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Edited Transcript of MIND earnings conference call or presentation 6-Jun-19 1:00pm GMT

Q1 2020 Mitcham Industries Inc Earnings Call

HUNTSVILLE Jun 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitcham Industries Inc earnings conference call or presentation Thursday, June 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guy M. Malden

Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems

* Robert P. Capps

Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director

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Conference Call Participants

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* P. Ross Taylor

ARS Investment Partners, LLC - Partner

* Tyson Lee Bauer

Kansas City Capital Associates - Senior Analyst

* Ken Dennard

Dennard Lascar Associates, LLC - Co-Founder, CEO and Managing Partner

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Presentation

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Operator [1]

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Greetings, and welcome to Mitcham Industries first quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ken Dennard. Please go ahead, sir.

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Ken Dennard, Dennard Lascar Associates, LLC - Co-Founder, CEO and Managing Partner [2]

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Thank you, operator. Good morning, everyone, and welcome to the Mitcham Industries Fiscal 2020 First Quarter Conference Call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co's -- Chief Executive Officer and Chief Financial Officer; and Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems.

Before I turn the call over to management, I have a few items to cover. If you'd like to listen to a replay of today's call, it'll be available for 90 days via webcast by going to the Investor Relations section of the company's website at mitchamindustries.com or via a recorded instant replay until June 13. Information on how to access the replay was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, June 6, 2019, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listing or transcript reading.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company's actual future results or performance to materially differ from any future results or performance expressed by the -- implied by those statements.

These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including its annual report on Form 10-K for the year ended January 31, 2019.

Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements.

Now I'd like to turn the call over to Guy Malden. Guy?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [3]

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Thanks, Ken, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2020 first quarter conference call.

I'll begin by making some general comments about the first quarter, Rob will then discuss our financial results in more detail and briefly address our market outlook. I will close with a few final comments, and we will then open the call for questions.

Now let me start by making a few observations. Our results were up on a year-over-year basis with consolidated revenues rising almost 30% due to gains in the marine technology products segment as well as improved activity in our leasing business. On a sequential basis, we did see revenues pull back from Q4 levels, but the results were consistent with our expectations with a couple of exceptions. The bulk of the sequential pullback was in the leasing segment with lease pool sales and other equipment sales accounting for most of the shortfall. On a year-over-year basis, the leasing segment was roughly flat with the large increase in leasing revenues being counterbalanced by decreases in lease pool and other equipment sales. Areas of relative strength for the leasing business include Alaska, the Lower 48 states and Colombia.

The marine technology products segment was also down sequentially, though to a lesser extent, than the leasing segment. However, its performance was much improved over last year's fiscal first quarter. The sequential contraction was largely due to 2 factors. First, the sale of our Australian subsidiary, SAP, which successfully closed during the first quarter, reflected a commensurate drop in revenues compared with Q4. Second, only half of the roughly $2 million in delayed deliveries that we expected to realize during the first quarter were in fact completed during that time. However, I'd like to note that we've recently finished the balance of those deliveries and this will benefit our second quarter results. On a year-over-year basis, the segment was up strongly due almost entirely to a large increase in Seamap revenues.

We continue to be very pleased with the order and inquiry flow we've been experiencing from our marine technology products. Our value-added technology has driven robust levels of orders through the first quarter, and Q2 levels so far have actually been even stronger. Demand for our SeaLink product line continues to trend very well and Klein's revolutionary new side-scan sonar technology, MA-X, has been extremely well received. This revolutionary development has garnered a good deal of interest in the industry due to its compelling combination of superior image quality and increased efficiency. We fully expect to see incremental sales from Klein sometime in the second half of the year.

And with that, let me now turn the call over to Rob.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [4]

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Okay. Guy, thanks. I'll begin by giving a more detailed review of the financial results, then I'll make some comments about our views on the current and near-term market.

Now let me start with the marine technologies products segments. Revenues for the segment totaled $6 million in the quarter compared to $3.7 million in the first quarter a year ago. Seamap revenues were $4.3 million in the quarter, which was up from $1.8 million in the first quarter of last year.

First quarter revenues from Klein were $1.6 million, up from $1.5 million a year ago. Now as Guy mentioned, both Klein and Seamap had certain orders that we were expected to deliver in the first quarter, but instead were completed early in the second quarter.

