RigNet Inc
Q4 2017 Earnings Call Transcript

Published: 7 Mar 2018

[Operator:]

Ladies and gentlemen, welcome to RigNet’s Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Carrie 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. I will now turn the presentation over to Steven Pickett, RigNet’s President and Chief Executive Officer. Mr. Pickett, please proceed.

[Steven Pickett:]

Thank you, Skyler and thank you to all of our listeners for joining this fourth quarter and full year 2017 earnings call. Yesterday after the markets closed, we issued a press release regarding our fourth quarter and full year 2017 earnings. The release is available on our website at www.rig.net. Before we begin, let me remind everyone that on our call -- that our call will contain forward-looking statements. Except for historical facts, all statements that address our outlook for 2018 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 risks 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. Today, in our call, I will review our financial performance including a review of our full year and fourth quarter 2017 results. I will also provide an update on our efforts to increase site counts in order to further scale our business. Next, I’ll spend time sharing information about our recent acquisitions and our strategic work in moving up the stack in order to even further increase the level of differentiation in our core managed communications services business. And finally, in the financial results section of the call, I’ll provide a more detailed review of our financial performance in fourth quarter and for full year 2017. We will open up the call for questions immediately following my prepared remarks. Joining me on today’s call are Tonya McDermott RigNet’s interim CFO and Vice President of Tax and Treasury and Brendan Sullivan, RigNet’s CTO and CIO. Yesterday, after the close, we announced fourth quarter 2017 revenues of $56.8 million. EPS came in at a loss of $0.31. Adjusted EBITDA was $8.5 million. And we generated unlevered free cash flow for $4.6 million. We have now delivered three consecutive quarters of revenue increases and two consecutive quarters of increases in adjusted EBITDA. This is the first time since 2014, prior to the collapse in oil prices that we’ve delivered three consecutive quarters of revenue growth. Revenue increased quarter over quarter by 11.7% and adjusted EBITDA increased quarter over quarter by 9%. In terms of our managed communications services business, revenues were up 3.6%, Apps & IoT revenues were up 15.9% and systems integration revenues were up 66.1%. These percentages represent sequential quarter over quarter growth rates. For full year 2017, we announced revenues of $204.9 million. EPS came in at a loss of $0.90. Adjusted EBITDA was $29.7 million. And we generated unlevered free cash flow of $11.8 million. Although managed communications services revenue declined 14.7% year-over-year and 8.9% compared to the prior year quarter, largely due to offshore stacking, Apps & IoT revenues grew by 141% year-over-year and 308% versus the prior year quarter. System integration grew by 15.9% year-over-year and 67.4% versus the prior year quarter. I’m particularly pleased with the team’s performance in the Apps & IoT business as we believe it is now RigNet’s single largest addressable market. In terms of site counts, we made a conscious decision in the early fourth quarter to turn down an unprofitable WiMAX LAN-based network that came to us through our DTS acquisition. This is an example of the financial discipline we will continue to drive within our business. That decision caused us to see a decline in a number of sites served during the fourth quarter of 2017, but our actually year-over-year number of sites served increased by 27.1%. And despite the WiMAX network turndown, we saw growth in every site count category year-over-year including offshore drilling rigs, offshore production, maritime, international land and other. These year-over-year results speak to the market share gains we are driving and highlight the customer value we are creating through execution of our strategy to move up the sack. In order to continuously increase the level of differentiation of our core managed communications services business by further growing our Apps & IoT line of business, in January this year, we entered into an agreement to acquire Intelie. Intelie is a real time machine learning and predictive analytics company that combines deep operational understandings with AI or Artificial Intelligence. This acquisition makes RigNet the first to offer a fully integrated technology stack that combines IoT reach with advanced video applications and complex real time data analytics, all on the top of a cybersecurity-hardened global communications platform. To give some color to the type of value Intelie will deliver to customers, the real time decision support capability is used by operators like Petrobras, their first energy customer. By aggregating and correlating tens of thousands of sensor data points per second from wells and rigs, Intelie uses supervised real time machine learning to detect anomalous performance and then delivers usable information back to decision makers through real time mobile dashboards. Intelie’s key differentiator is combining both real time data collection from hundreds and thousands of collection points agnostically with simultaneous data analysis. To fully implement and extract maximum value from the Intelie solutions, customers need highly reliable and secure communications. By combining Intelie’s capabilities with RigNet’s managed communications services, data will be synchronized and normalized to optimize operations and safety in any environment including at remote sites and at sites served by terrestrial networks. Intelie also integrates and speeds up complex planning processes that are typically done by multiple third-party engineering teams. With several engineering models are chained together, the machine learning constantly tests complex variables and it takes issues and shares the predictive results. In doing so, Intelie has proven that it can take complex engineering problems like well planning that might take as much as three months to complete to a cycle time of approximately eight days. We are thrilled with the customer relationships Intelie has built with some of the largest brands in the energy market and with several customers outside of energy who are