RigNet Inc
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Ladies and gentlemen, welcome to RigNet's Third Quarter 2017 Earnings Conference Call. My name is Alex and I will be you 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] As a reminder, this conference call is being recorded. I will now turn the call over to Chip Schneider, RigNet's Senior Vice President and Chief Financial Officer. Mr. Schneider, please proceed.

[Chip Schneider:]

Thank you, Alex. Good morning and welcome to today's call to discuss RigNet's third quarter results. With me today is Steven Pickett, CEO and President, as well as other members of our executive team. Yesterday after the markets closed, we issued a press release regarding our third quarter earnings. The release is available on our website at www.rig.net. Steve will begin today's call with a review of our third quarter business performance, and then I will follow-up with some financial details. Steve and I will then open up the call for the questions. Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for historical facts, all statements that address our outlook for 2017 and beyond, as well as activities, events, or developments that we expect, estimate, believe, or anticipate may or will occur in the future are forward-looking statements, which involve substantial risk and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings. I will now turn the call over to Steve.

[Steven Pickett:]

Thank you, Chip and thank you to all of our listeners for joining this third quarter 2017 earnings call. Today, in our call, I'll provide a high level summary of our third quarter financial performance; I’ll review our recent successes associated with growing the number of sites we served in our managed communication services line of business and I’ll review our results associated with our strategic initiative to expand our apps in IoT line of business. Starting with financial results, as outlined in our press release, third quarter revenues were $50.8 million, which represents two consecutive quarters of revenue growth, the first time we’ve had consecutive quarters of revenue growth since the third quarter of 2014, a full three years ago. Revenue increased due to execution of our strategy to grow by moving up the technology stack into the applications layer and in the IoT market, which were supported by our recent acquisitions of Cyphre and ESS. In terms of our managed communication services line of business, site counts grew for the third consecutive quarter. This represents the first time since the second quarter of 2014 that we've seen three consecutive quarters of site count growth. EPS came in at a loss of $0.23 per share. Adjusted EBITDA was $7.8 million and we generated $2 million of unlevered free cash flow. As you'll see in our release, we have, for the first time, started reporting on a new segment, which we call Apps & IoT. This segment saw revenue increase quarter-over-quarter by approximately $2.6 million, which represents growth of slightly over 100%, partly due to the acquisition of ESS. The reporting on this new segment will help our investors track RigNet’s progress related to this important area of focus within our business that is intended to enhance the value of the services we deliver to our customers, including enhancing the value of the managed communication services we deliver to our energy customers around the world. In terms of cost management, during the third quarter, we put in place a new restructuring plan that will result in reductions in expense and our supply chain team made important progress in reducing costs associated with key supplier contracts. As we continue to globalize our business and our support functions, we're finding additional ways to optimize our spend and drive operational efficiencies that are supported by this new structure. Going back to the topic of site counts, as I mentioned, in the most recent period, we registered the third consecutive quarter of growth in our overall site count. Our total site count increased quarter-over-quarter from 1051 to 1175 for a net increase of 124 or approximately 12%. This followed a 6% increase from the first to the second quarter of 2017. Included in this quarter's increase of 12% is a net increase of 11 offshore drilling rigs. It is encouraging that our offshore drilling rig count increased during the quarter, the first increase in this particular category in 10 quarters. Also included in the overall increase are a net 20 new offshore production sites. This increase is related to our efforts