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Edited Transcript of GEOS earnings conference call or presentation 6-Feb-19 3:00pm GMT

Q1 2019 Geospace Technologies Corp Earnings Call

Houston Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Geospace Technologies Corp earnings conference call or presentation Wednesday, February 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas T. McEntire

Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary

* Walter R. Wheeler

Geospace Technologies Corporation - President, CEO & Director

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Conference Call Participants

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* Chris Sansone

* Damon Benedict

Nierenberg Investment Management Company, Inc. - Senior Analyst

* Robert Michael Maltbie

Singular Research, LLC - MD & President

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Welcome to the Geospace Technologies First Quarter 2019 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Mr. Tom McEntire, the company's President and Chief Financial Officer.

Today's call is being recorded and will be made available on the Geospace Technologies Investor Relations website following the call. (Operator Instructions)

It is now my pleasure to turn the floor over to Mr. Rick Wheeler, President and Chief Executive Officer. Sir, you may begin.

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [2]

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Thanks, Tony. Good morning, and welcome the Geospace Technologies conference call for the first quarter of our 2019 fiscal year. Again, I'm Rick Wheeler, the company's President and Chief Executive Officer, and I'm joined by Tom McEntire, the company's Vice President and Chief Financial Officer.

We'll start this call with my overview of the first quarter, and Tom will then provide an in-depth commentary of our financial performance. I'll then offer a few final remarks. And after that, we'll open the line for questions.

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. All such statements are based on our present knowledge and perception, while actual outcomes are influenced by uncertainties and other factors we cannot predict or control. Both known and unknown risks can lead to undesirable results or differences in performance from what we say or imply. These risks and uncertainties include those discussed in our SEC forms 10-K and 10-Q filings.

As a matter of convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. However, the information discussed this morning is time-sensitive and may not be accurate on the date one listens to the replay.

Yesterday, after the market closed, we released our financial results for the first quarter of fiscal year 2019. For the 3 months ended December 31, 2018, we were pleased to see revenue reach $17.9 million, thus reflecting an increase of 22% over the same period last year. This represents our best first quarter revenue performance in the past 3 fiscal years. The higher revenue in conjunction with cost-reduction efforts implemented last year led to a 37% reduction in our operating loss compared to last year's first quarter.

Revenue from our oil and gas market segment totaled $11 million in the first quarter, an increase of 37% from the corresponding year-ago period. This offers some encouragement that the deep depression in oil and gas seismic services activities experienced in the last several years may be emerging from its deepest throes. Notwithstanding this improvement, not all product categories in our oil and gas market segment benefited equally. By example, revenue generated in the first quarter from our traditional seismic products saw a reduction of almost 27% compared to the same period last year. This indicates that during the period, most seismic contractors had adequate supplies of these products to carry out their existing seismic programs.

In total contrast, revenue from our wireless products more than doubled in the same year-over-year 3-month comparison. The large increase is the result of high rental demand for our cableless OBX marine nodal systems. Demand for these systems has outstripped our available capacity and is ever growing. And for this reason, we are increasing our capital investments in our OBX rental fleet to take optimum advantage of the presented market opportunities.

In the first fiscal quarter, our reservoir seismic products contributed $937,000 in revenue, derived mainly from our borehole products. This is an increase of 52% over last year. We believe permanent reservoir monitoring or PRM systems have the potential to generate much larger revenues from this product category. And discussions with oil and gas companies interested in the installation of such systems have become more active in recent months.

Furthermore, we believe our acquisition of the OptoSeis fiber optic sensing technology greatly extends our product offerings and opportunities to serve this market. Presently, we believe an open tender for a PRM system could come out in our 2019 fiscal year. However, we would not expect to record revenue even if awarded such a contract until subsequent fiscal years.

Revenue from our adjacent markets segment totaled $6.6 million, setting a new record of first quarter performance for these products. Although the industrial products portion of this segment experienced a slight decline in seasonal demand from the year before, we continue to believe that overall demand for these products is expanding.

Our emerging markets segment contributed $88,000 in the 3-month period ended December 31, 2018. We do not expect this new segment to make significant revenue contributions in the near term, but we are hard at work in the development and progression of these products in the expectation of future revenues.

At this point, I'll now turn the call over to Tom for more financial detail.

