RigNet Inc
Q1 2020 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, welcome to RigNet's First Quarter 2020 Earnings Conference Call. My name is Joelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session after the prepared remarks by management. [Operator Instructions] I will now turn over the presentation to Lee Ahlstrom, RigNet's Senior Vice President and Chief Financial Officer. Mr. Ahlstrom, please proceed.
- Lee Ahlstrom:
- Thank you, Joelle. Good morning and welcome to RigNet's first quarter 2020 earnings call. We hope you are all doing well. A copy of our earnings press release with supporting schedules, including schedules which reconcile the non-GAAP metrics we will discuss today to GAAP metrics is posted to our website, www.rig.net, under our Investor Relations page. For those of you who would like the release in PDF format, we have posted that as well. This morning, we posted a new investor deck on our website under webcast and presentations. We'll be referring to a number of slides in the deck and invite you to download it to follow along. Before we get started, I would like to make you aware that we will be making forward-looking statements today. Any statements that are not historical facts, including statements related but not limited to market expectations, future plans and aspirations, are forward-looking statements that involve certain risks, uncertainties and assumptions. These include but are not limited to risks associated with the general nature of the oil and gas industry, customer and other third-party interactions, our strategy and other factors detailed in the Risk Factors section of RigNet's most recent annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. RigNet disclaims any duty to update the information presented on this call. And I'd like to turn the call over Steve Pickett, RigNet's Chief Executive Officer and President. Steve?
- Steve Pickett:
- Thank you, Lee. Good morning, everyone, and thank you for joining us on today's call. On the phone with me is of course, Lee our CFO; as well as Errol Olivier, our Chief Operating Officer. Before I begin, I want to thank the men and women around the world of RigNet, who are working so diligently in these extraordinary times, from our workshop personnel who have continued to assemble, test and ship equipment to keep our SI and new MCS project contract to our technicians in the field who are ensuring critical communications remain online, to our sales force who's engaging with existing and potential customers and to our office staff who have transitioned to work from home with ease. I want to thank you on behalf of our board, management and shareholders, your resilience, adaptability, level of engagement and creativity are what drives our success. On Friday, before market open, and as you will see on Slide 6 of our new investor deck, RigNet reported a net loss for the quarter of $26.8 million or a $1.34 per share based on revenues of $58.8 million. This includes a $23.1 million or about $1.15 per share non-cash charge for impairment of goodwill. Adjusting to this net loss for the quarter was $3.7 million or $0.18 per share. Revenue increased by 2.2% versus the prior year quarter and was lower by 8.3% compared to the fourth quarter mostly due to a particularly busy end of year on a few projects in our SI segments. Adjusted EBITDA, a non-GAAP measure we define in our press release in one of our key performance metrics was $8.4 million for the first quarter. Adjusted EBITDA was essentially flat compared to the prior year quarter and down 30% from a particularly strong fourth quarter. Lee will provide some more color on the financials. It's only been two short months since we provided our last update. But the world has changed dramatically. The oil industry in particular has been hit not only by the demand reduction caused by COVID-19 quarantine, but also by the ensuing price war between the Saudis and Russia. As we've seen, even with the historic supply cuts agreed to by OPEC plus in April. We're still in an oversupply situation with depressed commodity prices, which we believe is likely to lead to reduce energy activity throughout at least 2020. Although, we are optimistic that is the global economy reopens, you will begin to see demand rebound. And that will get us closer to a supply demand balance with some price support. How is RigNet responding to this new environment? As you'll see on Slide 7 of our new investor deck, we've had three primary areas of focus. First and foremost, we are safeguarding our employees to make sure certain that they are able to continue working as normally as possible. Fortunately, we're a technology company. In the transition to work from home environments globally has been smooth and active. Our IT department has done an outstanding job to ensure we are all connected and able to carry on. In terms of workflows are moved to the cloud over the last two years, it certainly helped us feel more effectively with this situation. Weโre actively but cautiously evaluating when we will return to our offices, but even in the event that doesn't occur soon, we are confident that the organization will continue to respond in a positive and highly effective manner. Our next area of focus is to continue to deliver our customary outstanding service to our customers. And of course, to look for opportunities to grow the business, as our customers are constantly looking for new services that can help improve their cost structure. And we have a number of such solutions that