Geospace Technologies Corporation

Welcome to the Geospace Technologies 4th Quarter 2022 Earnings Conference Call. Hosting the 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 star 2. We ask that you please pick up your handset to allow 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.

Thank you, Ashley. Good morning, and welcome to Geospace Technology's conference call for the fourth quarter and year end of fiscal year 2022. I'm Rick Wheeler, the company's president and chief executive officer, and as mentioned, I'm joined by Robert Curta, the company's chief financial officer. And also on the call this morning is Dr. Mark Tinker, CEO of our subsidiary, Quantum Technology Sciences. I'll first provide an overview of the fourth quarter and year end, and Robert will follow up with in-depth commentary on our financial performance. Afterward, we'll open the line for questions that we'll try to answer. Some of today's statements may be forward-looking, as defined in the Private Securities Litigation Reform Act of 1995, and this includes comments about 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 performance results differing from what is said or implied today. These risks and uncertainties include those discussed in our SEC Form 10-K and 10-Q filings. For convenience, we will make a recording of this call on the investor relations page of our geospace.com website. And please take the opportunity to browse the website and learn more about GeoSpace and our products. Note that the information we record this morning is time sensitive and may not be accurate at the time one listens to the replay. So yesterday, after the market closed, we released our financial results for the fourth quarter and year end of fiscal year 2022, which ended September 30th, 2022. Our fourth quarter revenue grew more than 33% over last year's same period, exceeding the first three quarters of fiscal year 2022. This is largely attributable to the steady increase in demand for our OBX ocean bottom nodes as the year progressed, and we expect this demand will continue to grow in fiscal year 2023. Fourth quarter oil and gas segment revenue saw an additional boost as we began scheduled deliveries of specialty geophone sensors in partial fulfillment of a previously announced order that extends into fiscal year 2023. However, despite the improved Q4 performance, revenue for the full fiscal year missed last year's total by 6%, leading to a net loss for the year of $22.9 million. In response, we have begun the implementation of a board-approved dynamic plan intended to lead us to consistent profitability. The plan includes leveraging the successes of our diversification strategy that have created new products and revenue growth in the adjacent market segment. It also includes shedding the manufacturer of some low-margin, low-revenue products and reconfiguring our production facilities to lower our costs and raise efficiencies. As part of the plan, adjustments have already been made in our workforce since the fiscal year end and are expected to yield an annual savings of more than $2 million. And as our plan continues to unfold, regular evaluations of each business segment will focus on revenue opportunities as well as additional areas where costs can be reduced. Note that the fourth quarter and full year losses reported for fiscal year 2022 include a non-cash charge of $4.3 million for the impairment of goodwill related to our 2018 acquisition of Quantum. The technology we gained through this acquisition remains highly valuable and is in fact being targeted in a variety of new applications with promising revenue potential. However, past performance of our Quantum acquisition has not met the necessary expectations required to support its goodwill. Our reported losses also include a non-cash charge of approximately $400,000 for the write-off of certain heavy machinery in our cable shop. Over time, revenue from goods produced with this equipment has greatly diminished, and the space we'll recover from its removal will allow us to move our OBX rental operations from a nearby satellite facility to our main campus. This consolidation should provide much better efficiency and utilization of the factory, and in turn, reduce costs and increase our profitability. Recent conversations with our permanent reservoir monitoring, or PRM system, customers have led us to expect additional delays in the timing of a potential tender, although they've indicated that their overall interest and intentions have in no way diminished. This means the most opportune time for the transformation of our cable shop is now, when it should not interfere with ongoing main campus manufacturing activities, nor disrupt any ongoing OBX rental operations with the move. Note also that the ability of our cable shop to build both electrical and optical PRM system cables will remain intact after the transition. While we are certainly encouraged by favorable trends in our oil and gas segment, we are especially pleased with the revenue growth and product expansion of our adjacent market segment. Fourth quarter revenue from our adjacent markets products became the second highest in its history, almost matching the all-time record set in the fiscal year's third quarter. For the full 2022 fiscal year, our adjacent markets revenue reached $39.2 million. This outperforms last year's result by 21% and sets yet another full-year record for that segment. Within the segment, our Exile graphic imaging products, water meter cables and connectors, and contract manufacturing services each set new full-year records of their own. In another first, the fourth quarter included the very first shipment of our QuantaSmart water valves and subscription-based cloud control software. The dollar amount was not significant, but it nonetheless marks the beginning of what we believe will be another path of profitable expansion in the years to come. Overall, the ramping performance of our adjacent market segment provides strong validation that our strategy of selective diversification outside of the oil and gas industry is working by broadening our revenue base and moving us forward on a path toward profitability. Now, I'll turn the call over to Robert to provide more financial detail on the fourth quarter and full year.

