RigNet Inc
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Ladies and gentlemen, welcome to RigNet's Second Quarter 2020 Earnings Conference Call. My name is Towanda, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to Lee Ahlstrom, RigNet's next Senior Vice President and Chief Financial Officer. Mr. Ahlstrom, please proceed.

[Lee Ahlstrom:]

Thank you, Towanda, and good morning, and welcome to RigNet's Second Quarter 2020 Earnings Call. A copy of our earnings press release with supporting schedules, including schedules, which reconcile the non-GAAP metrics we'll 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've posted that as well. Before we get started, I'd 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 and future plans and aspirations are forward-looking statements that involve certain risks, uncertainties and assumptions. These include, but are not limited to the risks associated with the general nature of the oil and gas industry, customer and other third-party interactions, our strategy, the impact of COVID-19 on our business, PPP loan forgiveness 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 now I'd like to turn the call over to Steve Pickett, Rignet's Chief Executive Officer and President. Steve?

[Steve Pickett:]

Thank you, Lee. And good morning, everyone, and thank you for joining us on the call today. On the phone with me is Lee, our CFO; as well as Errol, our Chief Operating Officer. There's no doubt we're living in extraordinary times, and I'm pleased to report that the RigNet team is responding in an extraordinary way. Around the world, employees have continued to work from home where possible driving the business forward. Our field technicians and workshop personnel have enabled us to meet our customers' critical communications needs and continue progress on our SI projects. And our specialized Apps & IoT teams have helped our customers continue to drive operational savings and safety improvements. This hasn't been easy. A number of our employees in various locations have been diagnosed with COVID-19 and, to our great sorrow, we've lost an employee in our Mexico operation to this pandemic. Yet we persevere. And nothing is more important than opening our earnings call today by thanking each and every employee for his or her contribution to the strong results we've delivered for stakeholders in the second quarter. On behalf of the management team and Board of Directors, we appreciate your commitment to RigNet, and thank you for everything you're doing to make RigNet a success. Yesterday, after the close, RigNet reported a net loss for the second quarter of $4.3 million or $0.21 per share based on revenues of $53.4 million. The impact of COVID and directly associated oil price decline, reduced both revenue on a quarter-on-quarter basis, down 9.1% and, on year-on-year basis, down 11.5%. Nonetheless, we reported adjusted EBITDA, a non-GAAP measure we defined in our press release and one of our key performance indicators, of $9.7 million, up 16.2% compared to last quarter and down less than 1% relative to second quarter 2019. This was due to our strong cost discipline. It was held by the diversification of our revenue stream across the energy value chain, combined with the increasing contributions from the products, services and software within our growing Apps & IoT business segment. Lee will provide some more color on the financials. While we're pleased with our results during the second quarter, like you, we're thinking about the outlook in the third quarter and beyond. In our last update, I characterize the business environment as a mixed bag in terms of opportunities. It's fair to describe it that way today as well. Certainly, we've seen a slowdown as rigs are stacked and fix production platforms, particularly in the Gulf of Mexico, have shut down with oil prices in the second quarter falling below the economic limits required to keep them operating and with storage capacity reaching peak levels in the U.S. Although we've seen some reversals in stackings in the last week, we remain focused on cost controls and new business opportunities in the coming quarters to help us offset any further declines in the upstream market. Some of the second quarter platform shut-ins required us to relocate nodes associated with our owned infrastructure in the Gulf of Mexico, driving up costs, many of which we've captured in our COVID add-back to adjusted EBITDA. To highlight the magnitude of the changes, we saw more tower moves in the Gulf of Mexico due to production platforms temporarily shutting down in the second quarter than we've seen in the previous 3 years combined. We also continue to see some of our contracted revenue opportunities like some of the FPSOs in Brazil push out further in time. Likewise is drilling, and project plans are delayed, new opportunities to drive growth from MCS to Apps & IoT to SI projects are being pushed out, although not necessarily being canceled. The good news is that there is little significant amount of activity related to new business. For example, our bids and proposals team completed more than 140 different MCS and App & IoT quotes and proposals during the second quarter, including a couple of significant MCS-related fleet deals. In the System Integration business, we responded to 34 tenders and requested for clarification during the second quarter on a variety of projects, including LNG plants, offshore platforms and FPSOs. The SI team has also done a great job of working with customers to develop protocols to manage virtual factory acceptance tests, ensuring that we can continue to deliver to work sites in supportive projects. While this is bidding activity, not awards, we're pleased that opportunities appear to be available, and our customers continue to plan new projects. Intelie continues to gain traction, particularly with super majors. We've added one new European super major this quarter related to a regional deployment of our AI-backed machine learning platform and have been invited to participate in their tender for use of this platform in their global real-time operations center. The second super major has expressed quite positive feedback related to our performance during their paid POV. And we are in the contract negotiation phase with them today on yet another oil deployment. And yet another driller contracted to use the Intelie platform in specialized applications to support their drilling operations offshore. Finally, we're expecting to ramp up our Intelie support, or BP, late in the third quarter to further support their complex and diverse global operating environment, which will increase recurring revenue. Outside of oil and gas, we've expanded our Intelie applications