Input/Output, Inc.

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Input/Output, Inc.

12300 Parc Crest Drive
Stafford, Texas 77477
U.S.A.
Telephone: (281) 933-3339
Fax: (281) 879-3626
Web site: http://www.i-o.com

Public Company
Incorporated: 1979
Employees: 743
Sales: $247.29 million (2004)
Stock Exchanges: New York
Ticker Symbol: IO
NAIC: 334519 Other Measuring and Controlling Device Manufacturing

Input/Output, Inc. is a leading provider of seismic imaging technology used by the oil and gas companies for the exploration and development of reservoirs both onshore and offshore. The company prides itself on offering its customers full-seismic imaging technology solutions, ranging from the design and planning of seismic surveys to the acquisition and processing of seismic data. Input/Output's products are designed for traditional three-dimensional data collection, as well as time-lapse, or four-dimensional, data collection. The company maintains operations in Europe, China, South America, and the Middle East.

Origins

Input/Output experienced several distinct periods of existence during its business life, operating for years as a small, relatively obscure firm before realizing explosive growth that suddenly disappeared, engendering years of managerial instability and shareholder unrest. The company's roller-coaster ride began in Houston in 1968, when Aubra E. Tilley started a small firm to develop and manufacture seismic equipment for use in the petroleum industry. Initially, the company developed and manufactured products that enhanced and complemented the seismic acquisition systems of other manufacturers, selling components to companies such as Texas Instruments, Sercel, and Geoscience rather than directly to customers involved in oil and gas development and exploration.

Tilley's firm joined an industry whose importance to exploration and drilling efforts would increase as technological advancements improved the capabilities of seismic data gathering. During the early days of seismology, the ability of seismic equipment to identify reservoirs of oil and gas was limited by a number of factors, including the sophistication of computer technology. When Input/Output was formed, massive, expensive mainframe computers possessed less computing power than latter-day desktops, severely reducing the cost-effectiveness, comprehensiveness, and accuracy of seismic studies. The objective of a seismic study was to identify geologic formations that were indicative of nearby oil or gas—a salt dome, for instance, often indicated the presence of an underground lake of oil beneath it. To obtain a picture of formations beneath the earth's surface, seismic engineers triggered a series of dynamite charges, creating sound waves that reverberated off rock layers below. Listening posts, or sensors, that were placed strategically on the surface received the sound waves, which then could be interpreted to yield a crude image of telltale formations. In early seismic studies, receiving sensors were arranged in a line to generate a two-dimensional view along a vertical plane cutting through the earth. As technology advanced and computer processing power became exponentially more powerful, the sensors were arranged in a two-dimensional grid on the surface, processing the reverberations to produce a three-dimensional image. The leap in seismic technology and capability was enormous, evolving into an extremely valuable tool for companies engaged in finding and producing oil and gas. "You drill your dry holes on the computer," an executive of a seismic equipment manufacturer remarked in a June 20, 1994 interview with Forbes. Input/Output not only witnessed the significant technological advances that shaped its industry, but also figured as one of the select companies initiating the technological revolution, becoming one of the leading competitors in the seismic equipment manufacturing industry.

For Input/Output, prominence came with time. When Tilley formed the company, his business scope did not pretend to achieve the heights the company later reached—a fundamental change in the company's corporate strategy enabled it assume a greater posture in its industry. Input/Output began its business life by serving the type of company it later became. Initially focused on developing products that improved and complemented the seismic acquisition systems made by others, the company introduced its first product one year after its formation. In 1969, Input/Output introduced the Seismic Source Synchronizer, an instrument that allowed the user to remotely control the timing of explosive seismic energy sources. The company began to assume a greater profile in its industry during the mid-1970s, when it diversified its operations for the first time. In 1975, Input/Output branched out into the development and production of data acquisition systems by introducing the Digital High Resolution Recording System (DHRRS), a system that monitored shallow seismic signals.

A Change of Strategy in the Early 1980s

Input/Output achieved enough recognition during its first decade of business to attract the attention of a much larger competitor in the petroleum industry. In 1980, after work had continued on the DHRRS during the second half of the 1970s in the form of several upgrades, Kidde, Inc. acquired Input/Output and moved the company the following year to new headquarters in Stafford, Texas, 16 miles southwest of Houston. Input/Output's new base of operations, a 35,200-square-foot facility that employed 100 workers, was directed to carry out management's new strategy for the future one year after it was constructed. By 1982, Input/Output senior officials had realized the company's opportunities for growth were limited by its focus on serving primary seismic equipment manufacturers, prompting them to concentrate their future efforts on developing data acquisition systems rather than just on producing components for data acquisition systems. The decision marked a turning point in Input/Output's history, though it would be years before the company would reap the financial rewards produced by its new market focus.