served by the Intelie digital team. In terms of our previous acquisitions in 2017, we’re pleased with the progress of each acquisition and have substantially completed the integration activities. In 2017, we retooled our sales and marketing resources to support the sales of the new technologies, both that we have developed organically and that we have brought to RigNet through acquisition. In terms of our acquisition of Cyphre which was completed in late second quarter of 2017, this business continues to help differentiate our managed communications services offerings. Many of our customers are interested in having RigNet protect the networks we provide from cyber attack. Cyphre’s capabilities from Cyphre BlackTIE to support data at rest to the newly released CyphreLink to provide network security and Fornetix, which provides encryption key management, create an unmatched family of encryption services that protects the network and our customers’ data from unwanted eyes. Cyphre is particularly well-suited to support remote customers who have unique needs to add data protection without adding the network overhead and latency that is typical of most contemporary software-based encryption solutions. It’s important to note that these cybersecurity capabilities from Cyphre are not just applicable to remote networks, but are valuable in all enterprise markets. I am pleased to report that we are currently negotiating access to these broader markets through white label offerings with select major carriers and integrators around the world. We also see additional opportunities for Cyphre due to new European Union data privacy requirements, referred to as GDPR. In terms of organic efforts to increase our Apps & IoT portfolio, we made solid progress again in the fourth quarter. We started trials with an additional eight customers since our last earnings call who are now testing or have tested at least one of our Apps & IoT solutions. We also closed new business with five customers who now use and pay for these solutions to support their operations. One of these new customer contracts, which is a competitive fleetwide takeaway includes AVI, Crew Hotspot and IPTV application services. The availability of these over the top services were instrumental in our ability to secure this managed communications services contract. As a reminder, these Apps & IoT solutions soon to include in Tally, provide a relevant set of new services to both energy and non-energy customers, further differentiating our managed communications services offerings. Going back to financial results, on a segment basis, managed communications services revenue was $51.7 million for the fourth quarter compared to $40.2 million in the prior quarter and $45.8 million in the prior year quarter. System integration revenue for the quarter was $9.3 million compared to $5.6 million in both the prior quarter and the prior year quarter. Since our last call, we’ve added changed orders totaling $2.7 million which along with the expected work off during the quarter, brings our total system integration backlog to approximately $26 million. On a consolidated basis, SG&A expenses were $15.5 million in the fourth quarter compared to $13.4 million in the prior quarter and $14.4 million in the prior year quarter. SG&A increased due to executive departure costs of $1.2 million and due to investment in our Apps & IoT growth strategy. GAAP net loss attributable to common shareholders was $5.7 million or $0.31 per share in the current quarter compared to a net loss attributable to common shareholders of $4.2 million or $0.23 per share in the prior quarter, and net loss attributable to common shareholders of $3.8 million or $0.21 per share in the prior year quarter. Adjusted EBITDA in the fourth quarter was $8.5 million compared to $7.8 million in the prior quarter and $9.4 million in the prior year quarter. In the fourth quarter of 2017, a $500,000 increase in the fair value of earn-out, a $1.2 million cost associated with executive departure, and $600,000 in acquisition costs were recorded. In the third quarter of 2017, $800,000 in acquisition costs and $800,000 in restructuring charges were recorded. In the fourth quarter of 2016, $600,000 in restructuring charges were recorded. The executive departure costs, acquisition costs, change in fair value of the earn-out and restructuring charges are added back to net loss in our non-GAAP measures. Capital expenditures were $4 million in the fourth quarter, compared with $5.9 million in the prior quarter and $3.7 million in the prior year quarter. As a result, unlevered free cash flow defined as adjusted EBITDA less capital expenditures was $4.6 million compared to $2 million in the prior quarter and $5.7 million in the prior year quarter. CapEx spend for the quarter continued to be disciplined and was substantially comprised of success-based commitments to four large customers. Turning to the balance sheet. As of December 31, 2017, cash was $34.6 million. Net working capital excluding cash was $13.7 million, and our outstanding debt was $58.1 million. The decline in our cash balance reflects the $22.2 million and $5.1 million paid in the third quarter for ESS and DTS respectively, and $4.9 million in cash paid for Cyphre in the second quarter, as well as $18.2 million in payments, partially offset by $15 million of draws on our credit facility year to date. In closing, the RigNet team delivered on all three prongs of our strategy, resulting in revenue growth for the third sequential quarter along with two sequential quarters of growth in both, adjusted EBITDA and unlevered free cash flow. Additionally, compared to the prior year quarter, site count increased in every category that we track with an aggregate increase of 250 sites. The Intelie acquisition that was announced earlier this quarter, will deliver real time machine learning and artificial intelligence that will take our clients to a new level by allowing timely prediction models based on live data delivered over our highly reliable network and secured by our unique cybersecurity capabilities from the Cyphre acquisition. Our clients will now be always connected, always secure, and always learning. I would like to thank our RigNet team members for their hard work and their personal commitment to our business. And I thank all of you on the call for your interest in RigNet. With that we would be pleased to address any questions you may have. Skyler, please open the line?