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [3]

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Thank you, Rick, and good morning, everyone. Before I begin, I would 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 first quarter ended December 31, 2018, we reported revenue of $17.9 million compared to last year's revenue of $14.6 million. Our net loss for the quarter was $5.9 million or $0.44 per diluted share compared to last year's net loss of $9.5 million or $0.72 per diluted share.

A break down of our oil and gas product revenue is as follows: our traditional product revenue for the first quarter was $2.8 million, a decrease of 27% compared to revenue of $3.8 million last year. This decrease primarily reflects lower demand for our specialty sensor products.

Our GSX and OBX wireless product revenue for the quarter was $7.3 million, an increase of 101% compared to revenue of $3.6 million last year. The increase in revenue primarily represents OBX rental revenue resulted from large contracts executed in fiscal year 2018. This rental revenue was partially offset by a decline in sales of our land wireless products.

Our reservoir product revenue for the first quarter was $937,000, an increase of 52% compared to revenue of $618,000 last year. This increase in revenue resulted from higher sales of our borehole products and was partially offset by lower repair and service revenue.

Moving on to our adjacent markets product segment. Our industrial product revenue for the first quarter was $3.6 (sic) [$6.6] million, a decrease of 3% compared to revenue of $3.7 million last year. The decline in revenue was primarily attributable to lower demand for our water meter products and was partially offset by higher revenue contributions from our contract manufacturing services.

Imaging product revenue for the first quarter was $3.1 million, an increase of 11% compared to $2.8 million last year. This revenue increase was primarily due to higher demand for our equipment and film products.

Our gross profit for the first quarter was $3.1 million. This compares to a gross loss of $1 million in last year's first quarter. The improvement in gross profit resulted from an increase in our rental revenue and a related increase in factory utilization from higher production of OBX stations.

Our first quarter operating expenses increased by $516,000 or 6% compared to last year's first quarter. The increase resulted from incremental operating expenses associated with our recent acquisitions of the Quantum and OptoSeis businesses, including intangible asset amortization of $362,000, legal fees of $249,000 and $1 million of personnel costs for these acquired businesses. These increases were partially offset by $453,000 decrease in bad debt expense, a $335,000 decrease in severance expense and a $183,000 decrease in stock-based compensation expense.

Our first quarter cash investments in our rental equipment and property, plant and equipment were $10.2 million and $717,000, respectively. Primarily as a result of the significant demand for our marine OBX rental equipment, we believe fiscal year 2019 cash investments into our rental fleet could be $30 million or more. We estimate total fiscal year 2019 cash investments in our property, plant and equipment will be approximately $3 million. As a result of these cash investments, we expect our consolidated cash balances to decline significantly throughout fiscal year 2019.

Our balance sheet at the end of the first quarter reflected $27 million of cash and short-term investments. We had no long-term debt outstanding, and the available borrowings under our credit agreement were $21 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 prepared remarks, and I'll turn the call back over to Rick.

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [4]

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Thank you, Tom. The first quarter has provided a relatively good introduction to the 2019 fiscal year, marking yet a fourth straight quarter of positive gross profits. Provided that the oil and gas companies continue getting back to the business of exploring for new reserves and managing existing reserves through seismic imaging, promises of an improved climate in 2019 for the seismic industry will take further hold.

For Geospace, these market circumstances are driving increased demand for our wireless OBX products, and we are extending our ability to meet that demand through additional investment in these products. In conjunction with leveraging the recognized improvements in our oil and gas market segment, we believe it remains critical to continue our diversification efforts in our adjacent and emerging markets. As our 2019 fiscal year unfolds, we will continue our tandem focus on these multiple paths to success.

This concludes our prepared remarks, and I'll now turn the call back over to Tony for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bill Dezellem with Tieton Capital.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [2]

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That's Tieton Capital. And I'd like to actually talk a little about deep OBX, if you would, please. First of all, would you discuss the type of water locations that OBX is resonating with your customers? And what the geographies around the world that is being used the most, if there is any area that's seen a higher level of activity?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [3]

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Sure. I can tell you that the majority of utilization is for our what we call the shallow water OBX, which is capable of going down to about 750 meters of depth in water. There are some areas where they're using it that are very near that. And so there's a transition that occurs on occasion needing our deepwater unit, which will go actually over 3,000 meters in depth. But the primary utilization is of the 750-meter units. In reality, the utilization is across the globe. There aren't any specific areas that's being used in the North Sea. It's using -- being used near Asia. So it's not necessarily a prevalence of one area or another, so geography isn't really entering into it very much.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [4]

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And Rick, following up on that water depth, do most of the shoots tend to be in the, I'm going to call it, deeper water range of that shallow water OBX, so as opposed to it being in under 20 meters of water, you really are in water that's rather deep?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [5]

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The majority are not near that transition depth of 750 meters, but they're typically deeper than 10 or 20 meters.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [6]

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So that will...

