RigNet Inc
Q3 2019 Earnings Call Transcript

Published: 10 Nov 2019

[Operator:]

Ladies and gentlemen, welcome to RigNet’s Third Quarter 2019 Earnings Conference Call. My name is Lady and I will be your coordinator for today. [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, Lady. Good morning, and welcome to RigNet’s third quarter 2019 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 have posted that as well.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 and future plans as well as 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 now I would 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 to everyone and thank you for joining us on today’s call. We continue to have a lot of exciting things happening here at RigNet and I look forward to providing this update. As usual, after my comments, Lee will review financial highlights and then we will take questions.Yesterday, after the markets closed, RigNet reported a net loss for the second quarter of 449 – I am sorry, $494,000 or $0.02 per share based on revenues of $61 million. Revenues increased by 1.1% versus the prior quarter. Adjusted EBITDA, a non-GAAP measure we define in our press release and one of our key performance metrics, was $11 million for the third quarter. Compared to last quarter, adjusted EBITDA was up 12.6%, and compared to the year ago period adjusted EBITDA was up 26.1%.Before I discuss progress we made during the quarter, let me address one thing that I know is on your minds as well as on the management teams and the board’s minds, the current price of equity. We have seen a marked decrease during the quarter and the last month. While we attribute some of it to general concerns about the state of the energy industry, there continues to be what we think is a fundamental disconnect between our equity value and the business. We think one of those reasons is concern over the balance sheet and I would like to take a few – I would like to take a few minutes to comment on that topic in particular.As you know, we took additional debt on our revolver during the second and third quarters to pay $50 million of the $50.75 million settlement related to our GX arbitration with Inmarsat associated with the contracts signed in 2014. The final installment of $750,000 is due in the summer of 2020. So we’ve put that behind us. Of course, the impact on the balance sheet is longer lasting. At the close of the quarter, our leverage covenant, as defined in our bank facility as consolidated funded indebtedness divided by consolidated EBITDA as adjusted, was 2.99. Under the facility, the maximum is 3.25. So we have headroom there. Our fixed charge ratio was 1.88 versus a minimum of 1.25. While the leverage ratio is higher than we would like it, we believe it’s manageable and remains one of the best in the industry among our competitors. We anticipate that we will remain in compliance and that we should expect to see leverage decline in 2020 as we increase adjusted EBITDA as a result of both revenue expansion and cost control. We also expect to begin working with our bank group to renew our facility in the coming months, and we anticipate finalizing that late first quarter or early second quarter of 2020.Next, we are exploring some other options to help us de-lever, including the potential sale of some assets. We are relatively early in the process, and I’m not going to go into any more detail other than to say that we are committed to unlocking value for shareholders as a top priority. Finally, you know that acquisition activity has helped enable our transformation over the last few years. We will continue to stay active in the market to understand the opportunities that are out there. But given the state of the balance sheet and the current equity price in the short-term, we are not currently in the market to make acquisitions.Now I would like to update you on the progress we’re making across our various business segments, beginning with Managed Communications Services. On our last call, we announced that we had renewed our long-term relationship with Valaris to provide them with Managed Communications Services in a multiyear agreement. We provide them other services from our Apps & IoT segment as well. We also recently announced an exclusive multiyear agreement to provide Managed Communications Services to Borr Drilling, which has been putting its fleet of advanced jack-ups to work in West Africa and Mexico.In Brazil, we won 5 drillships with a local drilling contractor, which will be turned on over the next several months. And we successfully initiated service on the first of our Petrobras FPSOs, where we have won the Managed Communications Services business. In fact, earlier this week, we officially announced wins on 6 more FPSOs with Petrobras, bringing total global wins for FPSOs to 17 over the last 36 months. Including Galoc Production Company in the Philippines, we’re providing not only Managed Communications Services but real-time machine learning and Cyphre-based encryption to Galoc, making them our first triple-play customer.Revenue in the Apps & IoT segment grew 15.7% quarter-on-quarter, 24.1% versus the year-ago quarter and now comprises 15% of total revenue. The IoT revenues grew in the quarter and represented 55% of the Apps & IoT segment total for the quarter, down from about 64% in the first quarter as Intelie and our other apps, including AVI and CrewHotspot continue to increase their contributions at a higher pace.We are extremely pleased about how the IoT portion of our business continues to develop. In fact, both September and October were record months for the M2M or machine-to-machine portion of the IoT business in terms of bandwidth utilized and revenue generated. We told you on the last call that Intelie was continuing to win business and increase its contribution to revenues and that you’d begin to see more of an impact in the third quarter as Transocean turned up, along with some of our other customers.Earlier this week, we announced that we had reached an agreement with BP to provide Intelie Live for BP’s state-of-the-art Remote Collaboration Center in Sunbury, England. Our ability to implement this solution quickly and map tens of thousands of unique data points were some of the key criteria in the selection process where we are actually displacing the incumbent. We’re also implementing Intelie Live for BP, the same service we inaugurated with Transocean, to help manage their data from the edge to the core.In the fracking and unconventional markets, we are now working with three additional fracking companies in the Permian as well as 2 supermajors, delivering real-time monitoring of their unconventional drilling operations. We continue to expand the use cases for Intelie as our workforce tracking initiative attracts further interest and we develop new apps for real-time pipeline leak detection and stuck pipe onshore. As a result of a new contract with an existing supermajor, we’re also further growing our R&D work in Brazil. As a result of the use of the Brazilian levy in energy, this work is essentially customer-funded and allows us to develop new applications, where RigNet owns the IP without incremental R&D spend. Lastly, we’re looking at forming partnerships which could advance Intelie both within the energy vertical as well as in other verticals, and the interest level is high.Many of you ask what our goal is for the Apps & IoT segment. Aspirationally, and this is not guidance, we’d like to see the segment get to 50% of revenues in the next 5 years. Our System Integration business continues to perform well. We ended the quarter with backlog of $35.9 million. One of our SI wins during the quarter was with a customer who’s essentially replicating an existing project and rather than go to bid, awarded us the work directly. Finally, we are making progress on the government front. During the quarter, we were largely focused on an effort to be included on the General Services Administration or GSA list, which is what qualifies companies to bid directly for government contracts. We successfully filed all of the required paperwork and are now going through the final confirmation steps. This was an important accomplishment in the quarter.Overall, we are pleased with the business performance, but as I often say, pleased doesn’t mean satisfied. The team continues to demonstrate its ability to execute against the strategic initiatives both management and the board have defined. With that, let me turn it over to Lee.