In the equipment leasing segment, revenues decreased 3% to $3.9 million in the quarter compared to $4 million in the first quarter a year ago. While leasing activity improved due to strength in North America and Colombia, this was offset by lower equipment and lease pool sales, which were both down substantially from a year ago. And we're actively monitoring the market conditions and have remained steadfast on our strategy of adjusting the size and composition of our lease pool to suit both the seismic market and our longer-term goals.

Let me now discuss the profitability of each of the segments. First quarter gross profit for our marine technology products segment was $2.5 million compared to $1.5 million a year ago. This represents a gross profit margin of 41% and 40%, respectively. Improved margin this year is a result of both the higher levels of sales absorbing more fixed costs, particularly related to our Malaysia facility; and decreased levels of lower margin sales by SAP.

In our equipment leasing business, we continue to see reductions in our depreciation expense due to our ongoing asset rationalization strategy. Depreciation expense in the first quarter was nearly halved to $1.4 million from $2.7 million a year ago. The lower depreciation expenses and slight revenues enhanced gross profit in the quarter, which came in at $1.3 million compared to a gross loss of $235,000 in the first fiscal quarter of last year.

Our general and administrative expenses were $5.2 million for the first quarter of fiscal 2020 compared to $5.6 million for last year's first quarter. Now included in the costs this quarter were about $298,000 related to SAP, and these costs will not be recurring. Still, the year-over-year improvement reflects our ongoing restructuring of the leasing business and the lessened impact of startup costs related to our new products and related operations.

Our R&D expense was $315,000 this quarter, and this compares with $370,000 spent during last year's first quarter. Our overall operating loss for the first quarter of this year was $2.5 million compared to an operating loss of $5.6 million in the first quarter of fiscal 2019. Our first quarter adjusted EBITDA was a $61,000 profit compared to a $1.5 million loss in last year's first quarter.

Mitcham's financial position and liquidity remain strong. At the end of the quarter, we had about $27 million of working capital, which included cash and cash equivalents of approximately $8 million. Mitcham's capital structure remains debt free.

Now let me make just a few remarks about our near-term outlook. The marine technologies products segment is experiencing a growing level of inquiries and order activity driven by our recent introduction of innovative new product, such as SeaLink and MA-X. As of April 30, 2019, our backlog of firm orders for this segment was approximately $11 million, that's up from $8.7 million at January 31, 2019. Furthermore, we've already booked approximately $5.1 million in additional orders since the end of the first fiscal quarter, continuing the strong momentum set this year. Now these new bookings include orders for our MA-X technology, which has been gaining greater awareness and exposure to both military and commercial markets worldwide.

Now keep in mind that due to the widely variance, order sizes and delivery periods for our products, backlog tends to be a bit of a blunt instrument in extrapolating quarter-to-quarter results. However, as a broader indicator of overall demand and general market conditions, we believe it can be informative. We think the growth we're seeing, both sequentially and year-over-year, is a favorable indicator for our longer-term prospects and financial results. Although managing our backlog carries inherent executional risk in the form of balancing our production capabilities with the inflow of new orders, we are confident we can successfully navigate these challenges and fully realize our strategic vision for the marine technology products business. It remains our firm belief that the marine business will continue to gain strength through the year and exceed its prior year performance.

SeaLink is expected to make more substantial contributions through the year as its backlog has been very strong and we already have booked enough orders to keep our new production facility in Malaysia busy through most of the balance of the year. Klein will continue deliveries related to recent order bookings, and we will also pursue bidding opportunities and discussions with new and existing customers to further promote awareness of the many benefits of Klein's technology. Going forward, we should also continue to see cost savings and some incremental margin improvement in the marine segment due to the completed sale of SAP, which sales generally carry a lower margin.

For the equipment leasing business, though conditions are still tenuous, they have generally been trending better than we anticipated with some pockets of opportunity in Europe and elsewhere. That said, it is likely we'll see some sequential pullback in Q2 based on our current visibility. Now for the current fiscal year, we continue to expect solid improvement over fiscal 2019 and do expect to generate positive operating income and EBITDA.

With that, I'll turn the call back over to Guy for a few closing comments before we take your questions.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [5]

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Thanks, Rob. Overall, this fiscal year is shaping up to be an improvement over the prior year as the growing level of worldwide interest we've been seeing from our line of product -- of marine technology products indicates that the long-term prospects for Mitcham hold great promise.