can be turned up quickly to help our customers do just that. From our adaptive video intelligence service, AVI, to our Intelie AI-backed real time machine learning solutions. In terms of overall service delivery, our biggest challenge has been with respect to our workshop spaces in Aberdeen and Lafayette. These are areas within our facilities will just continue to operate in order to assemble and test much of the equipment that is dispatched to the field. These are spaces where employees may be in close contact with one another. I'm pleased to say that our local leadership teams have found a creative solutions to continuing the important work in these facilities. We have seen and are seeing some customer driven postponements with respect to getting equipment shipped out, because customers are generally unable given COVID-19 restrictions to perform in person acceptance testing right now. We've been working with them to explore during some of these acceptance tests via video, which has resulted in some success since the start of the second quarter. I am also pleased to tell you that with respect to dispatching service technicians to various field locations, we really had no interruptions with the exception of a single customer site in Iraq, where the government issued a ban on all travel. It's a bit of a mixed bag on the new opportunities front. In the current environment, we're clearly seeing situations that are negatively impacting us. First, we've seen many oil and gas companies slashed the capital budget spending programs in some cases by 30% to 40% versus their original 2020 plans. Much of this reduction is targeted at onshore U.S. activity in the shale basins. Not surprisingly, we're seeing many U.S. land rigs being stacked with a lag -- with the land rig count down more than 50% since mid-March. While that's concerning, let me share a little color on our exposure. You can see that more clearly on Slide 12 of our new investor deck. For full year 2019 U.S. land in production sites made up about 30% of our other site category, which, in turn, makes up about 20% of MCS revenues and MCS revenues for about 68% of total revenues in 2019. So from the total revenue perspective, U.S. land including production is a little less than 4% of total revenue in generally delivers lower gross margins than offshore sites, meaning, although negative, our U.S. onshore exposure is relatively small. Of course, we're also seeing some impacts offshore. The industry has seen some early contract terminations along with rig stacking, and where our customers have stacked, they're generally reducing or turning down communication services. It's too early to tell what the ultimate impact of RigNet will be, although, the revenue trajectory will be down. For Q1, our offshore rig split was 73% jackups and 27% floaters. We believe, we will see deepwater exploration slow during this period, but hopefully not stop, and hopefully development work in shallow water will continue, particularly in the Middle East, we are about 50% of the global jackup fleet is employed. Many investors have asked if this is going to be like the 2014, 2016 timeframe, while it's in early innings, and we offer a few thoughts. Activity levels going into this downturn are nowhere near what they were going into the last downturn. In fact, it's not reasonable to say that the drilling industry never really recovered from the last downturn in terms of day rates or utilization, either for floaters or jackups. Nonetheless, we've already experienced the decline in activity, particularly in the stock market. Pricing for us today is also quite different from the last cycle. We went into the last downturn generally enjoying contracts with high prices and strong margins. Much of that is either rolled off through contract expiration or has been competed away during the last downturn. This is important because as customers ask for discounts, and they are, we simply don't have the same margin to give. Additionally, contract terms on the bandwidth we procure is different than existed in the previous downturn. In some cases, we can move bandwidth or reduce bandwidth when our customers stack rigs, creating a somewhat more variable cost model that existed in the prior downturn. But I do want to point out the bandwidth suppliers tend to be less willing to implement temporary price reductions that would otherwise help offset the impacts of our energy customers requests to deliver price reductions to them. We've also diversified our revenue stream since the last downturn. First, within the communications part of our business, weโve gain share in the rig market. But we gain share even faster in both the midstream pipeline market and the production market. Both of these sub sectors are much less impacted by the price of oil. Of course, oil flows through pipelines regardless of the commodity price. And as it relates to offshore production, those production facilities require enormous upfront capital investment in the OpEx cost once those facilities turn on are relatively small, meaning turning them down is far less likely than temporarily suspending or delaying the drilling campaign. Second, we have expanded our system integration business in some of the projects we are building out actually benefit from lower input prices, making that revenue stream a bit more resilient as well. Third, we have a revenue stream in our Apps and IoT segments that can help our customers reduce their cost structure in almost any area of the energy value chain. This can serve as