RigNet Inc
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Ladies and gentlemen, welcome to RigNet Second Quarter 2018 Earnings Conference Call. My name is Skyler and I will be your coordinator for today. [Operator Instructions] I will turn the call 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 the second quarter 2018 earnings call. Yesterday, after the markets closed, we issued a press release regarding our second quarter 2018 earnings. The release is available on our website at www.rig.net. Before we begin, let me remind everyone 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 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 on our call, I will start with a high level review of our second quarter 2018 financial performance. I will comment on some business highlights from the quarter and I will provide an update on some meaningful activities that have occurred since the close of the quarter on June 30. In the financial results section of the call, I will provide a more detailed review of second quarter financial performance. We will open the call for questions immediately following my prepared remarks. Joining me on the call today are Tonya McDermott, RigNet’s interim CFO and Vice President of Tax and Treasury; and Brendan Sullivan, RigNet’s CTO and CIO. The RigNet team delivered a strong performance in the quarter. Yesterday, after the close, we announced second quarter 2018 revenues of $60 million, the first time we have exceeded $60 million in revenue in over 2 years. EPS came in at a loss of $0.23 and adjusted EBITDA was $8.1 million. Adjusted EBITDA is a non-GAAP measure. You can find a reconciliation of adjusted EBITDA to GAAP net loss in our 10-Q filing and our earnings release. The RigNet team delivered 22% revenue growth compared to the prior year quarter and 171% growth in the Apps & IoT segment compared to the prior year quarter. We experienced increased margins in all 3 lines of business, demonstrating the continuing scale advantages of growing our business. In terms of our managed communication services line of business, our site count increased by 246 sites or 23% compared to the prior year quarter and by 98 sites or 8% 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, which is largely made up of land-based sites serving the energy industry. Our site counts have increased in five of the last six quarters. We believe these increases are largely due to execution on our strategy to move up the technology stack. We now have both an industry leading communications services portfolio and a best-in-class technology services portfolio that together are helping our customers accelerate the process of digitizing their businesses. Our cybersecurity portfolio, our real-time machine learning and AI portfolio and our IoT and SaaS offerings are creating new high-value revenue streams for the company. These Apps & IoT services are optimized for use on the types of communication networks we deliver to our customers, making RigNet the logical provider of these services to the industries we serve. We made solid progress advancing our Apps & IoT business. We deployed Apps & IoT solutions with five additional customers since our last earnings call. Some examples of the apps and digital services we offer our customers are AVI, which stands for advanced video intelligence, CrewConnect and MetOcean. 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. CrewConnect, as its name implies, helps the crew connect to the Internet, in all of the social sites of a modern consumer. Not surprisingly, we are seeing increasing demand for these types of services. MetOcean is an app that provides real-time weather and sea state information in a micro area surrounding offshore assets enabling safer operations. On the M&A front, as a reminder, RigNet acquired TECNOR, a Mexico based remote communications provider in early 2016. There was an earn-out provision associated with that acquisition. During the second quarter of 2018, we reached agreement on the earn-out amount to be paid to the sellers of TECNOR. That included an $8 million cash payment which was delivered early third quarter. Additionally, in the second quarter, we closed the previously announced acquisitions of SAFCON and Auto-Comm and we are pleased with the early performance of these acquisitions. Our momentum has continued since we closed the quarter. First, we have secured three new system integration contracts that have served to more than double our POC-based backlog reported at the end of second quarter. Second, we have committed to further invest in our Gulf of Mexico communications infrastructure, which we believe is the largest over-water microwave-based network in the world. That infrastructure currently provides both microwave and/or WiMAX services on approximately 90 sites offshore, serving an area of approximately 2,400 square miles. This upgrade made in conjunction with a major U.S. carrier, will add both 4G and 5G LTE capabilities to the existing network to provide both enhanced fixed and mobile services to our customers. The project is expected to achieve substantial completion by the end of first quarter 2019 and will increase CapEx during each of next three quarters. Once this network upgrade is complete, it will provide the most advanced LTE network service in the Gulf of Mexico by using both 600 and 700 megahertz spectrum. That spectrum is able to penetrate offshore assets more effectively than higher frequency solutions and could be picked up by most consumer mobile devices. We believe this incremental infrastructure investment will serve our customers well and will further expand shareholder value. Third and finally, I am equally happy to report that as of today, we secured a new channel partner agreement with Singtel, related to our CyphreLink cybersecurity service. This decision by Singtel further validates the uniqueness of our hardware based cybersecurity services. We are excited to be working with such a strong brand serving the Asian market and beyond. Going back to our second quarter financial results, on a segment basis, managed communication services revenue was $41.7 million for the quarter compared to $40.6 million in the prior year quarter and $42.1 million in the prior quarter. Margins increased both versus prior quarter and versus prior year quarter. Apps & IoT revenue was $6.6 million for the quarter compared to $2.4 million in the prior year quarter and $5.3 million in the prior quarter. Margins increased both versus prior quarter and versus prior year quarter. Systems integration revenue for the quarter was $11.7 million compared to $6.1 million in the prior year quarter and $6.4 million in the prior quarter. In the second quarter, we added wins and change orders totaling $2.7 million, which along with the expected work-off during the quarter brings our total percentage of completion backlog to $19.6 million as of June 30. As I stated earlier, since the end of the quarter, this backlog has more than doubled. Again, margins increased both versus prior quarter and versus prior year quarter. On a consolidated basis, SG&A expenses were $19.7 million in the quarter compared to $12 million in the prior year quarter and $16.6 million in the prior quarter. The SG&A increase, relative to the prior quarter was largely due to the change in fair value of the TECNOR earn-out of $2.8 million. GAAP net loss attributable to common shareholders was $4.3 million or $0.23 per share in the current quarter compared to a net loss attributable to common shareholders of $4.2 million or $0.24 per share in the prior year quarter and a net loss attributable to common shareholders of $5.6 million or $0.31 per share in the prior quarter. Adjusted EBITDA was $8.1 million in the quarter compared to $6.1 million in the prior year quarter and $7.4 million in the prior quarter. Capital expenditures were $6.6 million compared to $4.9 million in the prior year quarter and $6.6 million in the prior quarter. CapEx spend for the quarter was substantially comprised of success based commitments to three large customers. In the following quarters, we look forward to the success based build-out of an LTE network in the Gulf of Mexico and buying an office in Lafayette, Louisiana that will consolidate three separate legacy facilities. The Gulf of Mexico LTE network will be a strategic differentiator for us and will make us the premium provider with best in class technology in the Gulf. Going from three Lafayette facilities that resulted from recent acquisitions to one, will lead to a reduction in spend and will create more opportunities for cooperation across our businesses. Turning to the balance sheet, as of June 30, 2018, cash was $18.4 million, net working capital excluding cash was $22 million and our outstanding debt was $58.1 million. The uses of cash in 2018 include the $5.1 million of cash paid for acquisitions, $12.7 million of capital expenditures and $2.6 million in principal payments on our credit facility. In closing, in the second quarter of 2018 the RigNet team delivered a strong performance with 22% revenue growth compared to the prior year quarter and 171% growth in the Apps & IoT segment compared to the prior year quarter. We are pleased with the momentum we are seeing in the business as a result of executing on our strategic growth plan. RigNet is now uniquely able to support our customers’ digital transformation with services that are 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 might have. Operator, can you please open the line.

