RigNet Inc
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Ladies and gentlemen, welcome to RigNet's First Quarter 2016 Earnings Conference Call. My name is Chelsea and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session after the prepared remarks by management and instructions will be given at that time [Operator Instructions]. I will now turn over the presentation to Chip Schneider, RigNet's Chief Financial Officer. Mr. Schneider, please proceed.

[Chip Schneider:]

Thank you, Chelsea. Good morning and welcome to today’s call to discuss RigNet’s first quarter 2016 results. With me today is Marty Jimmerson, Interim CEO and President as well as other members of our executive team. Yesterday, after the markets closed, we issued a press release regarding our first quarter 2016 earnings. The release is available on our Web site at www.rig.net. Marty will begin today's call with a review of our first quarter business performance, and then I will follow up with some financial details. Marty and I will then open up the call for 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 2016 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 risk and other factors in our SEC filings. Now, it is my pleasure to turn the call over to Marty.

[Marty Jimmerson:]

Thanks Chip, and good morning to all of our listeners, thank you for joining our first quarter 2016 earnings call. RigNet is a leading global provider of digital technology solutions focusing on serving energy facilities, maritime vessels and other remote locations around the globe. We provide mission critical services to our customers that allow them to operate more efficiently and safely. Our services are increasing relevant as operations have become more complex, sophisticated and dangerous. Like most companies serving the oil and gas industry RigNet is experiencing market headwinds. As a result of these volatile market conditions operator are reducing CapEx and utilization of drilling rigs continues to decline. In the near term we expect conditions to remain challenging as we do not expect a meaningful recovery in rig activity in the near term. We however remain very confident in the medium and long-term fundamentals of the offshore activity and the drilling industry’s inevitable recovery. During the first quarter, I am pleased to report that our managed services business performed in line with our expectations despite the continuing difficult market conditions. Our maritime efforts continue to gain momentum. Channel sales successfully signed up our initial partners and we continue to prepare for the anticipated launch of GX. Notably we were able to resolve the outstanding telecom systems integration or TSI contract issue noted in our Q3 and Q4 2015 earnings releases, and we’re on track to complete the project here in the second quarter of 2016. Finally, our management team and employees around the world continue to focus on providing best in class service to our customers knowing that the current market conditions will ultimately improve. As outlined in our press release revenues increased in the first quarter to $62.3 million and adjusted EBITDA was $10.7 million. Contributing to the quarterly increase in both revenue and adjusted EBITDA was the resolution of the TSI contract dispute. Chip will provide more details on our financial results in a few moments. We expect our remote communication solutions will continue to play an important role in driving productivity and efficiencies that help rig owners reduce breakeven well cost for operators and service companies. We believe our major drilling customers are well positioned with qualify fleet and financial capacity to weather this down cycle and are focused on operational efficiencies and safety, key objectives which we believe our services play an integral role in helping them achieve. We continue to see our customers demand in more of our services rather than less despite continued pricing and contract pressures on both the existing and incremental services. We continue to believe that aligning ourselves with customers operating high quality assets and providing best in class customer service will be rewarded overtime. We continue to focus on developing new business in this environment and there are customer opportunities that we are pursuing and winning. Examples of this success during the first quarter include the following which each have total contract values exceeding $1 million. First, a 3-year contract extension for one of our major drilling customer including providing GX for crew welfare. A 5-year contract renewal for major operator, a new win on the world's largest and first floating liquefied natural gas facility, the 3-year renewal for Alban services for a maritime customer, a 5-year renewal and upgrade on accommodation assets that we're seeing increasing bandwidth capacity and a new 3-year term deal for offshore assets in the North Sea where we will be delivering an iDirect private cloud solution. We remain committed to extending RigNet's broad range of services and technologies to both existing and new customers as well as incremental sites with incremental customers. In an effort to expand our activity into other verticals, we're using the energy down cycle as an opportunity to enhance our focus on the maritime industry and channel sales. In the first quarter we add resources to our maritime and channel sales efforts. While still early we're pleased with the identified opportunities around the globe and focus from our dedicated sales team. We signed a total of 24 new maritime vessels with contract value of $2.7 million in the first quarter. Our managed services business serves remote