Our newest products, such as SeaLink and MA-X, are gaining greater traction in the industry, and we have found a good deal of receptiveness and demand for the benefits of our technology. Since many of these products are still in the introductory phase, we have focused our efforts on educating and informing our customers about the many demonstrated advantages our systems have to offer relative to existing technology. In doing so, we've been laying the foundation for greater industry awareness, exposure and market growth while aggressively pursuing opportunities in the hydrographic, oceanographic and defense markets.

As Rob mentioned earlier, there is some level of execution risk in the attainment of additional orders as we commonly have to deal with both government and commercial customers, all of whom have their own unique circumstances and procedures. On the government side, in particular, procedures and timing can oftentimes be rather opaque and uncertain. And with that in mind, it's safe to say that more substantial revenue gains will likely appear in the second half of the fiscal year.

As I've said during previous calls, we are continuing to see an increase in ocean bottom nodal surveys, which may spur activity in the marine seismic market and has a good likelihood to drive additional inquiries for our source controller and RGPS positioning systems. Though our current backlog does not include a significant amount related to source controller systems, our visibility suggests that we may see an increasing number of such orders through the balance of the year and beyond. So overall, we feel good about our position in the marketplace and are very optimistic about the future of our business.

Now that concludes our formal remarks. We'll be happy to take any questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Tyson Bauer from KC Capital.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [2]

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Just a couple of clarification questions. We're keeping the guidance positive up income. Obviously, that leads to a fairly substantial EBITDA change from a year ago. The confidence that you must have in those delivery schedules given orders would have to be in hand or you expect them to be in hand here shortly in this quarter to be able to make those numbers. Give us a little flavor or color on what you're seeing in the market. You obviously had a big order intake in the month of May. The source controllers are not in the backlog. I would expect those to be in backlog this quarter when you announce the next conference call. And you talked about being that capacity in production. All those things put together, are we looking at a very substantial inflection point as we get toward that Q3 quarter?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [3]

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Yes. I think that's right, Tyson. I mean, obviously, the -- there needs to be at a -- that inflection point. And based on the backlog we see now and also the order flow we're seeing, that's not actually in hand yet. It really gives us some strong confidence, and that's really on the source controller side. Now Guy, maybe you want to talk about that a bit?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [4]

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Sure. Thanks, Rob. I'm -- Tyson, I'm actually in London, calling in from London. I'm at the EAGE, which is, of course, our big European conference for the industry. And we're seeing a -- generally, just a bit of an uptick in optimism. Everybody is feeling a bit good, a bit better and quite positive about things going forward. Backlog numbers are up for our customers, and it looks like a higher level of confidence in the activity going forward from prospect basis, including increased visibility into projects for next year.

We're getting a good sense from our customers of what they're starting to plan for, which would include both upgrades to source controllers and news -- new source controllers on some of the shooting vessels to support the ocean bottom node surveys that we have been talking about for the last couple of quarters. So I think we're starting to see things fall into place. So I would agree, I would expect to see, as we get through Q2 into Q3, that we'll have a lot better visibility on that and things are sort of shaping up the way we had anticipated.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [5]

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And on those systems, we're talking multi-million or $1 million plus in those systems. So we have some big lumpiness that could come into backlog just from that activity.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [6]

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That's exactly right. And Tyson, we -- just to give a sense of our confidence, we were actually -- are building a couple of systems now. We have that much confidence that we're going to see those orders. That's something we normally do, but we feel pretty comfortable right now to do that.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [7]

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Okay. There's been a lot of discussion you touched on the ocean bottom surveying, a lot of commentary on multi-shooting, which seems to be the new way and new technology, a way of going about shooting these surveys. Does that also -- that push in the industry helping you out and giving you that confidence that you're in the right spot?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [8]

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Yes. Absolutely. And again, with the source controller technology, with the additional shooting capabilities, not just random firing, but larger sources, more sources, you're seeing an emphasis on more shooting vessels. So that would turn into opportunities for us on the source controller side as well as the RGPS tracking system side as well.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [9]

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The bookings that you done, about $13.5 million thus far, including what happened in May, you're going to have to repeat or double that to hit some of these targets that you're providing. Is that something that we should or that we'll have to see within the next 2, 3 months?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [10]

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No. Not that quickly necessarily and not -- some of the stuff has much more quicker turnaround, again, since we're building some things now, and we can have shorter delivery times, you might normally think so. It doesn't have to be in the next 3 months necessarily. But I think we will -- that's something in that activity there.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [11]

