced sort of perspective of things, and they can change over the course of time. But clearly, if you look at our history, you can tell that there have been some significant projects that we've put together, and these certainly can fall into those same categories.
Bill Desim
That's helpful, Rick. And then are these parties or prospects, are they new to PRM or have they been customers in the past?
Rick Wheeler
Some are new to PRM, except perhaps in their partnered arrangements with other oil companies that were operators of fields that had PRMs. But as you probably well know, I mean, that science is now very well established. The given focus on oil companies to manage their fields in such a way to get more out of their existing capital resources that they've already invested certainly warrants PRM to have a hard look at doing so. In addition, with carbon capture, what it is today is in terms of a goal, oftentimes the enhanced oil recovery out of these fields is accomplished through injection of CO2. You know, there's additional aspects that make this interesting.
Bill Desim
Okay, that is helpful. And then you did mention that you see a tender. Well, actually, before we go there, are the geographies that these systems are being discussed to be deployed in the same as what we have seen you deploy in the past? or are these new geographies new regions of the world, I suppose I should say?
Rick Wheeler
Well, we've operated all over the world, so these geographies certainly are adjacent or in similar waters as where they have been before in many cases. There's a lot of deep water interests, if that's helpful to you, but they're all over the globe.
Bill Desim
All right, thank you. And then relative to the tender that you anticipate or think could happen by the end of September. Is this the same company that had a tender in the past that the terms were onerous and you chose not to submit to, or is this a new prospect?
Rick Wheeler
This is the same company. There were just some business considerations that precluded you know, participating in that original tender, but it's every expectation that a new tender will come out in that timeframe.
Bill Desim
And is it your expectation with having discussions with the customer that this will be a tender that you will be comfortable responding to, or is that still to be determined?
Rick Wheeler
Well, that's to be determined. We're certainly hopeful of that. Our discussions have been very fruitful with respect to, you know, what some of the issues were that we all needed to confer on. And hopefully that has been accomplished, but we'll see.
Bill Desim
All right. That is helpful. And then, Mark, I don't want you to feel left out here again. So, may I switch to quantum? And there was a reference in the release that kind of prompts this question. What is it or what can you share? to indicate that the system is working as the border patrol hopes or what is it that needs to be demonstrated and has that been demonstrated to them already? Maybe just let's just open it up broadly, please. Hi, Bill.
Mark
Nice to speak with you again. Part of our contract to successfully close it out required formal assistance acceptance testing. And that is when we go through a series of government witness and participant tests to make sure the system performed to spec. And we have successfully completed that.
Bill Desim
You have successfully completed the, that you just said? Yes, sir. Okay. So, now let me kind of bring the question to a more basic level. For those of us on the outside, What can you share with us to indicate or demonstrate that the system is doing things that are good for the Border Patrol? Very little.
Mark
Now that the system is operational, it is now being used by them to meet the mission that it was designed to serve. past that, it starts to enter into law enforcement activities that I'm not always privileged to. And if and when I am, I am unable to share. So I am sorry for that frustrating answer. That's the current case.
Bill Desim
Totally understand. I'm going to try a slightly different angle. If we were to have, those of us on the outside, if we were to have the same insights that the border patrol has shared with you that they have gained, would we see the value to the system yet or is it still too early for that?
Mark
I think we all would be seeing value.
Bill Desim
Thank you. And then one additional question. Just timing of the next order. So in light of the fact that even for us laymen, we would see value if we had the proper clearance, what's needed now to move us to the next purchase?
Mark
Well, now we're subject to the headwaters of government funding, which is Capitol Hill. So as everyone on the call I'm sure is aware, we're seeing fiscal year 22 budgets start to emerge. It's likely that we will enter into a continuing resolution for Homeland Security budgets that dips us into likely December or possibly January. So this is the hurry up and wait process as the funds and budgets become more established based on the performance and the needs of the agencies that these funds and budgets support. So, we're now sitting back letting the system do its job supporting that operation in the manners that we can and making sure that the necessary decision makers are aware of its value.
Bill Desim
And to that point, since the system has been deployed, has there been, have there been items that those holding the purse strings in Congress have seen that would make them more likely to want to fund?
Mark
You've asked a very targeted question, and I would love to give you the answer. I can't at this time. I'm sorry.
