Ion Geophysical Corporation

Greetings, and welcome to the ION Geophysical Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require assistance during the conference, please press star then zero on your telephone. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel White, Vice President, Investor Relations. Thank you. You may begin.

Good morning and welcome to ION's third quarter 2021 earnings conference call. We appreciate your joining us today. As indicated on slide two, our hosts today are Chris Usher, President and Chief Executive Officer, and Mike Morrison, Executive Vice President and Chief Financial Officer. We'll be using slides to accompany today's call, which are accessible via link on our website, iongo.com. There you will also find a replay of today's call. Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements. These statements are subject to various risks and uncertainties, including those detailed in our latest 10-K and other SEC filings, which may cause our results or performance to differ materially from those projected in these statements. Our remarks today may also include non-GAAP financial measures. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, can be found in our earnings release issued yesterday. I'll now turn the call over to Chris, who will begin on slide four.

Thank you, Rachel. Good morning, everyone, and thanks again for joining us. Today, we'll discuss ION's financial results, our progress diversifying into market segments with higher returns, and the outlook for energy and maritime operations industries we target. Our third quarter results improved considerably, largely due to the successful execution of our 3D strategy, and we expect to have a strong finish to the year. We delivered $44 million of revenues, an increase of 125% sequentially, and $22 million of adjusted EBITDA up significantly from last quarter. The second, significantly larger phase of our Mid-North Sea High 3D program was completed ahead of schedule, and a third fully funded extension began. Our team also continued to advance our diversification strategy in ports and offshore logistics through our climate-smart maritime digitalization solutions. Mike will elaborate shortly on the progress we've made in the evaluation of strategic alternatives, and the additional cost reduction program announced last quarter. So this is a good juncture to express how pleased I am with the whole ION team's third quarter performance and their fulsome demonstration of how we can punch above our weight. Everyone has been through a lot over the last 20 months of disruption and transition, and hard work and focus deserves due credit. So thank you. Let's start with the market dynamics and our strategy to succeed in the rapidly evolving energy and maritime operations industries. Both the global economy and commodity prices have rebounded above pre-pandemic levels. In the last year, Brent crude has risen over 125% to about $85 a barrel. Historically, rising commodity prices correlated closely with increased exploration spending. However, despite generating near-record profits, energy companies' exploration spending has become decoupled from oil prices as cash flow is directed towards dividends, share buybacks, paying down debt, and accelerating investment in energy transition-related strategies. Although supplies tightened, analysts anticipate seismic spending will remain muted near term as budgets are allocated to existing developments at the expense of future oil and gas projects, which still have a discretionary profile. The energy transition has narrowed our clients' focus and magnified the importance of precision around our future investment decisions. As we have said for some time, we expect data purchases will largely be aligned with lower-risk, higher-return strategies focused on stable regulatory environments, proven basins, lower carbon, and infrastructure-led exploration that leverages existing nearby facilities. ION is strategically investing in programs where we believe capital will continue flowing throughout the energy transition, such as the North Sea in Brazil. Meanwhile, investment in the energy transition is rapidly approaching that of traditional oil and gas. While posing clear challenges, the energy transition has also created new opportunities for the geophysical industry. Our data will help customers efficiently locate and develop energy resources with lower emissions and environmental impact whether it's more traditional sources or renewable ones. For example, there are potential seismic applications in offshore wind, carbon capture and storage, geothermal, and more. Our regional basin span data is already helping to identify and evaluate potential carbon storage fairways across the Gulf Coast and Gulf of Mexico to help mitigate emissions that impact climate change. But with respect to our core business, even in the most aggressive energy transition scenarios, offshore oil and gas is expected to remain an important part of the energy mix required to meet global demand, for at least the next two decades. We expect the seismic market will continue to improve as the majors settle into their new strategies, which includes near-infrastructure exploration, and national oil companies continue expanding beyond their home geographies. In particular, we believe that our strategic decision to participate in the 3D new acquisition multi-client market with some select ion differentiators will enable us to continue to capture market share even with limited recovery and industry conditions. That said, we are also focused on rapidly diversifying outside of energy into much larger markets where we can increase the stability and share of recurring software revenue in our business. We are targeting port management, energy logistics, and maritime digitalization markets. Our strategy is to empower industrial and government clients to sustainably operate in the maritime environment at lower cost, with reduced emissions, and with actionable intelligence around their marine resources. These large capital intensive ecosystems present significant digitalization opportunities. In our E&P technology and services business, revenues improved over 200% sequentially, primarily due to the successful execution of our 3D strategy. This portfolio pivot from 2D to 3D shifts our new product investment closer to the reservoir where client spend tends to be more consistent and programs have larger scale revenue and earnings potential. Even in a challenging environment, our multi-client market share increased approximately 50% through a purposeful focus on new 3D assets. More than half of the revenue generated this quarter stemmed from our 3D programs, from the two new acquisition campaigns in the North Sea to our immense, artfully remastered re-imaging program offshore Brazil. Our team not only completed the larger second phase of Mid-North Sea High ahead of schedule, but also launched a third fully funded extension nearby. I'm especially pleased that this new program allowed us to expand our strategic foothold in this promising North Sea sector in the same season as our Phase II programs. The Mid-North Sea High Program covers one of the few remaining underexplored areas offshore the U.K. where relatively low development costs close to