RigNet Inc
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Ladies and gentlemen, welcome to RigNet's first quarter 2018 earnings conference call. My name is Skylar and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session after the prepared remarks by management. I will now turn the presentation over to Steve Pickett, RigNet's President and Chief Executive Officer. Mr. Pickett, please proceed.

[Steven Pickett:]

Thank you, Skylar. And thank you to all of our listeners for joining this first quarter 2018 earnings call. Yesterday, after the markets closed, we issued a press release regarding our first quarter 2018 earnings. The press release is available on our website at www.rig.net. 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 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. The actual future results could vary materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings. Today, on our call, I'll review our financial performance, including a review of our first quarter 2018 results. I'll provide an update on our efforts to increase site counts in order to further scale our business. I'll spend time sharing information about our recent acquisitions, including Intelie, which we closed in late March, and both Auto-Comm and SAFCON that we announced and closed in April. I'll also spend time discussing a few of our newer organically-built Apps & IoT services that support our strategy to move up the technology stack. This strategy further differentiates our core managed communication services business and builds new Apps & IoT revenue streams. Finally, in the financial results section of the call, I'll provide a more detailed review of our financial performance in the first quarter. We will open 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 Chief Technology Officer and Chief Information Officer. Yesterday, after the close, we announced first quarter 2018 revenues of $53.8 million. EPS came in at a loss of $0.31. Adjusted EBITDA was $7.4 million and we generated unlevered free cash flow of $800,000. Adjusted EBITDA and unlevered cash flow are non-GAAP measures. You can find a reconciliation of adjusted EBITDA and unlevered free cash flow to GAAP net loss in our 10-Q filing and earnings release. The RigNet team delivered 12% revenue growth compared to the prior year quarter, two consecutive quarters of Managed Services segment growth and increased site count compared to both the prior-year quarter and the prior quarter. Our site count increased by 204 sites or 20.5% compared to the prior-year quarter and by 28 sites or 2.4% compared to the prior quarter. Compared to the prior-year quarter and the prior quarter, we saw growth in every site count category, including offshore drilling rigs, offshore production, maritime and other. Other is largely made up of land-based sites serving the energy industry. These results speak to the market share gains we are driving and highlight the customer value we're creating through execution of our strategy to move up the technology stack. Moving up the stack is creating new high-value revenue streams for the company, while further differentiating our core managed communication service. These new Apps & IoT services are optimized for use on remote communications networks and depend on highly reliable communication services. We closed our previously announced acquisition of Intelie on March 23. As a reminder, Intelie is a real-time machine learning and predictive analytics company that develops deep operational understandings and delivers artificial intelligence solution. This acquisition makes RigNet the first remote communications provider to offer a fully integrated technology stack that combines IoT reach with advanced video applications and complex real-time data analytics, all on top of a best-in-class cybersecurity-hardened global communications platform. To provide more information about Intelie's customer value propositions, their 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 detects anomalous performance and then delivers usable information to its customers through real-time mobile dashboards to help optimize operational performance. To fully implement and extract maximum value from the Intelie solutions, customers need and depend upon highly reliable and secure communications. Intelie also integrates and speeds up complex planning processes that, in the energy market, are typically done by multiple third-party engineering teams. When several engineering models are chained together, Intelie's machine learning constantly tests complex variables, analyzes information and shares predictive results. In doing so, Intelie has proven it can take complex engineering problems, such as well planning, that might take as much as three months to complete to cycle times measured in days. We're thrilled with the customer relationships that the Intelie energy team has built with some of the largest brands in the energy market, including Petrobras. Intelie's digital team serves customers outside of the energy market with the same real-time machine learning platform, with different algorithms to optimize their business performance. In order to even further grow our business and expand our relationships with oil and gas exploration and production companies, we announced and closed the acquisitions of Auto-Comm and SAFCON on April 18. Auto-Comm provides a broad range of communication services for both onshore and offshore remote locations. SAFCON offers a set of safety, security and maintenance services that expands our system integration portfolio and adds monthly recurring revenue. In terms of organic efforts to increase our Apps & IoT portfolio, we made solid progress again in the quarter. We deployed Apps & IoT solutions with five additional customers since our last earnings call. Examples of the apps and digital services that we offer our customers include MetOcean and AVI, which stands for advanced video intelligence. MetOcean gathers regulatorily required micro weather data through sensors deployed on offshore assets and displays that real-time information through easy-to-read dashboards to improve the safety of offshore and helicopter operations. AVI uses industry-leading video compression technology, optimized to be used in low bandwidth and high-latency networks to facilitate both video collaboration and real-time digital video monitoring. AVI supports the offshore industry's goal of taking people off of offshore assets in order to reduce costs and improve safety. The video collaboration allows experts to remain onshore to support offshore activities wherever those remote assets are deployed globally. AVI can also be used to monitor remote operations. In this use case, AVI can be coupled with data analytics that can notify key personnel of critical safety or security issues through man-down alarms and intruder alerts. Going back to financial results. On a segment basis, Managed Communication Services revenue was $42.1 million for the quarter compared to $41.7 million in the prior-year quarter and $41.7 million in the prior quarter. The team has delivered two consecutive quarters of Managed Services segment growth. Apps & IoT revenue was $5.3 million for the quarter compared to $2.4 million in the prior-year quarter and $5.8 million in the prior quarter. The increase compared to Q1 2018 was due primarily to our strategy of growth into the application layer and Internet of Things space. The decrease in Apps & IoT revenue compared to the prior quarter was primarily due to equipment sales in the prior quarter related to upgrades to customers' IoT endpoints. System Integration revenue for the quarter was $6.4 million compared to $4 million in the prior-year quarter and $9.3 million in the prior quarter. Since our last quarter, we've added wins and change orders totaling $4 million, which along with the expected work off during the quarter brings our total System Integration's backlog to $23.5 million. On a consolidated basis, SG&A expenses were $16.6 million in the quarter compared to $11.9 million in the prior-year quarter and $15.5 million in the prior quarter. SG&A increase due to increased stock-based compensation, acquisition costs, legal expenses and due to investment in our sales and marketing personnel cost to advance our growth and our Apps & IoT strategy. GAAP net loss attributable to common shareholders was $5.6 million or $0.31 per share in the current quarter compared to net loss attributable to shareholders of $2 million or $0.11 per share in the prior-year quarter and a net loss attributable to common shareholders of $5.7 million or $0.31 per share in the prior quarter. Adjusted EBITDA was $7.4 million in the quarter compared to $7.2 million in the prior-year quarter and $8.5 million in the prior quarter. Capital expenditures were $6.6 million compared to $3.2 million in the prior-year quarter and $4 million in the prior quarter. As a result, unlevered free cash flow – defined as adjusted EBITDA less capital expenditures – was $800,000 compared with $4.1 million in the prior-year quarter and $4.6 million in the prior quarter. CapEx spend for the quarter was substantially comprised of success-based commitments to four large customers. CapEx spend also included cost associated with two teleport moves that will reduce ongoing OpEx by year-end. Turning to the balance sheet, as of March 31, 2018, cash was $21.9 million. Net working capital, excluding cash, was $20.1 million and our outstanding debt was $56.9 million. The decline in our cash balance reflects the $3.2 million of cash paid in the first quarter for the acquisition of Intelie, $5.1 million of capital expenditures and $1.3 million in principal payments on our credit facility year-to-date. In closing, the first quarter of 2018, the RigNet team delivered 12% revenue growth compared to prior-year quarter, two consecutive quarters of Managed Services segment revenue growth and increased site count in all categories compared to both prior year quarter and prior quarter. RigNet's bundling of applications and IoT to our core offering contributed to site count growth of 20.5% in the last 12 months. Our acquisition of Intelie will provide a platform for increased Apps & IoT growth. The more recent acquisitions of Auto-Comm and SAFCON will help grow both our Managed Services and Systems Integration businesses. All three acquisitions will further enhance our relationships within the oil and gas industry. With RigNet, our customers are always connected, always secure and always learning. I'd 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'd be pleased to address any questions you might have. Operator, please open the line.