to diversify in the energy sector through the delivery of services and production related assets. We also increased site counts in other categories, including maritime vessels, where we drove an increase of 31 vessels and in international land sites where we grew the count by 20 sites. The other 42 sites that were added were predominantly US land based sites, helped by our acquisition of DTS. In terms of customer activity during the quarter, we secured one new offshore drilling customer and closed a four year extension with an existing offshore drilling customer. The site count growth we have seen across multiple categories coupled with our new customer acquisition successes seem to be positive indicators of our progress in building further market differentiation with both our apps and our cybersecurity capabilities. In July, as we previously reported, we successfully completed the purchase of substantially all of the assets of Data Technology Solutions or DTS, a US based provider of VSAT services to the energy and maritime markets. DTS assets include patented rapid deployment solutions that can be used to support time sensitive communications needs in the oil and gas market, in the maritime market and in the emergency response market. We are marketing these capabilities worldwide and secured new business since our last call that leverages these new capabilities to support both emergency response efforts in Puerto Rico and separately to support new onshore oil and gas activity in North America. Also in July, as we previously announced, we successfully completed the purchase of substantially all of the assets of Energy Satellite Services or ESS, the supplier of wireless and VSAT communications to the midstream sector of the energy industry. This acquisition more than doubles our SCADA market position, which is a key part of our IoT business. As a result of this acquisition, we now have a technology upgrade path through the availability of ESS’s SkyEdge II platform for all of our customers. All of ESS’s legacy customers now have access to RigNet apps. Prior to the acquisition, these solutions had only been available to RigNet customers. In terms of our acquisition of Cyphre, which was completed in May of this year, this business has added a new service offering to the portfolio called CyphreLink. This new service capability brings a similar level of data protection to the network that was previously only available to care for data at rest, meaning data stored in the cloud or at an enterprise data center. CyphreLink protect the data as it traverses network links in much the same way Cyphre’s BlackTIE service protects data at rest. Customer interest in this new service offering has been encouraging. Our integration efforts related to the acquisitions of Cyphre, DTS and ESS are proceeding according to plan and all three integration work flows are on track to be substantially completed by the end of the year. We continue to look for other inorganic opportunities to add scale to the business and add new capabilities to the business by continuously assessing M&A prospects as they become available. In terms of organic efforts to increase our Apps & IoT portfolio, we made solid progress again in the third quarter. We started trials with an additional six customers since our last earnings call who are now testing or have tested at least one of our apps and IoT solutions. We also closed new business with six customers who now use and pay for these solutions to support their operations. As a reminder, these apps and IoT solutions will provide a relevant set of services to build energy and non-energy customers, further differentiating our business and our managed communication services. Together, over time, these are expected to improve margins and enhance shareholder value. In closing, I'm proud of how the RigNet team responded to our customers’ needs during and in the wake of Hurricane Harvey. Despite those challenges, the team delivered revenue growth for the second consecutive quarter and site count growth for the third consecutive quarter. The team expanded RigNet’s position in the managed communication services market and further grew our apps and IoT business, all while delivering industry leading customer service and $2 million in unlevered free cash flow. I'd like to thank our RigNet team members for their hard work and their personal commitment to our business and I want to thank all of you on the call for your interest in RigNet. With that, I'll turn the call back over to Chip for a more detailed financial review.