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And the last one, MA-X technology, you introduced it in one of the shows. Just give us a sense of the industry's response? And who are we seeing that response from? Is it from the oceanographic survey companies? Is it more military? And is it being utilized more as an add-on feature? Or is it replacing a current technology? Just what are the dynamics that have given you the confidence that you got a home run potentially here?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [12]

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I think the answer is yes. Let me answer first and then, Guy, you can jump in. We're seeing broad reception, both survey companies, rental houses, military applications. We're continuing to demo the system in a number of arenas. So again, this is very, very broad. And it is both applications for an add-on to an existing program or system as well as total replacement. So they're kind of different embodiments of the technology at this point. Guy, you want to expand on that?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [13]

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Yes. Sure will. We actually have POs in hand. And these are specifically for replacement units with utilizing the added capability that MA-X has provided. So we're kind of seeing -- we start out of the box with replacement units for some older sonar technology. We fully expect that to continue. And as Rob said, it's both the survey companies or for survey operations as well as the rental houses to the users of rental product. There's several large rental companies that are showing great interest in that technology.

The other side of it, we're continuing to do demos not just on the commercial side, but on the military side. There is certainly a vehicle, a military vehicle application for this technology as we discussed in the past. And we're moving forward on a demo schedule to showcase some of that for military applications. So we feel pretty good about being right on schedule with the rollout, and we're starting to see some POs tracking.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [14]

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And are you teaming up with any other larger entities to help distribute this technology?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [15]

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I mean the answer is no, I think, on why being the question. Certainly, for the vehicle applications, we provide the payload for someone else's vehicle. We don't provide the vehicle itself, the AUV or something like that. So in that regard, we are partnering of it. We are not working with any one for the direct distribution of just the MA-X technology other than our normal [rep] network.

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Operator [16]

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Our next question today is coming from Ross Taylor from ARS Investment.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [17]

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And congratulations on all the good news that you guys are releasing. You commented the fact that you're building some of the source controllers for inventory. Are the costs of those builds in the numbers you reported for the last quarter? Or will they show up in the numbers for the next quarter?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [18]

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Well, they'll show up as an expense or cost when we actually deliver. So those costs are in inventory right now. So we've actually built the inventory.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [19]

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Okay. So they actually do show up right now in inventory.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [20]

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Yes.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [21]

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Also, how big do you think the total addressable market for source controllers is going to prove out to be?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [22]

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Oh, gosh. It's a bit of a niche, for sure, within a niche market. So it's not huge in -- it's not like an iPhone. But there are dozens and dozens of vessels, shooting vessels and survey vessels that are potential applications for this. So that's clear. It's a $1 million to $2.5 million per vessel. And if there are, I don't know, 50 potential vessels, I'm making that number up, but that's in the ballpark, I guess gives you a sense as to the total install base. That gives you a sense of things. So it's not $1 billion market for sure, but it's tens of millions for sure.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [23]

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Okay. And when you talked about -- you made a hire recently from, I believe, Teledyne. Will you talk about how that addition to your staff has changed the organization and how you see it opening up relationships with people like Teledyne and others inside the space where you can become the player, the add-on to other people's continental vessels, vehicles?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [24]

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Sure. Sure. Actually, we've made 2 hires from Teledyne. One is a sales position for primarily our Seamap products, which really just expands our sales capabilities. But I think the one you're alluding to is Thomas Meurling, who we -- is the -- our now Vice President and Chief Business Development Officer. And that's really is a strategic move to find new markets for us, new product applications, new technology applications. And I think Thomas has a wealth of contacts and knowledge in the industry and definitely opens up some opportunities for us to not only sales channels, but also perhaps some partnering opportunities, things of that nature. So it really is a game changer for us. As we kind of go through the coming months, we'll see some of that impact, I believe.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [25]

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Okay. And I want to put forward the idea that as you get orders, you don't need to wait until the next quarterly conference call to let people know. I think that this is one of those issues that having investors aware of things as they come in to show that you're getting this traction will reward investors. And I think that will be something that people are welcome as opposed to waiting for 3 months to hear whether or not we were able to sell anything or bring anything through in the next few weeks.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [26]

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That's a good point, a very good point.

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Operator [27]

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(Operator Instructions) Ladies and gentlemen, we reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [28]

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Okay. Thank you very much. I'd like to thank everyone for joining us today. And I look forward to talking to you at the end of our second quarter. Thanks very much.

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Operator [29]

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Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.