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [7]

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Go ahead.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [8]

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I'm sorry, I interrupted.

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [9]

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No. I was just going to say that the prevalent use is in shallower waters but not real shallow waters, although they are used there in circumstance.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [10]

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So the unit is being used in more open water rather than swampy areas.

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [11]

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For the most part, I think so, yes. But that's [pretty good] in those areas. But if you just want a statistic, they look at the coverage areas, I would say that's true.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [12]

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That's helpful. And what interest are you hearing from your customers at buying the OBX units as opposed to renting?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [13]

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Well, certainly, that conversation is always had. But in the minds of the contractors, it's driven by the level of utilization they would have for that equipment. Clearly, with these increased demands, it goes without saying that those utilization numbers are going up. I mean, our entire fleet in essence is being utilized. So it's much more likely that these conversations will get more serious about a purchase of these products, but we'll just have to wait and see.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [14]

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And then lastly, the inventory obsolescence jumped versus the September quarter. That surprised us given that the business seems to be improving. Can you talk about what seems to be opposing dynamics there, please?

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [15]

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Yes. Bill, this is Tom. Not any specific inventory item per se, but just a general reserve that we felt was necessary based on the overall aging of our inventory. We have some inventory that's still old and continues to age, and we felt like we needed some more reserves, so we put them there. So it's not going to necessarily trend down in a smooth line. There's going to be some blips here and there, but we hope that this is the higher of the blips.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [16]

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And so it sounds like that was one of the more subjective obsolescence numbers this quarter rather than the more formulaic that you've often had.

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [17]

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Well, there's always a lot of subjectivity into it. Yes, we have a formula for calculating it, but there also has to be a lot of inputs into what the formula spits out. So it's always a lot of subjectivity.

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Operator [18]

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(Operator Instructions) And we'll take our next question from Robert Maltbie with Singular Research.

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Robert Michael Maltbie, Singular Research, LLC - MD & President [19]

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I arrived a few minutes late, so apologies if you covered these already. A couple of questions. Regarding backlogs, could you speak to how they were shaping up? And also, I was trying to understand your noncore seismic business and versus -- or including adjacent markets segment, and it looked like a good quarter, product revenue-wise. Could you speak to year-over-year progress in your adjacent markets segment?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [20]

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Sure. From a backlog point of view, I mean, in our core seismic oil and gas seismic markets, where we're seeing the pressure for backlog is the OBX system. That's our marine nodal systems. At present, our entire fleet is, in essence, spoken for and out for rent. And we are in progress of extending our capital investments in those so that we can take further advantage of those markets. Regarding our adjacent markets, you're exactly right. I mean, it was a good quarter for those. We have seen a steady improvement and increase in those markets. What those markets really represent is our manufacturing and technologies that we developed primarily in our oil and gas seismic products that we've been able to take into other industries where they solve similar problems in alternate industries. A large portion of that has to do with smart water meters that are being installed in a lot of municipalities. And they need a nice, tidy connector that is waterproof that's easily field deployed for those sorts of units, and that market has seen an ongoing increased growth. Now in this quarter, and there's a seasonality to some of those particular products, we did see a dip. But overall, we still believe that there's an increasing overall demand for those products.

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Operator [21]

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Next we'll move to Damon Benedict with D3.

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Damon Benedict, Nierenberg Investment Management Company, Inc. - Senior Analyst [22]

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A question about the OBX rentals. Can you remind us what the cash-on-cash return would be from renting those out?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [23]

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Well, as we've mentioned earlier -- in an earlier announcement, last year, 2 of those contracts are expected to generate over $20 million in revenue just on those 2 alone. Now we had another contract that we had entered into for 9,000 of those units actually the quarter before, I believe, and those are currently contributing to existing revenues. Going forward, those other 2 contracts and yet some others that are in negotiation that we're likely to land are going to add to those numbers.

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Damon Benedict, Nierenberg Investment Management Company, Inc. - Senior Analyst [24]

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And can you give us any sense for what sort of improvement you might see in operating cash flow? I mean, you are positive this quarter before CapEx. I'm imagining that would only get better as you get some of the profit contribution from this new $30 million investment hitting the field. So it'd be nice to get some sort of rough sense for what that could do.