a comfortable rate in the period of low oil prices. Fourth, we've begun to venture into new vertical markets, including government, where our services fit well. We're working to support the government protocol and other industry verticals, both directly and through partners to leverage our best in class communication services, cybersecurity solutions, and real time machine learning capabilities to deliver value to customers in those industries. Therefore, to deliver new revenue streams and margin to RigNet. All of this means that we'll be, while we are and will be negatively impacted by oil prices during this period. We are better prepared to deal with this part of the cycle than we ever have been in the past. In terms of Q1 2020 impacts, and the impacts that we are seeing here in the second quarter, I think the biggest effect on us is that we're seeing decision times stretch and work orders are being pushed to the right. Slowly new revenue turn up across the business. So particularly in the SI and the Apps and IoT segments. Within Apps and IoT, we've seen some projects that have been paused, including workforce tracking project we had with one large customer where their subcontractors pushed back due to privacy issues. Fortunately, we were paid for all of our sunk costs, and are continuing to work with that supermajor to redeploy at other global locations, if they see our solution can absolutely drive improvements in health and safety performance. We're still very busy responding to project bids and inquiries across all segments. And in fact, we were awarded a $4 million job even during the first quarter in our SI business. At Intelie, in spite of some program delays the fund remains robust in new paid POVs are in the planning process with two supermajors. It's important to note that we don't believe these delayed opportunities are necessarily going away. And in fact, they're even new and expanded opportunities in all segments to highlight a few things we're working on. We have a couple of large upcoming RFPs in the MCS space. They will be competitive, but we believe, we are well positioned. And despite some of the rig stacking we're seeing, there's still reports that operators are issuing new tenders for drilling rigs. So there may be additional comms opportunity for us there as well. We're continuing to make progress on the FPSO front, you can see on Slide 13 of our new investor deck, the timing we're expecting for these assets to begin contributing revenue. While the schedule is always subject to change, we don't believe any of these projects are in danger of not moving ahead. Remember, these are long lived assets that will generate revenues for many years to come. Our IoT business has not slowed. There is little change in the business where these devices are employed. And we continue to pursue expansion opportunities. In Q1, we were impacted by some delays in hardware orders. But the monthly service part of the revenue stream has been steady. Intelie added a third tracking customer. So again, new deployment may slow as activity declines. With Intelie, we're also working on a number of new initiatives with supermajor here at U.S. as well as in the Middle East, where we're focused on analytical solutions to help them improve performance and efficiency. We're also seeing some exciting interest outside of oil and gas in manufacturing, where we're leveraging the solutions we developed for a large international food and beverage manufacturer. For other customers in this vertical looking to better monitor and control, utility usage, waste and productivity. AVI, our high resolution video solution has also generated a lot of interest, particularly from customers seeking to cut costs to remote video monitoring. Finally, we're seeing some positive results from being accepted onto the GSA schedule, enabling us to sell to federal, state and local governments and are working with one contractor already to provide a secure communication service for government purposes. In fact, we're also seeing some significant interest in cybersecurity solutions we provide including Cyphre, both here in the U.S. and abroad. Let me now talk about the last of our three areas of focus. RigNet is aggressively cutting costs and capital spending, while preserving our ability to serve customers. Non-essential spending has been eliminated including travel and professional fees. We have a special team focused on identifying sites, where we expect reduced bandwidth and are working proactively to reduce the costs associated with these sites as quickly as possible. Like many companies working in the oil field, we have reduced compensation to the Board, executives and employees in an attempt to save jobs. We drew down $3 million on our revolver to help preserve liquidity and flexibility. And we applied for and received approval for a PPP loan, which will help us continue to preserve critical jobs for over 290 employees in Houston, Lafayette, Denver and other U.S. locations as these employees maintain critical communications infrastructure. In short, we're pulling out all the stops to protect the business while still pursuing new revenue opportunities. In spite of the decline in oil prices, all indications are that the strategy we set out to execute after the last downturn, mainly diversification in terms of services and software and diversification both across the energy value chain and into other industries is still the right strategy. It will service well over time. With that, let me hand it back to Lee.