[Operator:]

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

[Walt Chancellor:]

Yeah, hi. Steve, a few financial ones, just to start. Perhaps, Tonya can help. The SG&A picked up pretty materially here in the first quarter. Looked like there was some higher stock comp. You articulate some of the reasons why. I guess, as we move forward, what should we be expecting? Was there anything anomalous with that first quarter SG&A spend? Can you help us there?

[Steven Pickett:]

Yes. First quarter did include a bonus payment for 2017 performance. So, that is all of 2017's bonus stock-based compensation in just the first quarter. We also had legal cost that will not continue on forever, of course, and some executive departure costs as well. Tonya, anything you wanted to add to that?

[Tonya McDermott:]

No, that's perfect. The stock-based comp, GAAP rules doesn't allow us to accrue it in 2017. So, we recognized it all in Q1 of 2018.

[Walt Chancellor:]

Okay. That's helpful. And then, I hate to harp on the financials too much, but also on the cash flow, it looks like there was a pretty big jump in receivables here in the first quarter. Any help with what's going on there? Do you expect working capital to continue to be a use of funds because fairly meaningful number?

[Tonya McDermott:]

AR did increase, and that's primarily due to increased revenue. We are going to pay close attention to it and work with our customers. Obviously, our customers are trying to drag out their payments to us, but we are working very closely with them.