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [25]

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Yes, Damon, this is Tom. And it stands to reason that as the rental revenue increases, which we expect it to in the coming quarters, that, that operating cash flow will also continue to increase.

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Damon Benedict, Nierenberg Investment Management Company, Inc. - Senior Analyst [26]

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Okay, great. And then on the GSX side, a little bit slower there still. Do you see recovery there? Is it really more about activity picking up? Or is there a substantial size of unutilized capacity you've already sold sitting out there that would need to be utilized first before you would see your revenues increase there?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [27]

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I think you need to see overall activity pick up there. I mean, there may be some unutilized assets that some of the contractors have, but for the most part, I think they're pretty much using what they have. You did see that as our traditional products, which really comprises mostly sensors, at least with respect to the land side as you're discussing, that there wasn't a lot going on in that particular segment, and that does indicate that they've pretty much got what they need to take care of the jobs that they have. On the wireless side with the GSX, we know they're using that equipment and they're using it effectively. It's always going to be operationally more efficient than the old cabled systems. But you're going to have to see some increased activity before you see that market pick up from our point of view.

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Damon Benedict, Nierenberg Investment Management Company, Inc. - Senior Analyst [28]

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Okay. And on the potential PRM tender, really nice to hear you could see some activity there. Would this be, from what you know, an existing customer, someone that's been in this market before or someone new?

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [29]

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This would definitely be a customer that has been in the market before. And there's not a long list of those, so you can begin guessing who they might be.

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Operator [30]

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Our next question comes from Chris Sansone with Sansone Advisors.

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Chris Sansone, [31]

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Regarding the 9,000 stations that you delivered for rental last quarter, can you talk about what's the duration of that business? How long did that rental contract last for?

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [32]

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It's actually 5,000 that we've just delivered this last quarter, and it's a 6-month minimum rental.

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Chris Sansone, [33]

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Okay. And then you talked about increasing -- you talked about your CapEx budget for this year. And I know last year, you discussed I think a $30 million budget. Are you seeing more demand now? Or you think that, that budget actually needs to be more than the $30 million you had originally mentioned in that press release?

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [34]

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Right now, we feel like the $30 million is ample, but a lot can happen between now and the end of the year. So that could change. It could go up. But we feel like $30 million is ample for what we know now.

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Chris Sansone, [35]

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Okay. And then in your 10-Q, you report how many stations you have in your rental inventory. Can you give us a sense for, as we exit FY '2019, ballpark, how many stations you think after the $30 million spend and what you have now, how many stations you'll have in your rental fleet?

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [36]

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It's going to be somewhere between 20,000 to 30,000 stations in the rental fleet.

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Chris Sansone, [37]

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20,000 to 30,000 additional from when you exited...

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [38]

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Oh, I'm sorry, that'd be 20,000 to 30,000 total. That's a big range, but I don't want to try to get too narrow on it right now.

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Chris Sansone, [39]

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Okay. And in that $30 million CapEx, is that entirely geared towards the OBX product?

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [40]

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Not all of it, but a vast majority of it is.

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Chris Sansone, [41]

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Okay. And then my last question is regarding the obsolescence -- the inventory obsolescence write-offs. If the land-based business were to come back, are those products, at this point, permanently impaired? Or can you reintegrate those products and use whatever will work in process or whatever else is that you're currently impairing?

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Thomas T. McEntire, Geospace Technologies Corporation - VP, CFO, Treasurer & Secretary [42]

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Yes. To the extent that we have reserves against our land-based products, and in fact we do, they're not impaired from a functional standpoint. They can still be used. They're still workable. And some of the components can be integrated elsewhere, but they're -- it's not like they have a shelf life.

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Operator [43]

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And it appears we have no further questions at this time. I'll turn the call back over to you, Mr. Wheeler, for any additional or closing remarks.

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Walter R. Wheeler, Geospace Technologies Corporation - President, CEO & Director [44]

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Thanks, Tony, and thanks to everyone who joined our call today. We look forward to speaking to you in our conference call for the second quarter in May.

Thanks, and goodbye.

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Operator [45]

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Thank you. This does conclude today's Geospace Technologies First Quarter 2019 Earnings Conference Call. You may now disconnect your lines at this time, and have a wonderful day.