Presidential Remarks

Remarks by Rick Wheeler

Geospace Technologies Corporation

2018 Annual Meeting of Shareholders

February 7, 2018

Thank you Gary, and much thanks to everyone here today.  I’ll point out that my comments may include forward-looking statements as described in the Private Securities Litigation Reform Act of 1995, and such statements are subject to known and unknown risks, many of which are discussed in our Annual Report as well as our S.E.C. Form 10-K and 10-Q filings.

I will first cover a review of fiscal year 2017, which ended on September 30th, 2017. Following that, I will give an update of the company through its first quarter of Fiscal Year 2018. Lastly, I will close my remarks with a look at what lies ahead for Geospace Technologies.

  1. REVIEW OF FISCAL YEAR 2017:

As the 2017 fiscal year began on October 1st, 2016, we had just closed the books on a third straight year of declining revenues, which had fallen to their lowest amount since 2003. The year had clearly been the worst in recent company history, and was a direct reflection of the most severe cutbacks by oil companies in seismic exploration, going back decades. This state of the market unfurled a backdrop of uncertainty for the 2017 fiscal year. As the first fiscal quarter came to a close, its revenue had outpaced the same quarter of the previous year, and there was cautious optimism in the voices of our seismic customers that the market seemed to be poised for improvement. As fiscal year 2017 continued to play out, all but the third quarter experienced similar year-over-year increases in revenue. Our wireless seismic products had the strongest impact on the year, making up 40% of total annual revenue. The numbers were far from those reported in earlier years for these products, but nonetheless served as a testament of the growing preference for these instruments even in a much attenuated market. Sales of GSX equipment from our rental fleet were the largest portion of this segment, with rentals of our OBX ocean bottom nodes being the second largest contributor. It is also noteworthy that our OBX products have shown continued use and acceptance in an otherwise extremely depressed marine seismic market. Over the course of the year, our non-seismic segment showed a 6% reduction in revenue from the previous year, although some product lines actually remained flat or posted slight increases. In spite of the lower revenue, operating income for this segment continued to grow for the third consecutive year. The reduction in revenue essentially came from lower sales of our water meter related products, largely due to a few customers working off excess inventories that arose from earlier over purchases. Even so, analysis of these products over a broader historic time line gives us an element of confidence that modest growth should continue.  There were disappointments that occurred in the year. At near coincident timing with the end of fiscal year 2017, we learned that submissions for a Permanent Reservoir Monitoring (PRM) system that had been under discussion would be limited to fiber optic sensor technology in contrast to our preferred electrical technology. As a consequence, the potential for revenue derived from our PRM products moved much further out in time, so we necessarily took additional obsolescence reserves on related inventory and impairment charges on related factory equipment that together amounted to $10.4 million. Thus despite an improvement in revenue over the previous year, our 2017 fiscal year closed on September 30th, 2017 with a recorded net loss of $(56.8) million, or $(4.32) per share. However our balance sheet remained stellar, reflecting absolutely no debt and over $51 million in cash, cash equivalents, and short term investments. Coupled with a borrowing capability of almost $24 million, our total liquidity at year was $75 million. In addition, $76.7 million of useful inventory, $16.5 million of rental assets, and $37.4 million of unencumbered property, plant, and equipment rounded out our set of tools as we entered fiscal year 2018. The first quarter of the year just recently ended, which I’ll now discuss.

  1. First Quarter of FY 2018

The first quarter of fiscal year 2018 began amidst some encouraging signs of improvement in the seismic industry, particularly in the land segment. However optimism should be tempered with a dose of caution, as the seismic market overall is far from returning to a level of normal commerce. As we reported yesterday, revenue in the first quarter totaled $14.6 million, and resulted in a net loss of $9.5 million, or $0.72 per diluted share. This represents a decrease in revenue of 4% from the previous year, although last year’s first quarter had the benefit of a performing OBX rental contract. In contrast, the first quarter of this year had no such contributions, but in partial offset, we did sell 14,000 channels of single-component GSX equipment from our rental fleet. Despite the reflected loss in the quarter, it is noteworthy to point out that a gross profit was recorded on product sales revenue, even though the rental portion of revenue fell short of a profit, reaching a little more than half of the amount necessary to cover its associated costs – primarily depreciation. First quarter performance was also impacted by onetime termination charges of $0.7 million in conjunction with a workforce reduction that occurred in December. This reduction was part of overall cost control plans that took into account the need for lesser resources in light of the indefinite postponement of any potential PRM revenue. While no PRM awards are on the imminent horizon, we will be discussing other potential PRM projects throughout the coming year. So what else lies ahead for Geospace in fiscal year 2018?

What Lies Ahead in FY 2018:

As mentioned earlier, there are heartening signs that the worst case of a drastically depressed seismic exploration industry may be behind, but there is a long way to go before the market achieves a reasonable element of stability and normalcy. As recounted in a recent Rystad Energy report, additional oil reserves from new conventional discoveries have fallen short of produced amounts for over a decade, and by 2012 had dropped to just 50%. Now, at the end of 2017, this replenishment ratio is a mere 11%. Moreover, this trend of shrinking discoveries has gone on uninterrupted since 2012, and the average size of a given find has also diminished from 150 million b.o.e. to 100 million b.o.e. over the same period. Even amidst well publicized announcements of large new discoveries in 2017, Rystad reported that the industry overall discovered only 7 billion b.o.e. of conventional reserves during the year – a level that goes back to the 1940’s. Shale and other unconventional sources have filled the immediate gap, but it is questionable whether or not they can fully offset the decline and depletion seen in conventional reserves. Although we believe recovery in the seismic exploration industry may follow an unpredictable time line, we see its occurrence as inevitable by all rationality. Our recent cost reduction efforts demonstrate a strategic component of how we will navigate through such recovery, with anticipated annual cost savings of approximately $6.0 million. Our strict management of our balance sheet, including the preservation of cash, is yet another strategic choice that helps underwrite our success. We have made great strides in the modernization of our manufacturing through judicious use of capital and talent, and our further pursuit in this endeavor will continue to create new and improved efficiencies. In addition, we continue to push the expansion of our non-seismic product lines, including new potential industries that may be aligned with our core competencies. All of these efforts comprise additional arms of a strategy designed to optimize our future. The success of our customers is the measuring stick of our own success, and is manifested through the hearts and minds of our dedicated employees. We are immensely grateful for all of their hard work and accomplishment and the diligent concern they exhibit every day for our customers. Together with our valued shareholders, we believe we have the right team to create the true value Geospace is known for.