in manufacturing and are currently using the Intelie real-time platform to monitor utility consumption to drive operational cost savings while also reporting on environmental KPIs in support of sustainability programs. Our first multi-region customer is a global household name and we have several other top-tier non-oil and gas companies in different stages of the pipeline, which highlights our ongoing work to grow and diversify in other industry verticals, leveraging our best-in-class technologies. During the quarter, we reported that Intelie is now co-sell ready through the Microsoft Partner Program. This means not only is Intelie available through the Azure marketplace, but that we are engaged with various Microsoft teams working together to show potential customers the benefit of Intelie's real-time machine learning running in Microsoft Azure Cloud. We've also been invited by Microsoft to showcase Intelie in their Houston innovation center and hope to do that as soon as the COVID restrictions are lifted. In fact, our developing channel program for Intelie has seen some tremendous strides this quarter, and we've opened up multiple prospects through these channels, including opportunities with Microsoft in North America, and with a major operator in the Middle East. And in conjunction with the top consulting group, where we are working with on joint opportunities in Southeast Asia and North America. And with our previously announced channel partner in Latin America. We are providing services to both the major national oil company and an international operator with that Latin America channel partner. In the cybersecurity arena, we announced the launch of our new cipher capabilities, which deliver approximately a 400% performance gain over the previous offerings. We've also worked to ruggedize our applications to ensure that we can more effectively address harsh conditions in remote industrial settings and mobile platforms. We've expanded our other security services as well, adding AI backed stock or security operations center services for one of our drilling customers to help them guard against the increasing danger from cyberattacks. Despite the challenges in this new environment, we've actually seen a number of new logo wins this year, adding approximately 8 brand-new customers across our segments in the first half of the year. And we've expanded our reach within approximately 12 of our existing customers, serving new areas within the organizations. In fact, as we look across the business at our largest customers, our top-10 customers, we generated about 40% of our 6-month revenues. 8 are generating revenue across multiple business segments. Expanding this to our top-20 customers, we total about 55% of our 6-month revenue. 15 customers are generating revenue across multiple segments. This is a solid confirmation that our strategy of diversifying our business and moving up the value chain by building a vertically integrated technology company is being well received by our customer base and is helping us gain market share and share of wallet. Speaking of diversifying our business. In government, and on the heels of becoming GSA listed in March, our other big news during the quarter was the signing of the contract with CACI International Inc. to collaborate on their Steelbox, secure voice and text app for government users. CACI's Steelbox provides a secure way for government users to interact with each other without using third-party public applications that could present a security risk. RigNet's contribution is the breakout feature, which allows users to call a phone that's not running the Steelbox app while keeping the communications secure. CACI is marketing Steelbox to a wide variety of government agencies and RigNet will receive a monthly per-user fee for each subscription that includes the breakout feature. Considering that the federal government has issued more than 4 million cell phones that are subject to controlled, unclassified information requirements, the target market is significant. While it's very early days, the system is up and running with the number of users already online, and we're hopeful that this will represent RigNet's, but certainly not last, successful foray into the government sector. Therefore, further diversifying our revenue stream. Before I turn it over to Lee, let me talk a little bit about the customer and competitive landscape going forward. COVID-19 and the related commodity price dynamics is continuing to reek habit across many industry sectors. In oil and gas, more companies have filed restructuring plans this year than filed in all of 2019. We were going to probably see this number pass the high watermark of filings in 2016 before the year is out. I want to remind our investors that the critical nature of the services we provide, not only on the communications front, but also in terms of some of the software applications we're providing that enable customers to improve safety in both operational and financial performance, often result in RigNet being deemed a critical vendor when our customers file reorganization proceedings. So far, in cases where a customer has filed a restructuring plan, we continue to be paid, including prepetition amounts. And as I've said before, in some cases, we're even paid on a more timely basis after the filings. My point is that we provide essential services to support our customers' ongoing operations, and we generally have not seen major bad debt exposure when a company goes into Chapter 11 restructuring. Of course, we've also seen some competitors file for restructuring. They, too, are continuing to serve their customers and participate in commercial activities in the normal course. Competition remains fierce, but so far, we haven't seen anything crazy in terms of the commercial environment. Finally, with respect to our own balance sheet. Our leverage ratio remains just over 3%, well below our 3.25% limit. And that includes having $6.3 million of PPP funds as part of our debt, which we expect to be fully forgiven. And based on the published time lines for that forgiveness process, that amount is expected to come out of our debt calculation before the end of Q1 2021. So to sum it up, we're in a challenging environment right now. But we do see important opportunities looking ahead. We're going to continue to focus on our costs, both in our operations and our back office, and I think the team is doing a great job there. We're also going to continue to manage cash, continue to pay down debt and continue to pursue new revenue opportunities across the energy value chain and in new verticals like government. All while tightly managing our CapEx spend. With that, let me hand it back to Lee.