[Operator:]

[Operator Instructions] Our first question comes from Andrew Spinola with Wells Fargo. Your line is now open.

[Andrew Spinola:]

Thank you. I wanted to ask about the revenue in the managed services segment in the fourth quarter was up I guess about 3.5% sequentially. I’m trying to sort of understand, what the drivers that sequential improvement and in terms of how I should think about that going into 2018?

[Steven Pickett:]

The drivers are simply generating incremental revenue on the sites that we serve. In some cases, that can be driven by increases in bandwidth as just one example. But, we’re certainly pleased with the trajectory that we’re seeing in that business.

[Andrew Spinola:]

And just sort of more simple question. There was a big step up in offshore rigs in the third quarter. Do they by any chance come on late in that quarter? And so, Q4 part of the growth is just seeing a full quarter of those or is this growth primarily due to the improvement in the per rig revenue?

[Steven Pickett:]

That is a factor, yes, no doubt. We had a full quarter’s worth of revenue from those sites and a partial quarter in the third quarter. So, that’s absolutely a factor. Again, things like bandwidth upgrades also play into the equation. So, indeed both are factors.

[Andrew Spinola:]

Got it. So, I mean, just in general from the sort of high level driver of this average revenue per rig, was there any visibility to an uptick in the fourth quarter or into 2018, or we’re still yet to see that turn up?

[Steven Pickett:]

Do you mean in the broader market the number of rigs that are active?

[Andrew Spinola:]

No, just the average revenue that you’re generating per rig?

[Steven Pickett:]

We’re focused on growing the business as much as we can. And certainly that includes growing our share position offshore as rapidly as we can. But, we don’t want to miss opportunities for things like onshore rigs or other assets or production assets, because we’re narrowly focused just on ARPU. We want to focus on just moving that revenue line and generating the benefits associated with adding scale to the business. So, it’s not just the focus on ARPU. Clearly, we want to drive as much revenue on each asset that we serve as we possibly can, by delivering more bandwidth and delivering more services that are up the stake. But, we don’t want to do that at the expense of missing opportunities on things like land-based assets where the ARPU is naturally lower.

[Andrew Spinola:]

Got it. Just a couple of more for me. On the cost of service revenue in managed service in the quarter was up a $1 million sequentially; it’s been coming down for quite some time. Is this just from the top-line growth. And so, maybe this would be kind of a bottom in the gross margin here in this segment or is the initial for sort of more savings on the satellite service side, the cost?

[Steven Pickett:]

So, couple of things. One, yes, it was largely driven by the increase in revenue. And the second part of the question, yes, we’re constantly looking at how we can take network costs out of our business outside of people that is the second largest cost component within the business.

[Andrew Spinola:]

Great. And then just one last question for me, Steve. I thought it was interesting that you used the fairly sizable contingent consideration with stock in the Intelie acquisition. I am just kind of wondering what your thought process is there, just your philosophy on acquisitions, given where your stock is, et cetera?

[Steven Pickett:]

By the way, it’s a fantastic business and a great team at Intelie. So, we’re thrilled about bringing them onboard. And our expectation is that the transaction will close before we get to the end of this quarter. Given how important this capability is to our business, I want to make sure that we are aligning interests between RigNet management, Intelie management and our investors. And so, by using contingent equity as part of the purchase price, I think we do the best job possible of aligning those interests.