[Lee Ahlstrom:]

Thanks, Steve. And I will apologize in advance because I have got a little bit of a cold here, so if I start coughing uncontrollably, that’s why. Now we are actually very pleased with our results this quarter, and I’d like to begin by recapping just a few of the numbers. As Steve said, the consolidated quarterly revenue was $61 million, up 1.1% compared to $60.3 million in the prior quarter. Now the increase compared to the prior quarter was due primarily to Apps & IoT, coupled with MCS and partially offset by SI. Revenue decreased 5.8% from $64.8 million in the third quarter of 2018. The decrease compared to the third quarter of 2018 was primarily due to a decline in MCS, largely as a result of lower equipment sales and some reduced VSAT and microwave revenue and lower project billings in SI during 3Q ‘19. This was all partially offset by a $1.8 million growth in Apps & IoT, almost entirely in the applications part of that segment.GAAP net loss attributable to common stockholders in the third quarter of 2019 was just under $0.5 million or $0.02 per share compared to a net loss of $6.2 million or $0.32 per share in the prior quarter and a net loss of $2.8 million or $0.15 per share in the third quarter of 2018. Adjusted EBITDA grew nicely quarter-on-quarter to $11 million. This was a 12.6% increase compared to $9.8 million in the second quarter and a 26.1% increase compared to $8.7 million in the third quarter of 2018.Now, let’s talk a bit about the segments. Managed Communications Services revenues were $42.1 million for the quarter compared to $41.2 million in the prior quarter and $44.9 million in the prior year quarter. Gross margin in the third quarter of ‘19 was 42.6% versus 39.3% in the second quarter of ‘19 and 37.9% in the third quarter of ‘18. Our MCS site count for the third quarter was 1,386, up 36 year-over-year and up by 2 sites sequentially compared to the second quarter of ‘19. Now this quarter, we gained a net of 2 offshore rigs, dropping 1 semi-submersible while gaining 1 jack-up and 2 drillships. Our fleet mix is about 71% jack-ups at about 29% floaters. And when you consider the approximately 495 rigs currently under contract, according to our data sources, we have about 38% of the worldwide jack-ups and about 36% of global floaters. Furthermore, in the production category, we were up 9 sites to a total of 384 as we continue to focus on the FPSO market. Our announcement of the 10 FPSOs, 1 in offshore Brazil in the last year, takes the total number of FPSOs we serve or will serve to about 31, giving us what we estimate to be about 16% of the worldwide market share of around 190 operational FPSOs. Total site count was negatively impacted by a reduction of 10 in the other category, all related to land rigs.Apps & IoT revenue was $9.3 million for the quarter, up 15.7% compared to $8 million sequentially and up 24.1% compared to $7.5 million in the prior year quarter. The increase was largely the result of Intelie ramping up in a number of customers, including Transocean, our large West Texas fracking customer, and progress associated with our safety-related digital workforce tracking solution we’re implementing for one of our super major customers at a large LNG construction site. One of our largest wins announced earlier this week is with BP. And we will be installing Intelie in their U.K.-based Remote Collaboration Center, where our goal will be to help BP extract value by improving their operational efficiency at well sites around the world, both onshore and offshore. We’re especially pleased by this win because we displaced an incumbent provider. I think this highlights our ability not only to demonstrate value to the customer quickly but also to rapidly and efficiently deploy the solution. We expect to begin seeing revenue contributions from the BP deal in the first quarter of 2020.Additionally, we signed a multiyear agreement to provide Intelie Live, the company’s real-time machine learning-based analytics program, to Ocyan, one of Brazil’s largest offshore drilling contractors and will be deployed in their real-time Decision Support Center, monitoring Maintenance, BOP, Power Management and the Dynamic Positioning systems, among other things. Our other applications are also contributing to growth. Along with Intelie Live, we signed a multiyear agreement with Transocean to provide our enhanced remote adaptive video intelligence solution to help improve operational integrity and efficiency. And we’re continuing to successfully roll out our crew morale offerings as bandwidth demands continue to increase for off-duty workers on both rigs and platforms. So our transformation to delivering more revenue via Apps is well underway. And to give some color, in 3Q ‘18, our split between IoT & Apps revenue within that segment was about 80-20, so about 80% IoT and 20% Apps. In 3Q ‘19, the split is about 55% IoT and 45% Apps, and we expect that to flip in the coming quarters so that the Apps will be driving more revenue than IoT. Now the IoT portion continues to perform well, particularly in