[Chip Schneider:]

Thank you, Steve. As Steve mentioned earlier, consolidated quarterly revenue was 50.8 million during the third quarter of 2017, representing an increase of 1.7 million compared to the prior quarter and an increase of 200,000 compared to the prior year quarter. In the third quarter of 2017, after the acquisition of ESS, we reorganized our business into three reportable segments, managed services, apps & IoT and systems integration. All historical segment financial data has been recast to conform to the new segmentation. On a segment basis, managed services revenue was 40.2 million for the third quarter, compared to 40.6 million in the prior quarter and 45.7 million in the prior year quarter. Apps & IoT revenue was 5 million for the third quarter compared to 2.4 million in the prior quarter and 1.6 million in the prior year quarter. Systems integration revenue for the quarter was 5.6 million compared to 6.1 million in the prior quarter and 3.4 million in the prior year quarter. Since our last call, we have added change orders totaling 900,000, which along with expected work off during the quarter brings our total systems integration backlog to approximately 31.5 million. On a consolidated basis, G&A expenses were 13.4 million in the third quarter compared to 12 million in the prior quarter and 12.2 million in the prior year quarter. Restructuring, acquisition costs and legal costs added pressure to G&A expenses as a whole. GAAP net loss attributable to common stockholders was 4.2 million or $0.23 per share in the current quarter, compared to a net loss attributable to common stockholders of 4.2 million or $0.24 per share in the prior quarter and net loss attributable to common stockholders of 1.7 million or $0.09 per share in the prior year quarter. Adjusted EBITDA in the third quarter was 7.8 million compared to 6.1 million in the prior quarter and 8.5 million in the prior year quarter. The increase compared to the prior quarter was due primarily to increased revenue. The decrease compared to the prior year quarter was due primarily to ongoing operating expenses, partially offset by increased revenue. In the third quarter of 2017, 800,000 in acquisition costs and 800,000 in restructuring charges were recorded. In the second quarter of 2017, 1.9 million of acquisition costs and a gain of 800,000 for the change in the fair value of an earn out were recorded. In the third quarter of 2016, net restructuring charges of 800,000 offset by 1.3 million from a change in the fair value of an earn-out is recorded. The restructuring charges, acquisition costs and change in fair value of the earn-out are added back to net loss in our non-GAAP measures. Capital expenditures were 5.9 million in the third quarter compared to 4.9 million in the prior quarter and 1.9 million in the prior year quarter. As a result, unlevered free cash flow defined as adjusted EBITDA less capital expenditures was 2 million compared with 1.1 million in the prior quarter and 6.6 million in the prior year quarter. CapEx spend for the quarter continued to be disciplined and was substantially comprised of success based commitments to five large customers, including two large investments, one related to equipment upgrades and one related to equipment for two new FPSOs. Turning to the balance sheet, as of September 30, 2017, cash was 32.9 million. Net working capital, excluding cash, was 11.9 million and our outstanding debt was 60 million. The decline in our cash balance reflects the 22.2 million and 5.1 million paid for ESS and DTS respectively in the third quarter and 4.9 million in cash paid for Cyphre in the second quarter as well as 16.7 million of payments partially offset by 15 million draws on our revolving credit facility year to date. As we noted in our 10-Q filing, we have completed the amendment and extension of our bank credit facility. This amended three year $100 million facility refinances existing debt and maintains access to additional capital to support growth initiatives, including potential M&A activity as well as strategic investments within our business. Loans under the credit facility bear interest at a rate of LIBOR plus the margin ranging from 1.75% to 2.75% based on a consolidated leverage ratio defined in the credit agreement. The amended credit facility will mature in November of 2020. Wrapping up, an increase of 12% in our site count, growth in our offshore business, production and maritime wins, expansion in our midstream business and backlog of 31.5 million in our systems integration business give us greater confidence around the stabilizing level of oil and gas industry activity and potential for growth in our business lines. Additionally, we remain focused on driving improvements in our network costs, while continuing to concentrate on cash generation and reducing core business expenses. With that, Steve and I would be pleased to address any questions that you may have. Operator, please open the line.

[Operator:]

[Operator Instructions] Your first question comes from the line of Allen Klee from Sidoti.

[Allen Klee:]

Could you just provide any color on the offshore drilling market? You had a nice sequential increase for the first time in quite a while and if you're seeing anything change competitively and just pricing in general for your customers. Thank you.

[Steven Pickett:]

Yes. We saw a nice uptick in offshore sites for our business and I think that is largely driven by the fact we're seeing some jack-ups go back to work. We're also seeing increases in semis. So I think that's all very encouraging for not only us of course, but the industry as a whole. So we are seeing some of those offshore facilities go back to work. We're also seeing uptick in our production, which is offshore for the most part as well. So the industry is certainly waking up and there is more activity out there than there has been in the recent past. So we're pleased to see that. Pricing continues to be a pressure point across the industry as a whole and we're not immune to that. So we do of course work with our clients where we can to provide pricing improvements, but at the end of the day, it's not something that we are incurring alone. We are seeing that across the industry and of course you see that in the margins a bit, but for the most part, the good news is that we are seeing an increased level of activity, which will ultimately lead to greater revenue we hope.

[Allen Klee:]

And then for the acquisitions you've made, can you provide any color in terms of their historical growth rates or how you think about how they might be able to grow going forward.

[Steven Pickett:]

We certainly see a lot of growth potential in our Cyphre business that is - something that is very early. It's a young company, it has a great potential, but we also have - we have growth opportunities with DTS and ESS which when you take ESS and bulk that onto our platform and with our customer base, I think you find that their ability to grow expands. They have greater access to capital. They have a broader market to work within and we are certainly seeing that opportunity clearly. And DTS brings capabilities to us that we did not before have and we're able to now deploy a different type of asset if you well into our marketplace which has been beneficial to a number of clients and has clients and new customers, new prospects become more familiar with what we can provide from our DTS acquisition. I think we'll find other opportunities not only in oil and gas, but outside of oil and gas.