[Walt Chancellor:]

Okay. And then, Steve, just high-level strategic view, you're clearly building out the portfolio with over-the-top solutions. Walking around the OTC floor, it seemed like there was a much higher emphasis on digital Internet of Things for the offshore and the oil patch. Just curious where we are in customer adoption as you're going out and selling these products. Are we still in a pretty heavy customer education phase or is it becoming a bit more of a pull model? Just any help for where you think we are in this evolution from the customer side.

[Steven Pickett:]

Sure. Maybe a couple of comments. One, I am really encouraged by the level of engagement we have related to those things that are in the Apps & IoT segment. And just maybe one other observation I'll share is I think all of us know when industries go through cataclysmic events, it's not unusual for business models to change. And I think we put ourselves in a position to really benefit from the business model changes that are taking place in the energy sector. And those business model changes are driven, number one, by the intense focus on taking cost out of the operation and using technology to do that. And I would say the other observation I would make is that back when – in 2014, when oil was $110 a barrel, our customers had large teams of people who were thinking about cybersecurity and doing app development just to name two. And as oil prices came down, those teams got a whole lot smaller. And so, our customers are increasingly – and even those who are not our customers in the energy sector, are increasingly looking for companies like ours to be their technology partners and indeed help by not just delivering the network, but by delivering the technology solutions that allow them to ensure that the network is protected, the data is protected and that they're able to use other technology solutions and to really optimize their day-to-day business performance. I guess, to summarize it again, I'm really encouraged by the level of engagement. And we're seeing that level of engagement with much higher levels within our customer base as well.

[Walt Chancellor:]

Okay. I appreciate the color. I'll turn it back.

[Operator:]

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

[Andrew Spinola:]

Thanks. Steven, can you elaborate on your comments earlier about the CapEx? CapEx looks a little elevated in the quarter. I think it sounds like you made some one-off expenditures to potentially save some money on teleports. Can you just sort of maybe expand on that? Tell us what's going into the CapEx in this particular quarter and maybe thoughts on where it might go going forward.

[Steven Pickett:]

Yeah. This quarter was higher in terms of the CapEx spend than we had in previous quarters. Certainly, new site ads means that we're increasing our spend on success-based CapEx. And so, as I mentioned really largely that $6.6 million is made up with success-base CapEx spending. But we did find an opportunity in two cases to move teleport locations as a way of saving OpEx over the longer term. So, we liked what the cash on cash return was related to that infrastructure investment. So, we decided to pull the trigger on those two moves, which also added to the CapEx number.

[Andrew Spinola:]

Got it. Just on the success-based CapEx, it's always an area of concern for me. And I'm sort of wondering if you could elaborate what exactly it is that you're paying for with the CapEx? And, obviously, the revenue trends have been relatively flattish. So, to the extent that there's success-based CapEx here, it's not really driving much revenue growth. So kind of help me understand what you're spending on and what you expect from that CapEx.

[Steven Pickett:]

Yeah, sure. So, a couple of things. One, the CapEx spend was during the quarter, so that doesn't necessarily mean those new sites turn on during the quarter where we're buying or spending CapEx. In terms of the makeup of that CapEx, it's largely equipment and includes some costs associated with getting that equipment deployed as well. So, it's the network communications equipment.

[Andrew Spinola:]

Okay. I think maybe just while we're on the topic, trying to understand the Managed Services revenue trend and – right, obviously, clearly, the CapEx this quarter is not going to impact this quarter, but it's been over $5 million the last three quarters. It was almost $7 million in Q3 and revenue has been going sideways. Is this primarily success-based CapEx in the Managed Services business? And maybe can you talk about the sort of countervailing trends where I assume that this CapEx is driving some revenue upside, but there's also some headwind as well? Can you sort of help me understand those different trends?

[Steven Pickett:]

Yes. First of all, yes, the lion's share of the spend is related to CapEx in the Managed Communications services segment. And in terms of sites, not all sites are created equal, meaning different sites are generating different levels of revenue. Obviously, land-based sites are generating less recurring revenue than offshore sites, just broadly speaking. But, yes, the CapEx is very much Managed Services based CapEx.

[Andrew Spinola:]

Okay, thank you.

[Operator:]

[Operator Instructions].

[Steven Pickett:]

I should probably correct a couple of numbers in terms of historical CapEx. Tonya, can you just review what the historical CapEx has been in the last couple of quarters? Or do I need to come back to it?

[Tonya McDermott:]

This quarter was $6.6 million.

[Steven Pickett:]

That's right.

[Tonya McDermott:]

Prior quarter was $4 million. And prior-year quarter was $3.2 million.

[Steven Pickett:]

Okay. Okay, thank you.

[Operator:]

And I'm showing no further questions, I'd like to turn it back over for closing remarks.

[Steven Pickett:]

Great. Well, thank you, Skylar. And thank you again for everybody who joined the call today. We appreciate your interest in the business. Thank you, again.

[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.