shore make it attractive for future investment. Data collection for the aforementioned 700 square kilometer third phase is expected to wrap up mid-November. Over the next year, multiple exploration and appraisal wells will test new prospects and further quantify nearby discoveries. Based on the outstanding subsurface image quality demonstrated in Phase 1, We expect to provide a regional perspective with fresh insights for developing the entire UK's next-time play. This program is a great example of how new, high-quality data can unlock the potential of new acreage. In addition to the North Sea, we are continuing to expand our highly successful Pecanio 3D re-imaging data set offshore Brazil. Brazil remains one of the hottest exploration spots globally due to the low development cost of its reserves, with some offshore projects breaking even at $35 per barrel. During the quarter, we booked strong sales of Pecania Phase 6, our newest addition to this data asset. Now one of the largest contiguous surveys in the world, Pecania spans 175,000 square kilometers of seamlessly re-imaged data. Due to our remastering and re-imaging emphasis and highly efficient proprietary software infrastructure, our carbon footprint per dollar of revenue is much less than any of our data library peers. We also have a compelling revenue dollar per computing petaflop, due to a proven and very modern high-performance computing software infrastructure. Building on that proprietary expertise in parallel scientific computing, we are in the final phases of delivering our new Imaging Anywhere cloud-native platform that will provide Ion's data processing team access to flexible and scalable compute capacity at an affordable cost. Imaging Anywhere enables breakthrough geophysical development speed combined with optimized compute performance that will deliver superior imaging results in greatly reduced turnaround times. This cloud software infrastructure will also enable integration of customer and partner proprietary technologies within the overall workflow. We are excited to be working with AWS to bring this to market in early 2022 while exploring different commercial models for deploying this technology. However, a key driver to imaging effort is the input data, and the industry continues to converge on the value that lower frequency seismic source energy provides to geophysically challenge proprietary and multi-client projects. Our Gemini enhanced frequency source seems to be in pole position as the only commercially proven technology solution at this juncture. We're the sole technical spec on a range of promising energy company tenders for early 2022 and look forward to redeploying our existing capacity very soon. In operations optimization, revenue has continued improving during the third quarter. Seismic tender activity is increasing, primarily for production-focused proprietary projects. The multi-year command and control subscriptions and routine equipment spares and repairs business from our substantial install base lends stability to this business segment. We are working more closely than ever with our Toad Streamer and Seabed Acquisition customers across both devices and software to deliver the operational flexibility and efficiencies required in the field. EMPN customers increasingly require complex survey configurations to address their objectives, and ION solutions are integral to meeting those demands in a recovering seismic services market. We continue to advance our diversification strategy in new maritime markets across software and devices. As part of our recent cost streamlining, we have suspended our naval defense initiative in devices given the long wavelength nature of business development and funding in the sector. We also continue to assess the near-term commitment that emerging regulatory environments have for monitoring solution requirements, such as our well alert offering for plugged and abandoned wells, and pace our prototype efforts accordingly. In software, Our diversification strategy into ports and offshore logistics is building momentum with an increasing pipeline of nearly 80 active prospects. We recently added a new pre-sales process to efficiently handle the large volume and wide variation of potential clients and ultimately send qualified leads to our sales team to close. Following our business development expansion in the Americas, I am pleased ION has secured its first port engagement in the U.S. The initial 60-day trial will convert to a commercial contract pending satisfaction of predetermined customer performance criteria. ION was recently recognized for our role in reducing ports impact on climate change. Our climate smart platform, Marlin SmartPort, was featured in Gateways to Growth, a British Ports Association program highlighting ports' vital contribution to society and the innovation shaping their pathway to net zero. Marlin SmartPort enables operations to be smarter, safer, and greener by digitalizing processes and connecting stakeholders to critical data. The program features client testimonials on the positive impact Marlin SmartPort has had on their operations and can be viewed on our website. In September, we received a grant to advance port decarbonization through Marlin SmartPort. The grant supports the UK's plan to address climate change and help achieve the country's net zero emissions targets by 2050. Today, approximately 90% of goods are transported by sea, and global shipping accounts for nearly 3% of global CO2 emissions. The six-month pilot study will validate whether vessel fuel usage and carbon dioxide emissions can be reliably estimated in and around ports using the International Maritime Organization global standards. We also continue to enhance our platform with new valuable client-driven functionality. Our team recently launched two new modules that drive automation and efficiency. The partner portal enables agents and vessels to access a wealth of real-time information and directly book port calls, delivering automated processes, increased efficiency, and enhanced communication. Our billing management module captures a timestamp of all billable port activities that can be integrated into existing financial systems to automatically generate accurate invoices. We are pleased with our port-by-port customer acquisition to date, but a key pillar in our software growth strategy is to engage governments on country-scale solutions for their offshore economic zones that address maritime traffic challenges across ports, illegal fishing, environmental monitoring, and more. We continue to work closely with the U.S. government to propose comprehensive digital solutions and to secure third-party financing alternatives for customers where necessary. To augment that strategy, we signed a partnership agreement with a UAE royal family office to drive business penetration in the GCC countries, and to provide project finance capacity for our Africa digitalization program. Our initial engagement is focused on coastal Africa. We have met with over 20 African nations, explored multiple third-party financing options, and submitted our first multimillion-dollar digitalization proposal. With that, I'll turn it over to Mike to walk us through the financials, and then I will wrap up before taking questions.