[Operator:]

[Operator Instructions] And our first question comes from Allen Klee with Maxim Group. Your line is now open.

[Allen Klee:]

Alright. Good morning, starting with the SI segment, it had a nice increase, I am trying to understand to what degree I should think of any of that as one-time and to what degree is that kind of a sustainable run rate going forward?

[Steven Pickett:]

Good morning Allen. First of all, thanks for the question. The SI business does have some peaks and valleys associated with the rates of project-based business has peaks and valleys. We haven’t shared any information at this point about what we think the baseline run rate of that business is. But certainly we were pleased with the performance of the quarter and really pleased with the growth in the backlog that’s happened since we closed the second quarter.

[Allen Klee:]

Okay. And then so in terms of what you said about CapEx, is the way to think that it will be elevated in the next three quarters, does that mean there is a reasonable way to think about it that the CapEx that you generated in this current quarter is a reasonable run rate for the next three quarters?

[Steven Pickett:]

The CapEx historically has always been largely about success based wins. And certainly we expect to continue to win in the marketplace. On top of success based CapEx, we do expect that the LTE network build will come in at something less than $10 million over that three quarter period. And CapEx related to the Lafayette facility, which again is integrating facilities that were – that came from recent acquisitions, would be something in the range of $5 million or less.

[Allen Klee:]

Qualitatively, can you discuss if on – in the Managed Services, if you are in general seeing kind of more customers come back per rig?

[Steven Pickett:]

We – I can’t comment on that specifically. But we are certainly seeing more activity. And when I am out with customers, I am regularly hearing that they generally have more activity within their business.

[Allen Klee:]

Okay, great. And then in terms of how we can model the falloff of the Noble contract, I know when you gave your 10-K for 2017, you said that no business is more than 10% of revenues, is there anything else you can add for how we should think about modeling that?

[Steven Pickett:]

No, there is nothing further I can share on that other than what we observe is that they are more or less on their schedule to execute that transition.

[Allen Klee:]

Okay. And then in terms of the Apps & IoT, that’s also been doing very well, could you maybe talk a little of how you are seeing, if you are kind of cross-selling or synergies of that with your traditional Managed Services business?