- Lee Ahlstrom:
- Thanks, Steve. Referring back to Slide 6, we'll begin with a summary of results. I'll follow-up with more detail on the segments. And then I'll touch on the balance sheet and liquidity. Consolidated quarterly revenue for the first quarter was $58.8 million, up 2.2% compared to $57.5 million in the prior year quarter, and a decrease of 8.3% from $6.1 million in the fourth quarter of 2019. The increase compared to 1Q โ19 was primarily due to SI coupled with Apps and IoT and partially offset by MCS. Of the $5.3 million decrease compared to the fourth quarter in 2019, $4.6 million due to SI, so we made some good progress on projects in the fourth quarter, and about $1.3 million was from Apps and IoT partially offset by an increase in MCS as a result of equipment sales. Net loss attributable to common stockholders in the first quarter of 2020 was $26.8 million or $1.34 per share including the non-cash impairment of goodwill, or a loss of $3.7 million for $0.18 per share excluding the impairment charge. This compares to a net loss of $12 million or $0.63 per share in the first quarter 2019, and a net loss of $0.5 million or $0.03 per share in the fourth quarter of 2019, which included a gain on the sale of certain non-core assets. If we exclude the gain on the sale, fourth quarter โ19 net loss was $4.8 million or $0.24 per share. Adjusted EBITDA was $8.4 million for the first quarter of 2020 compared to $8.4 million in 1Q โ19 and $11.9 million in 4Q โ19. You may remember that on our last call, we reminded everyone that, as has been the case for the last couple of years, first quarter adjusted EBITDA is generally lower than the previous quarter for a variety of reasons, including G&A being higher in the first quarter. That was a driver here along with lower 1Q revenues versus 4Q โ19. Touching on the non-cash impairment, like many companies in the energy space, the dual effects of COVID-19 and oil price decline served as triggering events for a review of goodwill. As a result of debt review, we determined that the carrying value of certain reporting units was an excess of their fair value, and determined that it will be appropriate to fully impair the goodwill for our MCS and SI segments. The result was a $23.1 million non-cash charge composed of $21.8 million for MCS and $1.4 million for SI. Following the impairment, the only goodwill on the balance sheet is $20.5 million in Apps and IoT. As a reminder, goodwill does not amortize we regularly conducted impairment tests and it found to be impaired be write it down. Also, there was no tax impacted of the impairment. Let's move on to the segments. Manage communication services revenue was $39.9 million to the quarter compared to $39.3 million in the prior quarter, and $42.3 million in 1Q โ19. Revenue compared to the prior quarter was up about 1.6% on higher equipment sales offset by somewhat lower service and installation revenue. First quarter 2019 included higher service installation revenues, which were generated by the T-Mobile installation last year, as well as higher microwave traffic revenues mostly related to North Sea traffic. Segment gross margin in 1Q โ20 was 36.1%, down from 38.3% in the fourth quarter of โ19, and from 36.3% in the first quarter of โ19. One contributor of lower gross margin in 1Q โ20 for sites for revenue declined, we weren't able to reduce corresponding bandwidth costs as quickly. As Steve mentioned, we have a team focused on working that issue. Our MCS site count for the first quarter of 2020 was 1,351 up by 11 compared to the prior quarter and down by 9 compared to 1,360 in 1Q โ19. Compared to 4Q โ19, we gained a net 7 offshore drilling rigs, all jackups and one offshore production site. Maritime is also up by an net 6. This was partially offset by a net three other sites being down. Apps and IoT revenue was $8.7 million for the quarter, up 9.1% compared to $8 million in the prior year quarter, but down $1.3 million or 13.3% compared to $10.1 million in the prior quarter. There are a number of moving parts here so let me give a little detail. In IoT revenue decreased as we saw lower bandwidth usage in 1Q โ20 compared to both 1Q โ19 and 4Q โ19. We also saw some lower equipment sales in 1Q โ20 compared to both quarters. About half of the segment delta compared to 4Q โ19 came from IoT. In Apps revenue was up compared to 1Q โ19. The increase was largely result of Intelie ramping up across a number of customers. Unfortunately, we saw a drop compared to 4Q โ19, and some work didn't renew as a result of what's going on in the industry. This includes a few Intelie specific projects with various customers. But revenue was also off on a few other things like MetOcean, our North Sea weather service, as well as other crew facing applications which are naturally down. The split in Q1 โ20, between Apps and IoT was about 51% IoT and 49% Apps. We continue to project this segment will be increasingly leveraged towards Apps as we go forward. Systems Integration revenue for the quarter was $10.1 million, up 41.3% from $7.2 million in 1Q โ19 but down 31.4% from $14.7 million in the prior quarter. As you know, revenues are tied to our progress on projects and in 4Q โ19, weโve made some great progress on our projects. We also made good progress in 1Q โ20 but not quite as much. Backlog in the business declined