Input/Output engineers began working on developing the company's first primary seismic system in the new Stafford complex, launching research and development efforts that would take most of the decade to complete. During this period, as the small firm geared toward the production of a full system, control over its operations changed hands. In 1985, after Kidde, Inc. decided to divest its petroleum industry assets, Input/Output was sold, remaining on its own until the end of 1986, when it was acquired by Dallas-based Triton Energy Corp. The acquisition did little to interrupt the work underway in Stafford. Input/Output, though it was a Triton Energy subsidiary, continued to operate as an independent company, enabling it to conclude its research and development work on its primary seismic equipment. After six years of work, the company unveiled its first system, appropriately named the Input/Output System One, in May 1988.

The introduction of System One moved Input/Output into the main sector of the seismic market, where its years of relative anonymity would end. System One, an eight-bit system, was an advanced land seismic acquisition system that made three-dimensional seismic surveys affordable, enabling the petroleum industry to begin the profound transition from two-dimensional to three-dimensional data acquisition. Exploration and production companies, consequently, began to realize a dramatic increase in the success ratios of their efforts. Improvements in the technology followed with the introduction of the System Two in 1991, the same year Input/Output completed its initial public offering (IPO) of stock, debuting on the NASDAQ. System Two, a 24-bit system, dramatically increased the range of recorded seismic signals, which enhanced sub-surface images that helped determine the ideal location for drilling a well. On the strength of System Two, Input/Output began a new chapter in its history, entering a period of explosive financial growth that stood in sharp contrast to the decades of modest growth that had preceded it.

By the beginning of the 1990s, advances in seismic equipment technology had dramatically improved the ability to identify telltale subsurface rock formations. The use of three-dimensional imaging to discover hidden reservoirs of oil and gas could increase the success rate for developmental drilling by as much as 80 percent, helping exploration and production companies avoid losses stemming from drilling dry holes, which could cost roughly $750,000. Input/Output, supported by System Two, was credited with making seismic equipment that was affordable for even small oil and gas companies, enabling the company to secure a substantial share of the market. By 1993, the company was estimated to control slightly more than 50 percent of the market for seismic equipment, maintaining a lead over its chief rival, the French company Sercel Inc., which commanded about 40 percent of the market.

Company Perspectives:

I/O aspires to become the world's first technology-only seismic solutions company. We intend to develop and deploy advanced technologies and services across the entire seismic workflow—from survey planning through field acquisition and on into processing and final image rendering. Our goal is to fundamentally improve image quality while reducing costs and cycle times for our customers. As the owners of advanced hardware, software, processing tools, and value-added geophysical services, I/O will provide tailored seismic solutions that address our customers' most difficult imaging and operational challenges.

Input/Output's sales grew rapidly during the first half of the decade, ending years of unspectacular growth. Between 1991 and 1995, annual sales swelled from $36 million to $134 million, driven by the demand for the company's affordable seismic equipment. In 1995, Input/Output completed one of the most significant acquisitions in its history, gaining assets that doubled the company's sales and net income. Midway through the year, the company purchased the seismic exploration products assets belonging to Western Atlas Inc. for roughly $120 million, adding offshore capabilities to its established strength in onshore seismic equipment. The assets, which generated $112 million in revenue in 1994, added marine seismic recording systems, vibrator source products, and geophone products to Input/Output's technology portfolio, helping Input/Output generate $278 million in revenue and $38.6 million in net income in 1996. Investors applauded the company's moves, driving its stock up to roughly $40 per share in mid-1996, a 20-fold increase from the company's share price five years earlier. Input/Output had become the darling of Wall Street. "The company has clearly been the greatest success story in the geophysical subsector for the last five years in terms of both technology and growth," an analyst remarked in an October 10, 1997 interview with the Houston Business Journal. But the company quickly faltered. The company's stock plunged to $14 per share by April 1997, 11 months after trading at $40 per share. Net income, which had reached $38.7 million in 1996, fell to $16.6 million the following year.

Problems Surfacing in the Late 1990s

The late 1990s proved to be a troublesome period for Input/Output. The company's chief executive officer, Gary Owens, resigned suddenly in the spring of 1997. The head of marketing resigned weeks later, followed by the company's chief financial officer, Robert Brindley. Shareholders filed a lawsuit against the company, Owens, and Brindley, alleging information about the company's business, products, sales, markets, financial condition, and business prospects had not been disseminated clearly to the public. One source of the company's troubles came from its main rival, the French firm Sercel. By 1996, the seismic technology on the market had matured, which prompted Sercel to cut the price of its products. Input/Output, fearing it would lose market share to Sercel, discounted its prices as well, which substantially reduced its profit margins. "They were too quick to discount products in anticipation of industry conditions," an analyst said in reference to Input/Output in an October 10, 1997 interview with Houston Business Journal. "They cut prices when they didn't really need to."