[Steven Pickett:]

Yes. The feedback we are getting from customers is that it is – that the fact that we can provide that portfolio of technology solutions on top of the managed communications layer is an important consideration for them as they are making decisions about managed communication services. Highlight – we talked on previous calls about a fleet wide win that we have had, the competitive win that we have had, that we have fully executed now by the way. And indeed, feedback from that customer in particular was that our ability to deliver technology solutions that lay on top of that network were an important consideration for them. And again, we are hearing that pretty consistently across the market. What we know is that there are a lot of challenges associated with delivering remote communications networks. And those challenges extend to delivering applications on top of those services, delivering cybersecurity protection, delivering real-time machine learning. And so bundling those together really makes a lot of sense to ourselves and broadly speaking to our customers.

[Allen Klee:]

Okay. And just finally, the SAFCON and the Auto-Comm acquisitions, where will they mostly show up segment wise?

[Steven Pickett:]

They do show up in each one of our segments, but largely in our System Integration segment.

[Allen Klee:]

Okay, great. Congratulations, great quarter.

[Steven Pickett:]

Great. Thank you, Allen.

[Operator:]

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

[Walt Chancellor:]

Good morning. Yes a quick one to start, I don’t know if you touched on this in your prepared remarks, but pretty healthy step up in the number of other sites you reported for the second quarter, what was the driver of that?

[Steven Pickett:]

It’s just about winning more often in the marketplace. We do share – and so by the way first of all good morning Walt. Thanks for joining. But we are just winning more often in the marketplace. And we do provide a breakdown of where those wins come from, from a – in terms of different categories that we report, so you can see that the – the number of increases offshore was of course smaller than the number of the increases that we saw onshore.

[Walt Chancellor:]

Okay. And I guess a product of market share and maybe general as the activity levels being better, is that a fair characterization?

[Steven Pickett:]

It is.

[Walt Chancellor:]

Yes, okay. And then to dig in on the Gulf of Mexico investment a little bit, maybe you could just help us explain what the incremental service offering or what the target marketing – target market for this investment is that will help you get a return on it? I thought you mentioned consumer devices somewhere in there and if you clarify I guess where the revenue incrementally will flow from this investment?

[Steven Pickett:]

So, two things. Indeed, we will be able to serve the consumer market. We will be providing SIMs of our own. But as I mentioned, we are also executing this with – in partnership I shouldn’t use the word partnership through a relationship with a major U.S. carrier. It also provides us an opportunity to expand the capacity of our fixed network as well. And so it will be also used for that purpose. Brendan, do you have anything you wanted to add to that?

[Brendan Sullivan:]

Yes, I can add to that. So, our 4G WiMAX network, it doesn’t allow for mobility. These are platforms that are for the most part touching the ground. By adding 5G LTE, you now pickup roaming traffic and that’s the mobile devices that roam in and out of the Gulf. So that could be anybody from commercial fishing or just pleasure craft and then you will also pickup rigs that are in motion.

[Walt Chancellor:]

Okay, got it. So, just testing water now so to speak.

[Steven Pickett:]

I mentioned this in my remarks, but there is also much more lower spectrums than we have historically used, so 600, 700 megahertz spectrum, which will penetrate into assets more effectively as well, which should make the service more desirable. And so we are really excited about this build out. It’s relatively speaking a small incremental investment and we are excited about the return characteristics of it. And the way over time, it can expand shareholder value.

[Walt Chancellor:]

Great. And then just to dive in on the financials a little bit in the P&L perhaps Tonya can help here. Just again on the SG&A and marketing costs, certainly elevated relative to levels we would have seen in the back half of 2017 or historically even backing out the earn-out $16 million and $17 million. I know you are hesitant to guide, but is there – should there be a meaningful reduction in that forthcoming incoming quarters or I guess how should we think about that proportion of the spend that is elevated relative to those historical levels?

[Tonya McDermott:]

We have made couple of things. One, thank you for pointing out that part of that comparison is related to the change in fair value of the TECNOR earn-out. In terms of other increases particularly year-over-year increases part of that is driven by acquisitions that we have done. And the other part of it is a conscious decision on our part to incrementally invest in sales and marketing in order to make sure that we rapidly get the word out about these new technology services that we are delivering. So I am pleased to see that the growth in that line of business that we are seeing and we will continue those investments.

[Walt Chancellor:]

Okay, I appreciate the time and the color. Thank you.

[Steven Pickett:]

Alright. Thank you.

[Operator:]

At this time, I am showing no further questions. I would like to turn the call back over for closing remarks.

[Steven Pickett:]

Thank you all again for joining the call. Appreciate it. And we will look forward to our next update at the end of third quarter. Thank you again for joining and thank you for your interest in RigNet.

[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.