to $22.4 million as of March 31, 2020 from $26.2 million at December 31. Net of our revenue burn, we added about $4.6 million in backlog during the quarter. Gross margin for SI increased to 22.1% from 14.4% in the prior quarter, and from 30.5% in the prior year quarter. The GM in the first quarter of 2020 was enhanced by progress on projects with higher margins compared to the prior quarter. SG&A expenses totaled $16.6 million in 1Q โ20 compared to $13 million in 4Q โ19 and $20.3 million in 1Q โ19. This increase compared to the prior quarter is primarily due to stock-based compensation, as portions of our short term bonuses are granted in equity in the first quarter of the year. SG&A in the prior year quarter include the legal costs of $2.1 million associated with the GX settlement. Capital expenditures for the three months ended March 31, 2020 totaled $3.7 million, compared to $8 million in 4Q โ19 and $7.1 million in 1Q โ19. As of March 31, accrued capital expenditures were $0.9 million compared to $2.5 million as of December 31, 2019 and $4.4 million as of March 31, 2019. Additionally, during the fourth quarter, we financed certain satellite equipment value to $2.8 million. This amount was included in other liabilities on the balance sheet at 12/31. But as we told you on our last call, this was reclassified as debt on our 3/31 balance sheet. After accounting for the accrued capital expenditures, capital expenditures on a cash basis were $5.3 million for the quarter ended December 31. Our first quarter CapEx was substantially composed of success-based commitments and capitalized labor. During the quarter, we generated about $2 million of free cash flow. We calculate this by starting with adjusted EBITDA and subtracting cash CapEx as well as principal payments and interest, cash taxes and some other cash add-backs. You may recall, we had a principal payment holiday in 1Q after we completed the extension of our credit facility. Our 1Q number is up about 700,000 compared to the fourth quarter, and up almost $7 million compared to 1Q โ19. With respect to the balance sheet, I've summarized our situation on Slide 21. As of March 31, 2020, cash was $13.6 million. Our outstanding debt was $113.8 million including both current and long term. At quarter-end, our consolidated leverage ratio as defined in the credit facility was 3.00 versus our cap of 3.25. And as a reminder, that kind of gross debt basis with terms defined in our credit agreement. After the quarter, we drew down an additional $3 million on the revolver to secure liquidity and flexibility, so we are almost fully drawn on the revolver, although, we have not used that cash. We are continuing to manage our liquidity but it is tight as customers continue to slow pay in the current environment. Our AR team remains diligent, however, and we are focused on getting cash in the door and on cutting costs. Many of you have asked about whether the company is apply for relief under the Paycheck protection program. As Steve said, we've applied and we were approved for $6.8 million loan which we expect to use for approves expenditures as defined under the program. We anticipate obtaining forgiveness for the maximum amount possible. We believe that we did not have access to other capital sources. As you know in the first quarter of this year, we tried to increase availability under our credit facility. And while we were pleased to extend that facility with our very supportive bank group, we were unable to increase its size. To raise equity capital of same amount as the PPP loan we secured, we would be required to have a stockholder vote, which could take months or fit into the narrow exceptions allowed by NASDAQ with potentially very unfavourable terms. These funds will provide us with much needed flexibility to continue to support over 290 U.S. jobs, and will enable us to delay to making any workforce reductions that could have a negative impact on our ability to deliver our critical services to our customers and to our overall business. Finally, we don't give guidance. But on our last call, we did say we had goals of increasing revenue and adjusted EBITDA year-over-year. I think given how much the environment has changed that's not going to be the case. And in fact, without providing any specifics, we expect both metrics to be down compared to 2019. That's probably not a surprise to anyone. Of course, the situation is very fluid. And as Steve mentioned, we're in early innings here. So I think that's perhaps all we'll say on the subject during the call. And with that, let me turn it over to Steve.
- Steve Pickett:
- Thank you, Lee. Before we open for questions, let me thank all of our shareholders who supported our proxy proposals. Weโve voted on these at our AGM which has held this past Thursday in all of those proposals passed. Thank you very much. We appreciate your support.
- Lee Ahlstorm:
- All right, Joelle, why don't we go ahead and open it for any questions we might have.
- Operator:
- Thank you. [Operator Instructions] And our first question comes from Allen Klee with National Securities. Your line is now open.
- Allen Klee:
- My first question is the actions you've taken so far to cut your operating expenses. Do you have a sense of what the run rate savings could of that could be on a quarterly basis? Or else being equal?