[Lee Ahlstrom:]

Thanks, Steve, and I hope our listeners are all staying safe and healthy during these difficult times. Let me start with a recap of second quarter results at a high level. I'll provide some additional detail at the segment level and I'll conclude with some comments on the balance sheet and liquidity. Consolidated quarterly revenue for the second quarter was $53.4 million, a decrease of 9.1% from $58.8 million in the first quarter of 2020. Compared to second quarter 2019, revenues declined 11.5% from $60.3 million. The revenue decline between the first and second quarters of 2020 was largely due to MCS as a result of a reduction in site count in this challenging environment as well as lower equipment resale in the second quarter. The reduction was partially offset by a small increase in both SI and our value-added applications in Apps & IoT. The decrease compared to 2Q '19 was primarily due to MCS, coupled with SI and again, partially offset by the continued growth in Apps & IoT. Net loss attributable to common stockholders in the second quarter of 2020 was approximately $4.3 million or $0.21 per share. This compares to net loss of $26.8 million or $1.34 per share in the first quarter of 2020. And I'll recall that the first quarter 2020 included a $23.1 million noncash impairment of goodwill. Excluding the impairment charge, results in the first quarter of 2020 were a loss of $3.7 million or $0.18 per share. In the second quarter of 2019, RigNet printed a loss of $6.2 million or $0.32 per share. And in absolute terms, the net loss in 2Q '20 was about 17% more than 1Q '20 and almost 30% better than 2Q 2019. Note that the 2Q '20 loss included a $3.9 million noncash charge related to an increase in the fair value of Intelie and the earn-out contingent consideration. This increase reflects our expectations that Intelie is more likely to meet its full payout under the earn-out agreement as recently amended. As Steve mentioned, the team delivered strong adjusted EBITDA performance for the second quarter of 2020, $9.7 million, a 16.2% increase compared to $8.4 million in the first quarter of 2020 and a less than 1% decrease compared to $9.8 million in the second quarter of 2019. Let's move on to the segments. Managed Communication Services or MCS revenue was $34.1 million for the quarter compared to $39.9 million in the prior quarter and $41.2 million in 2Q '19. Revenue compared to the prior quarter was down about 14.4%, driven by a decrease in site count and lower equipment sales. Both site count and equipment sales were also higher in the second quarter of 2019. Significant segment gross margin in 2Q '20 it was 32.7%, down from 36.1% in the first quarter of '20 and from 39.3% in the second quarter of '19. One of the key reasons for the decline in margin from first quarter 2020 was our inability to reduce our bandwidth commitments with suppliers as quickly as our customers stacked rigs or shut down sites. As you know, we don't secure bandwidth on a per-site basis, and we generally try to commit to our suppliers for longer terms to help ensure we get the most favorable pricing. This can lead to a mismatch in our supply versus customer demand when the industry goes through the kind of upheaval we've seen in the last few months. Although some of our more recent contracts and contract amendments give us more flexibility to reduce bandwidth commitments to our suppliers during a period of stacking than existed in the past. Our engineering and procurement teams are actively working to identify and negotiate further potential network-related savings, and we expect to see some of these benefits beginning in the third quarter. It shouldn't be a surprise that our MCS site count for the second quarter of 2020 was down compared to both the previous quarter and last year's comparable quarter. At 1229 on June 30, we're were lower by 122 sites compared to 1Q '20 and down by 155 compared to the 1384 in 2Q '19. Our offshore actually held up comparatively well quarter-over-quarter, and stacking has reduced net rigs by 3. We are also lower by 49 production sites offshore, 36 of them in the U.S. Gulf, where customers are shutting in platforms or did shut in platforms, some of which we believe will be temporary as a result of lower oil prices and limited storage capacity. Finally, maritime sites were down by 16 and other sites, which were largely U.S. land decreased by net 54. Apps & IoT revenue was $8.8 million for the quarter, up 0.7% compared to $8.7 million in the prior quarter and up about $0.8 million or 10% compared to the $8 million in the prior year quarter. There are a number of moving parts here, so let me give a little detail. In IoT, revenue on bandwidth usage was up slightly compared to 1Q '20 and down slightly compared to 2Q '19. We also saw slower equipment sales in 2Q compared to both quarters. In Apps, our SaaS revenue increased both quarters -- both quarter-on-quarter and year-on-year. The increase was largely the result of Intelie ramping up across a number of customers. Specifically, Intelie's 2Q revenue was up an impressive 58% relative to Q2 '19 and 14% higher than 1Q '20. The split in Q2 '20 between Apps & IoT was about 50% IoT and 50% apps. We continue to project that this segment will be increasingly levered toward apps in the future. Systems Integration revenue for the quarter was $10.5 million, up 3.2% from $10.1 million in 1Q '20 and down 6% from $11.1 million in the prior year quarter. As you know, revenues are tied to our progress on progress, and so revenue is sometimes uneven. In Q2, as in Q1, we made some good progress on these projects. I think our team has done a very good job at working around some of the fiscal restrictions that have been in place during the COVID lockdowns. Backlog in the business declined to $15.9 million as of June 30, 2020, from $22.4 million in the prior quarter. Gross margin for SI increased to 28.4% from 22.1% in the prior quarter and was down from 36% in the prior year quarter. The GM in the second quarter of 2020 was impacted by timing and productivity on certain projects compared to the prior quarter. SG&A expenses totaled $11.7 million in 2Q '20 compared to $16.6 million in 1Q '20 and $17.4 million in 2Q '19. The decrease compared to prior quarter is largely due to stock-based compensation as we pay our short-term bonuses and equity in the first quarter of the year. SG&A in the prior year included legal costs of $2.2 million associated with the GX settlement. Compared to the prior year and prior year quarter, we have cut costs in travel, professional fees and marketing and other expenses as a response to the COVID-19 pandemic. And of course, I mentioned the $3.9 million noncash charge related to an increase in the fair value of the Intelie earnout consideration earlier in my remarks. Capital expenditures for the 3 months ended June 30, 2020, totaled $3.1 million compared to $3.7 million in 1Q '20 and $4.6 million in 2Q '19. As of June 30, 2020, accrued capital expenditures were $0.7 million compared to $0.9 million as of March 31, 2020 and $1.9 million as of June 30, 2019. After accounting for the accrued capital expenditures, capital expenditures on a cash basis were $3.3 million for the quarter ended June 30, 2020. Second quarter CapEx was substantially composed of success-based commitments and other capitalized labor. During the quarter, we generated about $2.1 million of free cash flow after making our principal and interest payments. This is up from about -- this is up by about $400,000 -- sorry, excuse me, this is up from about $400,000 in the first quarter. We calculate this free cash flow by starting with adjusted EBITDA and subtracting Capex, cash taxes and other cash add backs as well as P&I. Looking at our unlevered free cash flows, we start with adjusted EBITDA and subtract CapEx. We increased to $6.6 million in the second quarter, up from $4.7 million in the first quarter of 2020. With respect to the balance sheet, as of June 30, 2020, cash was $15.6 million, up $2 million from March 31, 2020. Our outstanding debt was $115 million, including both current and long term. At quarter end, our consolidated leverage ratio, as defined in the credit facility, was 3.03 versus our cap of 3.25. And as a reminder, that's on a gross debt basis with the terms defined in our credit agreement. We are continuing to manage our liquidity, but as we said last quarter, it remains tight. I will note that AR is up about $6 million from March 31, but that is entirely due to some significant SI invoices that were sent out at quarter end, and we expect to collect those amounts during the third quarter. Also remember that our long-term debt now includes the $6.3 million of the Paycheck Protection Plan loan proceeds, which we have used for payroll costs as defined under the program. We anticipate filing our forgiveness application in the near future. And while we cannot offer guarantees, we anticipate obtaining full forgiveness for the maximum amount, removing this amount from our long-term debt by the end of 1Q '21. The timing on the forgiveness is governed by a published process and includes 60 days for our bank to review, the forgiveness applications, once it's filed. And then up to an additional 90 days for the small business administration to review the application. These funds have provided us much neater flexibility to continue to support over 290 U.S. jobs and enabled us to delay making any workforce reductions. That concludes my remarks, Steve. And I think with that, Towanda, we're ready to open it up for any questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Allen Klee with National Securities.