Bill Desim
That's all right. Thank you for the help, and we'll look forward to what happens after we're done waiting. Thank you, Bill. Thank you.
Operator
And once again, if you have a question, please press the star and 1 on your touchtone phone at this time. And we'll take our next question from Scott Bundy with Morrison Cabot.
Scott Bundy
Hi, Rick.
Rick Wheeler
Hi, Scott. Nice to hear from you.
Scott Bundy
Thank you very much. I have a question, Mark. I'm going to... I'm going to reference, if you don't mind, to sort of get to the answer. The Border Patrol improved Southwest border technology, but significant challenges remain. It was put together in February 23rd of this past year. I'm quite sure you're aware of it. And just bear with me for a second here. It says Border Patrol expects that security improvements introduced by the new border wall may improve. increased the threat of cross-border tunneling, but according to Border Patrol, currently lacks adequate technology to detect tunnels or tunneling activities or monitor permanent cross-border tunnels. Bear with me for one more second here. According to a senior program official, until recently, the tunnel detection capabilities that existed on the market were technically immature and did not meet the Border Patrol's mission. So my question is, and if you go through this report, they indicate that six miles of sensors will be laid down and the potential for another 100 miles in the future. My question is, do we have competition?
Mark
That wasn't the question I was expecting you to ask. I'm familiar with that report. Sometimes you have to have competition to progress an opportunity within the government. I think our systems stand alone. And the Intel recently part might be a profound revelation within that report.
Scott Bundy
And from, Bill probably asked this, I'm going to ask it slightly differently. What's left to do to open the eyes of people to make them aware of just what you guys have done in the past, which you obviously can't talk about, I understand. What's left?
Mark
We have to serve the missions. And in so doing, there's going to be latency of those revelations to the individuals on this call. That's where I get stuck. So we serve the mission. We serve the Border Patrol. It's their mission, their job. And we are a component of a massive law enforcement organization in the Border Patrol. And when they have successes, they execute those successes. And we may or may not be one of the key contributors to that. But later downstream, as those law enforcement operations are concluded, they become a little bit more revealing as to what's occurred. And so that latency is the challenge between where we are today and getting the system in, performing, and running, which was the big milestone that we're all very proud of, and now serving the mission and enjoying some successes. And past that, I either have to speculate in ways I love to do, but it's not appropriate on this call, or...
Scott Bundy
I get that. Let me just, this is just for my own ignorance, if you don't mind. In this report, they go through pretty significant detail about, oh, let me just use Andrel or Elbit systems in terms of line of sight activity. And we all know that there was appropriation to Andrel of a pretty significant amount of money. I think it was in the order of a couple hundred million dollars. So What do you think Andral did to get $200 million that you guys need to do to get whatever?
Mark
They didn't get it. So there's a lot of good marketing going on there. Deals have not – you have to perform and you have to execute through the contract for a long period of time. Some of those things are more forward in what they're able to talk about because they are using line-of-sight technologies. that we all enjoy every day. We at GeoSpace and Quantum have profound non-line-of-sight capabilities that we know serve oil and gas effectively. And now that we're bringing that into the security and surveillance market, we have to be guarded into their effectiveness. And so for us to get those funds, that's what we're doing. So these dominoes are falling in sequences they're supposed to. Again, the system's in the ground. It's performant. It's now meeting mission and going forward. So as we continue to meet that mission, I think downstream from here, we'll be pleased with where we end up.
Scott Bundy
My last question, I think you can answer this. I found it quite interesting in the State of the Union address that President Biden said something to the effect that, wait till you see the technology we have at the border or something to that effect, is it fair to say he's aware of what's going on?
Mark
I wouldn't be surprised if he was aware of what's going on.
Scott Bundy
You are aware of what I'm talking about?
Mark
Yes, sir.
Scott Bundy
Thank you very much, guys.
Mark
Thank you. Thanks, Scott.
Operator
And there are no further questions at this time. I will turn the program back over to Rick Wheeler for any additional or closing remarks.
Rick Wheeler
All right. Well, thank you, Brittany. And thanks to everyone who joined our call today. We look forward to speaking with you again on our conference call for the fourth quarter of fiscal year 2021 in November. So thanks again. Sorry for the earlier technical difficulties. Goodbye.
Operator
Thank you. This does conclude today's Geospace Technologies Third Quarter 2021 Earnings Conference Call.
Disclaimer