ION Geophysical Corporation reported second quarter 2010 revenues of $75.4 million, resulting in net income of $1.1 million, or $0.01 per diluted share. In the second quarter of 2009, ION's net loss was ($16.6) million, or ($0.16) per share, on revenues of $89.3 million.

Bob Peebler, ION's Chief Executive Officer, said, "We were pleased to regain profitability, and even though we had an exceptionally weak quarter for our multi-client business, our other divisions' results were strong enough to drive our consolidated results into positive territory. Our data library sales for the quarter were lower than expected due to the impact of the Gulf of Mexico oil spill and other timing issues, and we had lower than normal revenues from our new ventures programs, as a significant portion of our 2010 programs began acquisition in the third quarter. We view the quarter as an anomaly for our multi-client business and we expect a substantial improvement during the third quarter, where we have two significant underwritten arctic programs now in progress. We also expect to see improvements in data library sales for the balance of the year. Second quarter highlights include another record performance for both our data processing and Concept systems businesses and a solid performance by our marine business. We saw continued strength in both DigiFIN(TM) and Orca(R) sales and signed the contract with BGP to equip their new 12 streamer vessel with our latest offering, DigiSTREAMER(TM). While the equipment related to the BGP sale will be delivered later this year, we expect to recognize the revenue on this sale in 2011.

"Another bright spot for the quarter includes having our land equipment joint venture, INOVA Geophysical, fully operational with the management team in place. In addition, the team is making progress on both the R&D and marketing and sales front. On the business side, the land equipment business is still anemic, with an estimated total market reduction of nearly 40% in 2009 and a continued slow down extending into 2010. We do believe that overall activity for land contractors has improved somewhat, and INOVA's equipment business had some revenue growth year over year, but not sufficient to regain profitability. There is growing interest in FireFly(R), particularly in difficult terrain such as the Marcellus shale plays in the northeast United States and parts of Mexico. We expect slow improvement for INOVA moving into 2011, but it will likely be late 2011 before we can expect the land equipment business to return to a more normal pace."

Change in Segmentation As a result of the formation of INOVA Geophysical, the Company has adjusted its financial reporting segments, such that it reports three primary segments: Systems, Software (formerly Data Management Solutions) and Solutions. These three segments represent the main product and service offerings of the Company, from the manufacturing of seismic equipment to the software and processing necessary to understand the results. The historical land business that was contributed to the INOVA Geophysical joint venture is now referred to as our Legacy Land Systems (INOVA).

Second Quarter 2010 Total revenues in the second quarter of 2010 decreased 16% to $75.4 million compared to $89.3 million a year ago. Excluding the 2009 second quarter revenues of the Legacy Land Systems (INOVA) segment, total revenues decreased 6%. The Systems and Solutions segments experienced lower revenues by 12% and 3%, respectively, while the Software division experienced a 10% increase in revenues. A reconciliation of results excluding the Legacy Land Systems (INOVA) segment can be found in the financial tables of this press release.

Adjusted for the Legacy Land Systems (INOVA) 2009 results, the Systems segment generated sales of $29.8 million in the second quarter compared to $34.0 million in the same period in 2009, a decrease of $4.2 million primarily due to lower geophone sales.

The Software segment's revenues increased to a second quarter record of $10.1 million compared to $9.2 million a year ago, as a result of the continued success of converting vessels to the ORCA software platform.

The Solutions group generated $35.5 million in revenues compared to $36.7 million in the same period a year ago. The decrease was primarily driven by reductions in new venture program revenues, mostly offset by continued robust data processing services. The decrease in new venture revenues was as a result of the timing of 2010 programs scheduled to occur in the second half of the year. ION's Data Processing services group continues to experience strong demand, with revenues increasing by 50% in the second quarter of 2010 as compared to the same period in 2009.

Consolidated gross margins for the second quarter of 2010 increased to 37% from 34% in the second quarter of 2009 and from 25% in the first quarter of 2010. The increase in gross margin was primarily due to the contribution of the Company's lower margin land business to INOVA Geophysical in March 2010. Adjusting for the Legacy Land Systems (INOVA) 2009 results, operating expenses for the second quarter of 2010 decreased by $5.5 million compared to the prior year period. As a percentage of revenue, operating expenses during the quarter improved to 29% compared to 34% in the prior year period. Adjusted EBITDA for the second quarter increased to $16.0 million compared to $5.3 million in the second quarter of 2009. A reconciliation of Adjusted EBITDA to reported earnings can be found in the financial tables of this press release.

The Company accounts for its 49% interest in INOVA Geophysical as an equity method investment on a one fiscal quarter-lag basis. Thus, the Company's share of INOVA Geophysical's first full quarterly results will be included in the Company's financial results for the three months ending September 30, 2010. For the three and six months ended June 30, 2010, the Company recognized a loss on its equity investment of ($0.2) million, which represents five days of activity between the closing of the joint venture on March 25, 2010 and March 31, 2010.

Year-to-date 2010 Consolidated revenues for the first six months of 2010 decreased 16% to $164.1 million compared to $196.1 million for the same period in 2009. Excluding the results of our Legacy Land Systems (INOVA) segment in 2009 and 2010, revenues for the first six months decreased 6% or $10.1 million. The Software segment revenues increased $1.6 million or 10% over prior year, while the Solutions segment revenues remained consistent at $83.6 million. Systems segment revenues decreased $11.7 million to $45.9 million primarily as a result of softness in both land geophone sales and general marine purchasing activity. Gross margins for the first six months of 2010 remained essentially constant at 31% compared to 32% for 2009. Excluding the 2009 and first quarter 2010 results of our Legacy Land Systems (INOVA) segment, operating expenses as a percentage of revenues for the first six months of 2010 decreased to 32% compared to 37% in the prior year period due primarily to one-time items in 2009. The Company's effective tax rate during the first six months of 2010 was 26.0% (provision on a loss) compared to 25.7% (benefit on a loss) for 2009. The increase in effective tax rate relates primarily to the transactions involved in the closing of the INOVA Geophysical joint venture and to changes in the distribution of earnings between U.S. and foreign jurisdictions.

Loss from operations for the first half of 2010 totaled ($5.0) million compared to ($52.1) million in the prior period. Excluding the first quarter 2010 results of our Legacy Land Systems (INOVA) segment, income from operations was $4.6 million.

For the first six months of 2010, the Company reported a net loss of ($70.7) million, or ($0.52) per share, compared to ($55.0) million, or ($0.54) per share, in 2009. Excluding the after-tax impact of the special items as noted in the table below, the Company reported a net loss of ($10.2) million, or ($0.07) per share for the first six months of 2010. Adjusted EBITDA for the period increased 37% to $31.9 million compared to $23.3 million in 2009.

Outlook Brian Hanson, Executive Vice President and Chief Financial Officer, commented, "We communicated during our first quarter earnings call that we expected our first quarter results to be the low point for the year, and we strongly believe that the second half of 2010 will be considerably better than the first half. We continue to anticipate a profitable year for ION in 2010, excluding any one-time charges. Our current expectations are that we will experience increasing momentum in all of our businesses as the year unfolds, which will likely carry into 2011."

Tags: ION Geophysical Corporation