[Allen Klee:]

Congratulations on relative very good performance during tough times. Starting with the MCS segment. Oil has now stabilized at a little over $40. Can you talk a little more about maybe what you're hearing from customers in terms of does it feel like we might be approaching stability or that it's still kind of a concern?

[Steve Pickett:]

First of all, Allen, thanks for the comments. Indeed, the team delivered a great quarter. In terms of feedback from customers, we are here recently, getting some information from the market. Indeed some of the stacking that was announced in the second quarter is beginning to be rescinded. And we're also beginning to see platforms that were temporarily shut down in the Gulf of Mexico turn back on as well. But I think we still live in an uncertain period. So we're going to remain cautious and remain focused on managing costs to ensure that if there is further stacking or further shutdowns in the Gulf of Mexico related to production platforms, that we're properly prepared for that. And with that, maybe, Lee, did you have anything you wanted to supplement that with? Or Errol?

[Lee Ahlstrom:]

I'll let Errol go first as he's our customer-facing expert.

[Errol Olivier:]

Yes. So Allen, as I've said many times to our staff, a few weeks is not a trend, but we are seeing these stacked rigs going back to work, it's very encouraging. We're seeing a number of opportunities coming back into the queue for quoting. So we're in the proposal stages for a number of opportunities. So yes, it would be good to say that all things look good going forward, but it's too early to tell, but we are seeing some encouraging signs.

[Lee Ahlstrom:]

Yes. And I would just agree with Errol there just in the sense that as you look at some of the drilling contractors and they're publishing their fleet status reports, they are announcing some new contracts. And as we try to keep track of what tenders might be out there, there are some reports of operators continuing to have rig needs and moving ahead with tenders in the market. So I think that's a cautiously optimistic sign.