- Lee Ahlstrom:
- Allen, we have pulled out costs on the order between $15 million to $20 million across COGS and SG&A. And that's on an annualized basis. Actually, sorry, that's not annualized that was the effect really as looking at three quarters of spend, so really from Q2 to the end of the year.
- Steve Pickett:
- And Allen, we've also taken down the CapEx, expected CapEx expenditure since as well.
- Lee Ahlstrom:
- Yes, that's exactly right, Steve. We're down, I would say. And, again, largely, it's going to be success based, but right now, we're looking at maybe somewhere slightly below mid-teens.
- Allen Klee:
- That's great. That was going to be my second question.
- Lee Ahlstrom:
- I thought it might be.
- Allen Klee:
- You guys are good. And then just to understand, so you borrowed $3 million from your revolver post quarter. And I guess the PPP money of $6.8 million, is that also post quarter-end?
- Lee Ahlstrom:
- That's correct. Yes.
- Allen Klee:
- Okay. So between the two of them that's close to $10 million. Okay.
- Lee Ahlstrom:
- Yes, that's right.
- Allen Klee:
- Youโve also talked in your -- on your slide presentations, and you discuss, you're looking at government assistance in various jurisdictions, does that apply to something besides the PPP?
- Lee Ahlstrom:
- It does Allen, there are a number of programs in various jurisdictions around the world. So for example, in Singapore where we have an office, there is a small refund that the government is giving all businesses. In Canada, the same kind of thing, these are not material amounts that we report, but certainly every little bit helps.
- Steve Pickett:
- And we're staying quite tuned into those kind of opportunities both in the U.S. and in other parts of the world for obvious reasons.
- Allen Klee:
- Okay, thank you. And then -- it was, I mean, I give you a lot of credit that you were able to sequentially throw your site count in this environment, which clearly shows you're gaining share and doing something right or more than something. Is there any way to break out kind of the new ads versus shutdowns that got to those numbers? And then maybe if you guide any indications, of what's going to potentially get shutdown in the near term, also in relation to you announced, some wins of new business?
- Steve Pickett:
- So, Allen, I could maybe the only really -- the breakout I can give you is maybe on the rig front of the offshore mid front, where we as I said, mentioned, we added seven jackups and then we actually added two floaters and lost two floaters. So in that gain in zero of the floater side.
- Allen Klee:
- Okay.
- Steve Pickett:
- And with respect to what potentially going to be turned off. That's where we get notice of that, obviously as our customers are getting noticed themselves. And so again, it's pretty fluid situation. But I know Errol and his team of sales executives and customer service delivery managers are in contact with our customers around the world every day to help understand exactly what the situation is and what we can be looking forward to. Errol. I don't know if you want to add any comment there or Steve.
- Errol Olivier:
- Yes. So, I want to add just a little bit. First, I'm pretty impressed and encouraged by our ability to execute in times like this, our operations group is really been able to hold us all together. So customer satisfaction for the services we deliver is playing an important factor in what's going on today. Yes, we're seeing customers ask for discount gifts or some jobs that are canceling. But the key thing for us right now is to make sure that our customer services don't suffer. And we've been doing a great job of that. But I'm even more encouraged by the opportunities that are coming into the pipeline, and I can't tell you exactly, the numbers, what offsets what, everything's fluid, everything's dynamic. But, to see that the pipeline is still very active, and that we're -- we've got a busy proposals group that's proposals out every week, that certainly hasn't slowed down, means that there's still some other opportunities out there outside of just the core drilling market that we've been chasing and a lot of this comes from the expansion out into the production facilities and the other products and services we're offering like ABI and also Intelie and others.
- Allen Klee:
- That's great. Maybe just following-up. You talked about opportunities in government to, is government as a percentage of how much you're selling into government today? Is that a meaningful number? Or is it not yet material?
- Steve Pickett:
- Not yet meaningful. But we're quite encouraged by the level of engagement that we have, not just here in the U.S., but internationally as well. Yes, particularly in the Middle East.
- Allen Klee:
- Okay. And then you gave some very good data points to kind of compare this downturn to the prior one. Is it fair to say the conclusion that is kind of -- and everyone's crystal balls, not very good these days. But based on what you know today that this downturn might not be as bad as the last one? Or do you not know enough to be able to say that?