[Operator:]

Our next question comes from Alan Klee with Sidoti and Company. Your line is now open.

[Alan Klee:]

For the Intelie acquisition, is there any financial related to the Company that you can provide for us?

[Steven Pickett:]

We’ve not released those yet, Alan. So, not at the moment.

[Alan Klee:]

And then, with your ongoing restructurings, any way to think about how -- what you can get from that on the benefit side in 2018?

[Steven Pickett:]

We are still executing on some of that restructuring. And we haven’t made any forward projections on how that will flow through our P&L. But suffice it to say, a substantial amount of that work has already been completed. We will constantly be looking at ways to further manage our cost structure, both as it relates to just kind of overall efficiency and of course with the continued focus on our network costs as well.

[Alan Klee:]

I am not sure if I missed it, but did you say what was behind the big jump in revenue in systems integration?

[Steven Pickett:]

I didn’t specifically comment on it, but we did have some projects that where customers were interested in making good progress in the fourth quarter. And so, no doubt that that helped drive those very nice increases in system integration in the quarter.

[Alan Klee:]

Are those sustainable type of increases or is it more to be think of as a one-time type of thing?

[Steven Pickett:]

I don’t know if I’d call it a one-time thing. I would describe that business as lumpy in some quarters. So, just that the project basis for that business can cause the revenue stream to be lumpy.

[Alan Klee:]

Is there a way you might be able to call out if there was a certain amount of kind of one-time tax expenses related to the U.S. federal tax changes in terms of deferred tax asset or repatriation that we should think about?

[Steven Pickett:]

Alan, great question. I am going to turn that over to Tonya, our interim CFO.

[Tonya McDermott:]

Basically, because of our current loss positions and our foreign tax credit position, there was no tax due estimated on the transition tax and a highly immaterial impact on our balance sheet and so forth.

[Steven Pickett:]

Which at some level, speaks to the diversity that we have in the business from a global point of view. So, there’re puts and takes across the board.

[Operator:]

[Operator Instructions] Our next question comes from Walt Chancellor with Macquarie. Your line is now open.

[Walt Chancellor:]

Steve, I guess, you lost the Noble business to a competitor and the 10-K mentions a few other competitors expanding their presence in oil and gas. If I heard you correctly, you’re still focused on gaining market share there. Can you characterize the competitive environment in that managed services offshore drilling market right now? Is pricing still under pressure? And then, I guess as a corollary, would you expect to maintain your market share through ‘18 including the loss of the Noble business?

[Steven Pickett:]

Yes, no doubt, we continue to focus on growing share. And although the Noble decision was a disappointing decision for us, at the end of the day, those kind of things happen in the competitive markets. And we are offsetting that with some fleet-wide wins of our own. And when I look at the aggregate performance, I’m pleased that we can look with confidence that we’ve been growing our position in offshore -- supporting offshore assets, in spite of the number of assets that are offshore, continuing to decline. And so, again, disappointing that Noble decided on another direction; that transition is expected to be a 12 to 18-month transition. So, it won’t happen all at once. In the meantime, we’ll continue to be focused on winning as often as we can. And I think what we’ve demonstrated over the last 18 months or so is that we’re winning more often than we’re losing.

[Walt Chancellor:]

I appreciate that color. And I guess, in a related sense, you continue to move up the stack. Do you think that’s materially improving your positioning when you’re bidding for this work or is this still a bit immature, maybe an ancillary value proposition with the Apps & IoT more for the multisite clients? I guess, how is that -- how is moving up the stack affecting those competitive dynamics, if at all?

[Steven Pickett:]

It’s actually affecting in an important way. The reality is the feedback I’m getting from customers and our sales teams are getting from customers is that they really want more than just the communications partner, they really want a technology partner who can develop apps that recognize the challenges associated with delivering communications services in difficult to reach areas, difficult to reach places. And so, it is -- there is no doubt that what we’ve done in terms of moving up the stack is differentiating our managed communications service. And it’s beginning to contribute more significantly on the revenue and margin line. So, we will continue with that focus on a go forward basis because of both of those things that one, it really allows us to maximize revenue on a per site basis and number two, it is differentiating our managed communications services business.

[Operator:]

And I’m showing no further questions.

[Steven Pickett:]

Thank you everyone for joining. I appreciate your interest.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.

[Steven Pickett:]

Thank you, all. Bye, bye.