[Allen Klee:]

That's great. And I would think with you guys outperforming some of your competitors that have been challenged, can you talk a little of, maybe if you feel that given that you have an ability you've had an ability to maybe gain share, and what you're seeing if people are being somewhat rational on pricing or there's been a change on pricing?

[Steve Pickett:]

Yes. As we said, we're not seeing anything crazy as it relates to the market dynamics. One of the reasons why we wanted to highlight the number of new logos that we've secured during these last spent 6 months is to emphasize the point you're making, which is indeed, we continue to gain share. And I think that's all about the very strong performance that our team is delivering for our customers. We believe we're the premier provider in the market, and I think customers are increasingly seeing that based on their experiences with us.

[Errol Olivier:]

Yes. And I might add to that. When you look at our business, the most important thing for us right now is to secure the core, holding on to our customers. The work that we've seen that's going away is actually campaigns ending or rig stacking, but we haven't been losing customers. I'm pretty proud of that. The team has done a good job to make sure their customers are being serviced, even in these challenging times. So that's the key thing. So when you can hold on to all of the customers you have, and then pick up some market share from opportunities that are coming about, that's a good position to be in.

[Allen Klee:]

That's great. I'm going to move on to Apps & IoT. I thought the performance -- well, the performance outperformed my expectations. And one thing, the margins were much better than I thought. And so maybe if you could comment on that. And then the idea of apps versus IoT, maybe just remind us on what's driving the growth in apps and how you think about the margins there?

[Steve Pickett:]

Yes. So let me start, and I'm sure, Lee will want to add on. In terms of apps, what's really growing the -- what's really driving the growth there is Intelie. As Lee mentioned, pretty substantial year-over-year growth in that particular line of business. And frankly, we're still in early innings as it relates to that. Many of the contracts that we've signed are related to substantial regional or global deployments, and they're really, really at the very beginning. So we certainly have an expectation that, that will continue. And in terms of gross margin expansion, yes, no doubt, that was helped by the increase in revenue on Intelli, where gross margins on a software-based real-time machine learning platform are considerably higher than the gross margins that we see in other parts of the business.

[Lee Ahlstrom:]

Yes, Allen, remember, one of the key elements of the whole Apps business and the strategy around that, and particularly with Intelie, is you spend the effort to develop the app once and then you resell it, right? And when you resell it, the cost that we experience is pretty low. Well, there may be a little bit of customization work on a particular app that we're selling to one customer that we then sell the same app to a different customer, and we have to do something a little bit different. But the framework of that app effectively doesn't change, right? And so that should, by definition, push margins higher. And I think what's driving it is, no matter where you look in the oil and gas industry, you continue to see customers talk about moving towards a digital strategy. And this is an industry which, frankly, in many ways, has lagged many other industries in moving towards digital and getting the benefits of the digital revolution. And so what we're seeing is, again, customers who don't have the internal resources who actually can't do this in-house in a cost-effective manner, turning to companies like RigNet to -- where we can bring very cost-effective, incredibly innovative and impactful applications into their business that help drive their financial performance, their safety, their environmental and their operational effectiveness. And so I think that's why you're seeing Intelie, in particular, have the kind of success we have, not only inside oil and gas, but now moving outside oil and gas into some other manufacturing arenas.

[Allen Klee:]

The CACI partnership sounds positive on multiple fronts. Can you give us a sense of kind of when this starts up and how the sales process works? Like I assume it's being sold by CACI, but if you could just go through that?

[Steve Pickett:]

Sure. It has started up. So we're quite pleased by that. It's, again, very, very early days. But there are a number of users on the platform already. And no doubt, we're committed to supporting CACI as they sell into the government sector, but they will absolutely be leading the sales effort as it relates to that.

[Allen Klee:]

And just so I understand, does this happen -- this happens for someone who already has a phone? Or is your opportunity with a new government phone sale?

[Steve Pickett:]

No, it works on existing phones, too. And just think about it as any other app that you might use on your phone. You download the app, and it provides an alternative way of communicating, and that alternative way of communicating is much more secure than some of the off-the-shelf consumer-grade solutions that are out there. So, it's really well suited for the government market.

[Lee Ahlstrom:]

And Allen, as you can no doubt see from just the headlines, right, even the recent headlines with all of the concern around various apps and the security issues that they may possess, right? Security and communicating is top of mind for the U.S. Government. So it's a very good opportunity for us, we think.

[Allen Klee:]

Yes. It did, seems that way. Then the Systems Integration, I'm trying to think about -- your results were good, the pipeline has been declining as given the environment we're in. But then you also talked about a lot of opportunities to bid on. So, I'm trying to figure out how to think about how this is going to play out as the pipeline has been shrinking. Can you maybe give us a sense of the existing -- the length of the existing contracts? And like if you do win some of these new potential projects, like, how long it would take for them to maybe get -- to actually -- for you to start working on them and to get revenue from them?