[Chip Schneider:]

And Alan, maybe to expand on that, in the case of each of these acquisitions as you would hope when you have an acquisition, we expect a combination of two companies to perform even better than either of the company’s standalone. So we've established a nice scale in the SCADA IoT market as it relates to ESS. And if you had heard my comments, the ESS technology is something that provides a technology upgrade path for our customers that we didn't have previously and would have required a capital investment in order to go get. And the ESS customers didn't have access to the kind of application capability that we have that they will now have. So we're thrilled about bringing that new technology together with our applications capability in order to provide a much more robust solution towards those customers that are served in the midstream marketplace. And as it relates to DTS that was a company that was almost exclusively operating in North America and we see applications for their capabilities around the world. So we're actively marketing those capabilities around the world. And finally, terms of Cyphre getting a lot of customer interest certainly within our core market, but customer interest outside of our core markets as well, which is quite encouraging.

[Allen Klee:]

For the systems integration segment, we saw an improvement in the operating margin. Do you feel that at least in the near term it's sustainable kind of around these levels?

[Steven Pickett:]

I think that business is performing well. They're executing contracts very effectively. They are managing cost very effectively. We did have in second quarter we had an adjustment that was you know an additional cost which was a one-time adjustment in that particular quarter. But going forward, we have some strong contracts, we've got the 30 and 31 million or so in backlog that we're working off. I think the execution in that business gives us comfort that we’ll continue to see improvements in that business. I can’t tell you where the margins are going to land at the end of the day, it’s a project business, but they are executing quite well. So we do think it's a sustainable business and we'll see how it continues forward from here.

[Allen Klee:]

Two quick questions on cash flows, for CapEx, any thoughts of kind of a run rate going forward if it should look to kind of averaging like a trailing 12 months or something. And then is there any reason that we should think that there should be a change in working capital that should be a use of source of cash in the next few quarters.

[Chip Schneider:]

I'll address those separately, so with respect CapEx, I think our models of success based CapEx for the year are about what we expected. So I would say that over time over the course of the year although it's been a little bit lumpy from quarter to quarter, I think in the aggregate it's about what we expected. And with regard to future CapEx, I think that's going to be made up of continued success base, we may have some maintenance in there and so forth, but for the most part I think we might see growth in CapEx, we certainly want to see growth in CapEx because that indicates to us we have more business opportunities. And that kind of leads to the second question, which is, with respect to cash flow associated with - cash flow associated with our working capital, we're going to seem as the business grows, as you know working capital tends to be consumed as revenue grows. So as AR grows, we’ll probably see some outflow of cash to finances as receivables. When the business was coming down, we saw cash being thrown off by liquidation of receivables. But I suspect as we grow, we're going to see it go the other way. So there is going to be some additional consumption of cash on the growth of revenue, but that's good a thing, that’s a good way to invest in the business. So we're looking forward to that opportunity.

[Allen Klee:]

My last question is related to expenses, with the restructurings that you're doing now, can you give us some sense of what that could mean for the run rate of expenses going forward. And also for legal expenses potentially related to Inmarsat, is the amount of that material that you could call out if it is. Thank you.

[Steven Pickett:]

To answer your second question first, litigation and arbitration, those types of things are expensive. So we are certainly spending what’s necessary to continue with those activities.

[Chip Schneider:]

It's probably important to note that those are not added back to EBITDA.

[Steven Pickett:]

So that’s certainly you know it’s, I don’t know if material is the right word, but it’s a significant number. And we’ll incur that for several more months as we go through the process. With regard to - what was your other question?

[Allen Klee:]

If you could give us help with what the run rate of expenses, how it might go lower as a result of some of the restructuring that you've done.

[Steven Pickett:]

We do back to see benefit from the restructuring of course over the next year and as we go forward from there. But we are making other changes in our business where we're making some additions to certain - we're making additions of certain new positions to help support some of our new business lines. So those things are happening in tandem with reductions in other positions that are redundant or no longer necessary as we transition as a company. So I suspect we will see the savings in some areas, but we'll also have a counterbalancing increase in other areas. So, yes, we will have savings, but we will also have additional costs going forward.

[Operator:]

[Operator Instructions] Your next question comes from the line of Walt Chancellor from Macquarie.

[Walt Chancellor:]

Just was wondering if we could get a high level trajectory outlook aspirational goals for that apps and IoT segment over the next few years, medium, long term, however you want to think about it. And I understand if you don't want to give hard numbers, maybe as a percentage of the business mix just how you see that segment evolving.