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 fourth quarter ended September 30, 2022, We reported revenue of $25.9 million compared to last year's revenue of $19.4 million. The net loss for the quarter was $8 million or $0.62 per diluted share compared to last year's net loss of $5 million or $0.39 per diluted share. For the 12 months ended September 30, 2022, we reported revenue of $89.3 million compared to revenue of $94.9 million last year. Our net loss for the 12-month period was $22.9 million or $1.76 per diluted share compared to last year's net loss of $14.1 million or $1.05 per diluted share. Here is our oil and gas market segment revenue. The oil and gas market segment produced revenue of $14.8 million for the three months ended September 30, 2022. This compares with revenue of $10.7 million for the same period of the prior fiscal year an increase of 38%. The 12-month period ended September 30, 2022. The segment contributed revenue of $49.1 million versus $52.3 million for the same prior year period. The increase for the three-month period is due to higher demand for our seismic sensor and a higher level of repair parts and services needed for the repairs of customer-owned marine wireless products. The 12-month decrease in revenue is due to lower demand for the purchase of our land and marine wireless products, partially offset by higher utilization of our marine wireless rental fleet and a higher demand for our seismic sensors. Our adjacent market segment revenue is as follows. Our industrial product revenue for the fourth quarter of fiscal year 2022 was $7.2 million, an increase of 30% over the fourth quarter of 2021. The industrial product's 12-month revenue for the fiscal year 2022 is $25.6 million, an increase over the same period in 2021 of 20%. Both periods' revenue increases are due to higher sales of our water meter, cable, and connector products, industrial sensor products, and contract manufacturing services. Imaging product revenue for the fourth quarter was $3.7 million, an increase of 21% compared to last year's revenue of $3.1 million. The 12-month revenue for the imaging products for fiscal year 2022 is $13.5 million, a 22% increase when compared to the same period in 2021. The increase in revenue for both periods is due to a higher demand for our thermal imaging equipment and consumable film products. Finally, revenue from our emerging market segment for the fourth quarter was 140,000 compared to 170,000 for the same period in 2021. The 12-month revenue for the segment for fiscal year 2022 was 711,000 compared to 10.2 million for the same prior year period. The decrease in revenue for both periods is due to meeting contractual obligations in fiscal year 2021 for a contract with the Customs and Border Protection U.S. Border Patrol that was awarded in April of 2020. Our fourth quarter fiscal year 2022 operating expenses increased by $6.1 million compared to the fourth quarter of 2021. The increased operating expenses for the three months ended April 30, 2022 was due to due to a one-time non-cash charge for the goodwill impairment in the company's emerging market segments, a decrease in favorable non-cash adjustment for contingent consideration related to our quantum and optoscience acquisitions, and higher engineering project expenses. The 12-month operating expenses increased by $8 million or 24% when compared to the same prior year period. The increase in operating expenses is due to the goodwill impairment in the fourth quarter already mentioned, higher engineering project costs, increased personnel costs, incremental operating costs associated with our recent acquisition of Quanta, and increased sales, marketing, and other general business expenses. This increase was partially offset by an increase in favorable non-cash adjustment for contingent consideration related to the quantum and opti-size acquisitions. Our 12-month cash investment into our rental fleet was $4.8 million, and cash investments into property, plant, and equipment was $1.1 million. Our balance sheet at the end of the fourth quarter reflected $17 million of cash in short terms and investments, and we have $8.5 million of additional liquidity from our credit facilities. 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. I'll return the call back to Rick.