[Lee Ahlstrom:]

Sure it will. So, I was going to say, first, let me just offer a slight correction. The backlog has been decreasing. You're correct about that. The pipeline, which I would say is the list of opportunities that we have, that we're bidding on, that are coming in the door, that our team is responding to. I would say the pipeline is as robust as ever. And so the question really becomes, okay, when are the customers who are reviewing the bids going to start making decisions to launch off on these projects? And I think, as Steve mentioned maybe earlier in his remarks, the good news is we're not seeing these projects canceled. They're just being pushed out a little bit to the right. So typically, we have work that is on a contract basis, anywhere from 6 months for a large project, maybe 3 years. And so we have a number of each of those types of opportunities in, what I'll call, the opportunity pipeline that we've responded to now. So Steve, do you want to add anything?

[Steve Pickett:]

No, that was very thorough. Thanks.

[Errol Olivier:]

Yes. And I might add to that, too, though. I got to echo what Lee just said. It's the pipeline that's building up because of the whole COVID situation. These projects aren't getting kicked off, but they are still in planning stages. And we expect that when things start opening up that these awards will start happening. And we've got, not only a large number of opportunities already that have been quoted, but a large number of opportunities in Q2 to be quoted over the next coming months.

[Allen Klee:]

Great. And then just 1 or 2 financial questions. In terms of -- I'm sorry, I lost where I was. Yes, so with free cash flow, and you've been doing a good job in managing that. I would say that the 2 things are your ability to manage working capital and CapEx. How do you think about those? And I think you did talk about the working capital, at least on the jump in the AR and why that -- some of that will get collected next quarter. But just in general, what you're doing and how you're thinking about those 2 things that you can sometimes control.

[Lee Ahlstrom:]

So on the CapEx side, most of our CapEx, right, in a normal year, probably 80% plus of our CapEx is success-based, right? To the extent that we're putting equipment on a new FPSO or a new set of rigs or something like that, we're spending money. We're not launching out on a new customer, doing a bunch of installations, we're able to pull that back very naturally. So it's a fairly natural kind of decline in CapEx spend if you're not installing on a new set of bases. Now that can change pretty quickly, right? If we win a big fleet deal, for example, you're going to see CapEx go up, but then that's obviously going to drive future revenue for us. We've also done a really good job, I think, in our procurement and operations group of reusing equipment that we have available that maybe has come off stacked rigs and have been very, very effective in reducing our actual cash CapEx costs by using inventory that we have on hand. With respect to AR and AP and other elements of working capital, we continue to manage that. I would say, really every company out there in terms of our suppliers and our customers, everyone is focused on the same things. And so I think we all recognize that there is a bit of a strain on the supply chain in these difficult times. And companies are working together, I think, pretty effectively to ensure that there's no service interruptions for customers and take care of the issues as they arrive.

[Allen Klee:]

That's great. My last question. I thought it was interesting when you were talking about your cost of bandwidth and the ability to react when there's a downturn. And you've said you might get some savings in 3Q. Could you maybe just elaborate a little bit on that of like -- of the bandwidth commitments you have of how much ability you have over time, if this is a longer downturn of -- that you can address that?

[Lee Ahlstrom:]

Steve, do you want to start or do you want me to?

[Steve Pickett:]

Sure, I'll start. So Allen, today, indeed, many of our contracts with our suppliers give us the flexibility to turn off bandwidth when our customers are stacking rigs. Now there can be some delay in getting that implemented. And so we do expect to see further benefits associated with that contract flexibility hit us in the third quarter, we -- hit us in a positive way, I mean, in the third quarter. But we haven't quantified what that has been, at least not publicly. And our engineering team is laser-focused on that.

[Allen Klee:]

Great. Thank you. And congratulations on very good performance.

[Steve Pickett:]

Thank you.

[Operator:]

Thank you [Operator Instructions] Our next question comes from the line of [Indiscernible] with Emerson. Your line is open.

[Unidentified Analyst:]

Hey guys. Thanks a lot. Great quarter. A couple of quick questions. So digital oilfield seems to be abuzz among many of the integrateds and some of your customers. Equinor was called out by Baker Hughes for North Sea Digital oilfield and SaaS -- their SaaS opportunity. Is that a part of your partnership with Baker Hughes and Equinor, since they're both customers of you?

[Steve Pickett:]

So first of all, Brian, thank you. And indeed, yes, both are customers of ours, but not specifically related to our real-time machine learning initiatives. They're not -- let me say, specifically, Equinor is not one of those customers.

[Unidentified Analyst:]

Okay. And when we talk about just the SaaS business, Apps & IoT, in particular. What do you see the TAM over the next 3 to 5 years?