the area of machine-to-machine traffic. We track a number of key metrics and you might find some of the growth numbers interesting. In terms of volume, we’ve seen an increase in traffic through October of about 45% year-to-date to almost 63 gigabytes per month. Now that may not sound like a lot of traffic, but you consider – but if you consider that most of the devices are transmitting very few bits at a time, it’s actually quite a lot. We’re also seeing our average monthly usage per terminal has increased this year by about 31% across our more than 5,700 terminals. In a nutshell, our customers are deploying more and more sites and generating more and more traffic from those sites.Systems Integration revenue for the quarter was $9.7 million, down 13% from $11.1 million in the prior quarter and down 21.8% from the $12.4 million in the prior year quarter. Last quarter, we did have some strong billings from 2 of our larger projects. Backlog in the business declined to $35.9 million from $37.1 million at June 30, meaning that net of our revenue burn, we added about $8.5 million in the backlog during the quarter, including some projects that were direct awards rather than competitive bids. Gross margin for SI decreased to 23.3% from 36% in the prior year quarter and from 26.2% in the prior year quarter. The GM in the second quarter benefited largely from some savings recognized on several projects nearing completion, where we were able to benefit from reduced costs. As we said in the press release, we continue to view the outlook for the SI business as positive, and the number of RFPs we’re responding to is fairly steady.Our SG&A expenses totaled $15.2 million in 3Q ‘19 compared to $17.4 million in 2Q ‘19 and to about $17.4 million in 3Q ‘18. The decrease compared to the prior period is primarily due to the reduced GX legal costs. SG&A for 3Q ‘19 included credits of $400,000 of GX Phase 2 legal costs. Our GX costs were $2.2 million in 2Q ‘19 and $700,000 in 3Q ‘18. Capital expenditures were up in Q3, $5.9 million compared to $4.6 million in the second quarter and compared to $6.5 million in the prior year quarter. CapEx for the quarter included about $1 million associated with our new Lafayette, Louisiana location that consolidated what was formerly three facilities into one. We actually just christened the facility a few weeks ago and are really pleased with how it’s turned out. We’re already seeing the benefits from bringing the teams together that have been in 3 separate facilities to 1 facility and enabling collaboration across a wide range of opportunities. Furthermore, there was $1.5 million of CapEx associated with a large success-based job for a certain super major in Angola. The remaining $4.4 million of CapEx was substantially composed of other success-based commitments. We are expecting a little boost in Q4 as we’re able to recognize more revenue across a number of projects.With respect to the balance sheet, as of September 30, 2019, cash was $14.3 million. Our outstanding debt was $114.4 million, including both current and long term. And remember that we made an additional $5 million payment on our GX settlement using the revolver during July but offset that by a principal payment at the end of September. So our outstanding debt was up only about $3.3 million. Our AR balance dropped from about $68 million at the end of Q2 to about $62 million at the end of Q3 as we continued to focus on our collection efforts. I think there’s still an opportunity for us to improve there, though I will say we saw customers holding on to cash as we reached the end of the quarter, and I am expecting to see the same behavior at the end of the year.Finally, I am pleased to report that we generated positive free cash flow this quarter of about $0.5 million after CapEx, cash taxes, cash interest and principal payments. Cash breakeven or better continues to be the goal of the entire team as we manage the business, though the timing of CapEx around success-based opportunities and other factors may impact quarters differently.With that, let me turn it back to Steve.

[Steve Pickett:]

Thank you, Lee. Before we open it up to questions, I want to thank the RigNet team for their hard work and specifically congratulate our operations team for another quarter with great safety results. I know each of them is focused on driving the business to improve our results and increase value for our shareholders.With that, let’s open up the line for questions, please.

[Lee Ahlstrom:]

Alright, Lady, we will take some questions now.

[Lee Ahlstrom:]

Okay. Thank you, Lady. Well, there are no questions for us today. Steve and I will certainly be around in the office and feel free to give us a call to follow up. We look forward to seeing you back in March when we report our fourth quarter and full year 2019 results. And we would just like to thank you all for joining us on the call today.

[Steve Pickett:]

Thank you, everyone.

[Lee Ahlstrom:]

And thank you, Lady.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Thank you everyone for participating.