Managerial instability, stagnant sales, and declining stock value hobbled Input/Output's progress for the remainder of the 1990s, as the company fell from the heights it reached earlier in the decade. Owens was replaced by a petroleum engineer named W.J. "Zeke" Zeringue, the former president of Halli-burton Energy Services, and Brindley's post was taken by Ron Harris, but the two new executives left after little more than a year in charge. Zeringue reportedly clashed with Input/Output's board directors as the company's stock value continued to plummet. Commenting on the relationship between Zeringue and the company's board of directors in a June 4, 1999 interview with the Houston Business Journal, an analyst said, "It's like a couple that was at each other's throats for two years. Then they finally get divorced, and you ask what caused it? Who knows?" Zeringue and Harris resigned within weeks of each other in the spring of 1999, followed by the resignation of the company's chief technical officer before the end of the year, when Input/Output's stock was trading at a record low of $4.37.

As Input/Output entered the 21st century, the company continued to struggle, recording lackluster financial results and lacking stable leadership. An interim chief executive officer, Sam Smith, guided the company for nine months before Timothy J. Probert, a 27-year veteran at Baker Hughes International, took the helm. Probert resigned in early 2003 to take a job at Halliburton Co., which led to the hiring of a former Halliburton executive, Robert P. Peebler. Peebler, an Input/Output director since 1999, became president and chief executive officer in April 2003, inheriting a company mired in financial mediocrity. After reaching a record high $278 million in revenue in 1996, Input/Output's financial vitality waned. In 2001, the company collected $212 million in sales. In 2002, the total dropped to $118 million. The following year, sales rose to $150 million, but the total was nearly half the revenue volume collected by the company seven years earlier.

During the first years of Peebler's stewardship, encouraging progress was made in restoring Input/Output's financial health and in positioning the company for the future. In 2004, two important acquisitions were completed that helped increase sales nearly 65 percent and strengthen the company's technology portfolio. In February, the company paid $49.8 million for Concept Systems Holdings Limited, a Scotland-based software developer with applications tailored for offshore seismic analysis. The company's software was installed on towed streamer vessels as part of seabed monitoring systems. In June, Input/Output acquired GX Technology Inc., a Houston-based designer of customized imaging solutions for marine environments. The company paid $152.5 million for GX Technology, gaining a company whose services encompassed all elements in the seismic workflow, including survey planning, technology selection, project management, advanced processing, and final image rendering. Thanks in part to the two acquisitions, Input/Output generated $247 million in revenue in 2004. The increase buoyed hopes for the future, but a $3 million loss for the year coupled with the value of the company's stock, which was trading in the $7 range in 2005, showed that more work needed to be done before Input/Output could enjoy the same level of success it enjoyed a decade earlier.

Key Dates:

1968:: Input/Output is founded by Aubra E. Tilley.
1975:: The company diversifies into the development and production of data acquisition systems.
1980:: Kidde, Inc. acquires Input/Output.
1982:: Input/Output begins to focus on developing its own data acquisition systems.
1985:: Input/Output is sold by Kidde, Inc. and is acquired the following year by Triton Energy Corp.
1988:: The Input/Output System One is introduced.
1991:: Triton Energy spins off Input/Output in a public offering.
1997:: Input/Output begins to struggle financially.
2002:: System Four is introduced.
2003:: Robert Peebler is appointed president and chief executive officer.
2004:: Input/Output acquires Concept Systems Holdings Limited and GX Technology Inc.

Principal Subsidiaries

Concept Systems Holdings Limited (U.K.); Concept Systems Limited (U.K.); Geophysical Instruments AS (Norway); Global Charter Corporation; Global Charter S.A. (Argentina); GMG/AXIS, Inc.; GX Technology Canada, Ltd. (Canada); GX Technology Corporation; GX Technology de Venezuela C.A.; GX Technology EAME Limited (U.K.); GX Technology Finance EURL (France); HGS (India) Ltd.; I/O Cayman Islands, Ltd.; I/O Exploration Products (U.K.), Inc.; I/O Exploration Products (U.S.A.), Inc.; I/O General, LLC; I/O International FSC, Inc. (Barbados); I/O International, Inc. (U.S. Virgin Islands); I/O Luxembourg S.a.r.l.; I/O Marine Systems, Inc.; I/O Nevada, LLC; I/O of Austin, Inc.; I/O Sensors, Inc.; I/O Texas, LP; I/O U.K. Holdings Limited (U.K.); I/O U.K., Ltd. (U.K.); Input/Output Canada, Ltd.; IPOP Management, Inc.; Sensor Nederland B.V. (Netherlands).