[Steve Pickett:]

Very substantial and with a great growth trajectory. We haven't publicly disclosed what we view that as being, but I think there's a fair amount of data out there in the public domain about that, and that data would suggest that it's billions of dollars just in the oil and gas market. And of course, the Intelie platform, although we've clearly deployed it quite rapidly in oil and gas, what makes it so competitive in oil and gas, makes it quite applicable in other industry verticals as well. So for us, the TAM isn't just oil and gas TAM. It's TAM across a lot of different industrial sectors, particularly those industrial sectors who really need a real-time solution and need a solution that's really optimized to handle very significant amounts of data.

[Lee Ahlstrom:]

Steve, one of the last studies, I think I saw and that we had put in a slide, a couple of versions of our investor deck ago, suggested that the TAM in digital oilfield overall was over $30 billion. And so that's obviously lots of parts and pieces in there. And I don't think that we're saying that we can address all $30 billion of that. But it's a big number in oil and gas, and it's a big number in other verticals that we're targeting. So I think there's a huge runway here for Intelie.

[Unidentified Analyst:]

What do you think the -- what inning are we in, in terms of penetration? Just as an industry, not so much as for you guys individually.

[Steve Pickett:]

My view is as an industry, we're in kind of second or third inning. And I think as it relates to Intelie, we're even earlier than that. We've just been thrilled with how quickly it's been embraced by the energy sector, given how innovative it is. But we're earlier on. And as a matter of fact, some of our wins are related to displacing some early movers in that market, which would hopefully highlight to you just how differentiated the platform is.

[Lee Ahlstrom:]

Yes, I think that's a great point.

[Unidentified Analyst:]

And similar to SI, I would imagine, has your -- was that for SI, your pipeline -- are your opportunity set is pretty -- still robust your requests for proposals. Was that also carry into Apps & IoT and Saas?

[Steve Pickett:]

It does, Brian. As a matter of fact, in the SI part of the business, we responded to in the range of about 40 new bidding opportunities or clarifications on bids that we had previously provided. But in the combination of Apps & IoT and MCS, the Communication Services business, that number was 140. So it's really quite brisk and we're excited to see not just growth within existing customers, but landing new logos even during this tumultuous time that we're going through.

[Lee Ahlstrom:]

And what's really interesting is -- let me just make one quick comment. What's really interesting is, particularly with Intelie, we're actually seeing some of the inquiries because they found us, right? And this is both, I think, inside oil and gas, but certainly outside oil and gas, where people have heard about Intelie and they say, "Hey, can you guys do this?" And we'll say, "Well, yes, we can. And here's how we can help." So that's, I think, a positive thing even without marketing directly into some of these other verticals, the business is coming off.

[Unidentified Analyst:]

With the 140 requests, what kind of delta is that year-over-year? And also, would you say that's E&C as well as energy? And I'm particularly interested in your exposure to E&C, given potential for infrastructure spending. Would -- I've seen a lot of awards out of customers like Flour, you have relationship with Flour and some of the -- or maybe Jacobs as well. Activity levels seem to be promising for future awards. Would that translate into future business for you guys?

[Steve Pickett:]

The short answer is yes. And indeed, those are all customers that we've had historically. And I would say, particularly in the Apps & IoT area, the funnel would indicate very good opportunities for growth.

[Unidentified Analyst:]

Last question. In terms of the joint venture network gulf assets with T-Mobile, I believe they announced that they will be able to expand to 5G capability. What's your utilization currently in the network? And given that Tampnet acquire similar assets, it looks like it might value you guys to network at $100 million to $150 million. What I'm getting at is, is there the potential to sell a portion or all of the network and then just leaseback? It seems like it would be similar to an offset of interest expense if you delevered by selling the asset to an investor and then leasing back. Critical would be your capacity utilization as well. Have you...

[Steve Pickett:]

We still have a material amount of capacity available on that owned infrastructure. No doubt the opportunity that you just described in terms of sale-leaseback absolutely exists. I mean, just fact based. And I agree with you. I think the value of that owned infrastructure is very much underappreciated in the public markets. As it relates to us and competition with Tampnet, there are a couple of things that are really striking about the difference between the 2 networks. Number one is, as a result of our partnership with T-Mobile, we're access -- we're using frequencies that are much lower, not so much lower spectrum. And so we're operating at 600 megahertz with T-Mobile and 700 megahertz that penetrates into these big offshore facilities much more effectively. Number one. Number two, network is upgradable to 5G. So it's a 4G- and 5G-enabled network. And then finally, our network tends to be much more resilient in terms of battery backup. So when a storm comes through, and there's a need to turn down power locally, our network is going to stay up and running for a much longer period of time, supporting evacuations of the platforms and in some cases, still operating to support return to the platforms when that time comes. So there's some substantial differences. But net-net, I think there's a lack of appreciation for the underlying value of that asset.

[Unidentified Analyst:]

Definitely. With T-Mobile, do they market on the Gulf -- the asset, do they market on the network? And do you share revenue if they do successfully attract customers that's maybe outside of your verticals? And I guess, what is the opportunity to -- given its -- capacity utilization is low, which is a good thing in this case. The opportunity to get into other verticals through even any third-party reseller, maybe beyond T-Mobile?