- Steve Pickett:
- Well, in terms of the downturn itself, I don't know, if we know enough yet to know how it will compare. But what I do feel confident about is that we are better prepared to deal with the downturn, whatever it ends up looking like, and given what we've done to transform the business over the last couple of years. Yes, not to say there wonโt be pain along the way, of course, but I think we are at a much better position than we were during the last downturn.
- Allen Klee:
- Okay. And then moving to Apps and IoT, so the profitability decline and that isn't that kind of maybe where we think the current profitability run rate is kind of based on everything that's happened?
- Steve Pickett:
- Allen, I think that's a little bit difficult to say its down, a little bit compared to what it was December 31. It is about let's see, I think it's about flat compared to where it was -- its actually up compared to where it was March 31 of 2019. I think it's tough to give guidance around that. But over the course the year of 2019, we went from about 44% of gross margin in the Apps and IoT segment to 57.7% at 12/31. We're down a little bit from that. And we'll see how it develops but it looks like it's somewhere in that range and potentially increasing. I think the more Apps we actually sell without having to do development, we should continue to drive that margin on a gross margin percentage upwards.
- Errol Olivier:
- I might answer that. I'm going to say, I might add to that and that is, a drop in the Apps and IoT is quite different than a drop in the satellite communications, where in satellite communications, we have a significant amount of cost underlying the drops that we're seeing Apps and IoT or more just to slowdown in customers delaying things and pushing them back but not canceling. So as people go back to work and they're out in the field need these applications and also now starting to see that these applications are helping them do their job remotely because they can't be on site. And we're seeing, renewed interest in quite a bit of proof of values and collaboration with customers right now really curious about how those things can support them while they're not able to be sitting specialists out in the field. It will turn around.
- Lee Ahlstrom:
- Yes. That's a great point. And that's I think, specifically where something like a AVI or video solution really can come in and provide that remote monitoring and let somebody who's working at a real time operations centre see what's happening out in the field real time. So one of the key elements of the strategy around diversification was this view that in a lower oil price environments. Maybe customers have already cut costs pretty significantly. And they needed technology to help pick up the slack in the workload and let them do more smarter. And I don't think that has changed. In fact, I think, if anything, what we're seeing is the validation of that thesis, where again, people are trying to cut costs and you're struggling to do it on the people front. You've actually got to do more with less and technology the only way to do that.
- Allen Klee:
- Okay. As we move on to SI segment, I know last year, you had some expected seasonality in some of the quarters, as that I guess, the timing of the backlog getting worked off. Is there anything like that we should think about this year?
- Lee Ahlstrom:
- I don't really think for this year. We have, as Steve mentioned, we've got a lot of bids and Errol mentioned as well, a lot of bids in the pipeline. So we're kind of waiting to see results on those. And of course, we also have some existing change orders. That could be pretty positive for us on some of the projects that are currently in the backlog. So, I think that's probably the amount of color we could give you on SI at this point.
- Allen Klee:
- Okay. The quarter included of $4.2 million gain from the sale of non-core assets. Can you just touch on what that is and to the extent there are any other potential opportunities in your portfolio?
- Lee Ahlstrom:
- So remember that was actually for last quarter Q4 that we've had that sale on the asset and it was a number of cell phone towers or towers that we own, that we determined that we're not really the natural owner of those and so we sold those to a third party and we are still using some of the space on those towers. In terms of other existing asset sales or potential asset sales, again, we're not a terribly asset heavy company. But we are looking at a few things which could potentially generate some revenue for us, although I would say the timing is uncertain and discussions on these types of things can take a significant amount of time. Steve, anything you want to add to that?
- Steve Pickett:
- No. I think it's right on and it just wouldn't necessarily generate revenue, but it would obviously generate cash. If we were to move forward with one of the -- with a further asset sell.
- Allen Klee:
- Okay. Well, thank you so much and good job in executing in a very tough environment.
- Operator:
- Thank you. I'm not showing any further questions at this time. Iโll now like to turn the call back over Lee Ahlstrom for closing remarks.
- Lee Ahlstrom:
- Thank you, Joelle. I appreciate that. And we certainly thank all of you for joining us on today's call. We look forward to speaking to you again in August when we report our second quarter earnings, and we actually hope that we can see many of you in person before that as the country starts to open back up and potentially we all start doing a little bit more travelling again. In the meantime, Steve, and I and Errol available for follow-up calls today. So either give us a ring or send us an email and we'll get something scheduled. And then stay well and thank you for joining us. Bye, bye.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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