[Steven Pickett:]

Yes, you're right, we’ll stay away from giving hard numbers, but it's clearly in the area of strategic focus. And the reason it's in area of strategic focus is not only does it create an opportunity to increase our ARPU, we believe that it provides a real opportunity to differentiate our core managed services business as well. So you won't see all of that benefit associated with that segment only within that segment. We believe there will be additional benefit in that managed communication services line of business as a result of the investments that we make in that in apps and IoT too. Clearly we want to see that grow even faster than the rest of the business over time. And it will remain an area of focus and remain an area we want to - where we want to add capabilities.

[Walt Chancellor:]

I guess just shifting to some of the offshore rig site wins. And I think you mentioned a few discrete drivers, but just wondering if you can put some color on, I guess what's really enabling those wins that saw in the quarter. Is it technology offering, is it price, any color you can put around what helped create that result this quarter would be great.

[Steven Pickett:]

Largely I think it’s because some of our clients are being called back to work at the end of the day, you know, on that list of additional rigs, you’ll see a number of our clients you’ve either, you know, switched out rates - and that number go up and down. This is a net number, at the end of the day, we've seen a few jack-ups taken out of service for instance where we’ve see far more but into service. So we’re following our customers and their business opportunities and prospects. So I think we're seeing and I don't know if you're seeing this in other parts of the industry, but we're seeing more activity, more assets put to use and that's the primary driver. Now we believe that we have some products and services we can offer that will help them manage their cost more effectively, drive some of their cost down, make them more attractive in terms of what they are able to do for their customers or so forth. So you…

[Chip Schneider:]

To add to that, what I'm hearing from our customers with some consistency is that they’re now really looking to us as a technology partner and that thinking through not only what do they need in terms of communications infrastructure and capability to delivery this service, but they're looking to us to help them think through the what applications can be put on top of that bandwidth in order to drive operation improvements and what can we do to help secure the network from a cyber attack as well and that’s creating differentiation which we’re pleased with.

[Steven Pickett:]

And some of our onshore site growth was really a direct result of some of our acquisition activity, particularly DTS and that’s helped us as well. We've acquired customers and sites there. So that's been helpful. So you can see very clearly that acquisition is providing a benefit to RigNet.

[Walt Chancellor:]

And I understand, as my question follows. But Steve as it relates to that comment around being a technology partner, do you see your future acquisitions our product development, do you see that being sort of industry agnostic in the sense that you're just going to be looking to deliver tools that help customers regardless of what they're doing, whether they're drilling a well or any other business process? Or do you expect to maybe take also an approach trying to cater to specific needs of upstream oil and gas companies, whether it's data collection or anything like that?

[Steven Pickett:]

The way I'd describe it to Walt, is that the solutions that we're making available are focused on solving a specific problem for our existing customers. And we're looking to do that in a very unique and special way in order to again create more differentiation in the marketplace. But what we're finding is that those solutions do have applicability even beyond the markets that we currently serve. And so we're working with distribution partners to make sure that when those applications can be used and create value outside of our core market that we have a way to monetize that through distributor relationship.

[Operator:]

Your next question comes from the line of Andrew Carmichael from Simmons.

[Andrew Carmichael:]

So I was just wondering, I guess a lot of my questions are really kind of already answered, but as it relates to the offshore drilling sites, is there headroom for additional multi-tenant revenues that you could see forthcoming from this recent win you guys have.

[Steven Pickett:]

Yes. That's always the model that we're pursuing. And so as activity level picks up, our hope is that creates more opportunities in this multi-tenant operating environment that exists on those offshore rigs. So the short answer is, yes, that's something we're hoping to see.

[Andrew Carmichael:]

And are you seeing kind of any early signs of momentum on that front just given what we've seen with the early pickup if you will in offshore…

[Steven Pickett:]

As Chip described, there are puts and takes along the way, but clearly from the third quarter results, there's some encouraging signs as it relates to opportunities for further growth.

[Operator:]

I'm showing no further questions at this time. I would now like turn the conference back to Mr. Schneider.

[Chip Schneider:]

We appreciate your participation in the call today and look forward to talking to you next year with our fourth quarter results. Thank you.

[Steven Pickett:]

Thank you everyone.

[Operator:]

Ladies and gentlemen this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.