[Steve Pickett:]

Yes. So indeed seem like

[Unidentified Analyst:]

Like a Tampnet, similar to a Tampnet model, almost having an embedded Tampnet model within your own model. Does that make sense?

[Steve Pickett:]

I think so. As it relates to T-Mobile, indeed, they're marketing their services that run on this owned infrastructure, on top of this owned infrastructure that RigNet has. In terms of the commercial model, we're paid a recurring fee for maintaining that network annually. And we also have an arrangement where we would share roaming revenue outside of T-Mobile, of course, with them after they've recovered the cost of their network.

[Unidentified Analyst:]

Got you. Great. I think I have one more. I'll jump in the queue for it, let's see. Apologies. On the government side, with CACI, the CACI award. Can you kind of walk me through? Was this admiral -- the rear admiral that was hired a year ago? Is this endeavor into government through CACI? Or is this a different sales process? And was there -- are there other opportunities within CACI besides the emergency response or I guess government encrypted offering? And can you give us an idea of which government sectors are utilizing it first, whether it's Homeland Security or whatnot.

[Steve Pickett:]

We don't have clarity on who's using it first. But first of all, yes, Jamie is responsible for our entry into the government sector and is engaged with CACI. By the way, Errol's very helpful through that process as well. And we would love to support CACI in other areas as well. And in terms of government, there is engagement with other companies who support the government as well, but nothing that we've announced publicly just yet. But yes, thrilled with what Jamie has done, which is support of the whole organization, of course, to secure this first one. And let's just say, we're quite active looking for other opportunities because our portfolio fits well in the government sector, particularly given our lead position in cybersecurity and the importance of secure networking in the government sector and not just the U.S. government sector, by the way, but governments around the world.

[Unidentified Analyst:]

Yes, that was going to be my next question. And also, I mean, given the problems we're having with security, especially from China. I know you've mentioned before, rigs being hacked on almost biweekly basis. And you have, of course, the cybersecurity protecting that -- those instances. What is kind of the -- what's the government utilizing now? And is there a concern? I guess, there is obviously some concern for security. And do -- in using partners such as T-Mobile and yourself who are the backbone for the app, I guess, who are we displacing? Or is this a -- is it a large opportunity because of that risk from maybe some other vendors?

[Steve Pickett:]

Yes, I believe it's a large opportunity because of that risk. And there's -- as far as I know, there's not another secure app like this available. So I think it's a fresh new frontier for CACI. And again, we're thrilled to be supporting them as they pursue that very big market.

[Unidentified Analyst:]

Jamie seemed to be quite involved when he was at the FCC in terms of -- I think it was the 911 respond -- joint response efforts and communication efforts in the past. Is this kind of replacing those legacy type of secure comms opportunities?

[Steve Pickett:]

This one is not particularly replacing anything related to 911. But Jamie has deep experience in government, obviously, just a great leader. And he not only has communications experience, given his time with the FCC, but is really a well-regarded name in the world of cybersecurity as well. So we're thrilled to have him on the team, and he's thrilled to have this first win secured.

[Unidentified Analyst:]

In terms of the SaaS product, and I know you have 1 test for food segment -- food processing with Pepsi. Is that correct? Is that expanding? Or is it pretty much operable? And are you adding more features, I guess, opportunities in the food sector.

[Steve Pickett:]

Yes. It is operable, and it's expanding. It's expanding both geographically across Latin America, and it's expanding in terms of the number of applications that are being used on the platform. And we think some of the reasons why it's been adopted there and it's being rolled out there are some of the same reasons why it fits well in other industrial applications. So we're actively pursuing some of those other industrial applications as well.

[Unidentified Analyst:]

Is this with Pepsi? Is this directly with Pepsi or more one of their bottlers or partners? And I guess, since it is expanding in South America, are you -- have you now jumped into other partners in South America. Is Pepsi National or regional thus far?

[Steve Pickett:]

I probably shouldn't get into the specifics as it relates to a specific customer. But it's more broadly Latin America rather than just South America. And we do have a partner, not necessarily for the industrial sector, but in the oil and gas sector that we've publicly announced in Mexico and more broadly in Latin America called Bardasz that's -- have been in a very good partnership for us.

[Operator:]

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Lee for closing remarks.

[Steve Pickett:]

Well, we may have had a connection problem, so...

[Lee Ahlstrom:]

We did just have a connection problem. I apologize. For some reason, it just dropped me there for a second.

[Operator:]

I'm showing no further questions in the queue. I'll turn it back over to Lee for closing remarks.

[Lee Ahlstrom:]

All right. Very good. Well, look, thank you all very much for joining today. We very much appreciate it. We'll be back in November to talk about our third quarter results. And of course, if you have any further questions, please feel free to give me a call in the office. Happy to follow-up with you individually. Steve?

[Steve Pickett:]

Thanks to everyone for joining [Indiscernible] around the world for all you're doing to support the business and customer. Bye for now. Thanks again.

[Lee Ahlstrom:]

Thanks, and have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.