communication sites around the world including offshore and onshore drilling rigs, production facilities, vessels and other remote sites. Our revenue and profitability are more closely tied to offshore drilling given the mission-critical nature of our services and data intensity associated with offshore drilling operations. At the end of the first quarter, RigNet was billing on a total of 232 rigs that included 221 active and addressable offshore rigs which represents a 31.3% market share slightly down from a market share of 32.3% in the prior quarter. Maintaining our approximately one-third market share in this environment speaks to the quality of drilling customers that we currently serve and the quality of service that we deliver. In the first quarter, we added 8 new rig wins offset by 14 rigs ceased service primarily due to stacking and scraping. Included in our rig additions were four competitive wins on higher end drilling rigs. Average revenue per offshore rig declined 9.8% over the quarter as operator utilization otherwise referenced to as a multitenant arrangement continues to be challenged in the current environment. Since we started reporting in late 2014, we've been notified directly by customers or through public announcement that 77 offshore drilling rigs we serve will be cold stacked or scrapped. By the end of first quarter, we had stopped service on a total 64 of these 77 rigs. This leads another 13 offshore rigs that we expect will be leaving service during 2016. We expect that there will be additional rigs removed from service through 2016 and 2017. Taking a longer-term view of offshore drilling market, a key market that we serve today, our thesis that the market is transitioning to newer offshore rig fleet continues which will be more favorable over the long-term for RigNet due to the increasing technological sophistication of these rigs and the associated increased in capacity needed to accommodate higher level of operational functionality. We expect the global fleet of drilling rigs to decline through 2017 which will not only help rebalance the dynamics of supply and demand but also improve the overall quality and reliability of offshore drilling. We're encouraged that several of our customers are indicating that they are starting to receive inquiries and holding meaning conversations with operators regarding future drilling plans while we view this information as a positive indication that we may be getting closer to the trough, but we still expect that it will be at least 2017 before the offshore market starts to rebound. In summary, the intensity of the current downturn while challenging in the near-term will also be the catalyst to drive out excess supply through scrapping of older rigs and cancellation of certain speculative new bills which in the mid to long-term will be positive. Thus despite the market headwinds and upstream oil and gas today, we remain positive about long-term attractiveness of this key market segment. Also as we previously announced, RigNet completed its acquisition of TECNOR a leading remote communications provider in Mexico on February 4th. RigNet has long served the offshore drilling industry in Mexico, but recent energy reforms have been opening the doors to foreign investment, a positive step for drilling and production service companies both offshore and onshore. TECNOR brings in an important local presence and knowhow with a quality management team, advanced solution capabilities, market positioning in oil and gas and other verticals, and overtime will serve a spring board into Latin America. I am pleased with our integration results and the tremendous collaboration between the respective management teams. Now turning to TSI business segment. We ended the quarter with $22.6 million contracted TSI backlog compared to $27.4 million in December 2015 including a $15.5 million project related to an LNG facility in Texas which is in the early stages and currently scheduled for completion in 2018. As we look forward we will execute on our strategy of pursuing projects result in pull through opportunities generating recurring managed service revenues after completion of the project installation. We have been successful with these projects in the past and we still believe opportunities exist. We will also focus on opportunities that provide better margins, balanced working capital utilization, and most importantly satisfactory risk mitigation. I would like to provide you with an update on global express or what we call GX. RigNet has now launched global express and fleet express subscription services to users on land, offshore and at sea providing same high throughput global coverage, additional networks paths to remote sites with critical communication requirements, and enabling content rich applications. We expect GX to help us serve better our customers’ needs as well as provide more opportunities to remote locations around the world at competitive prices. With service now operational field trials are currently being scoped and scheduled with customers across the global. We’re excited to begin offering this new exciting solution to our customers and prospects. In closing, regardless of where we find ourselves in the business cycle, RigNet is helping to enable the increasing digitization of oilfield by providing technology solutions across the life of the field from drilling through production and transportation. The mission critical role of our remote communications solutions is at the heart of RigNet’s importance to the oil and gas industry whether in periods of high growth or in today’s lower commodity price environment. The macro environment today clearly continues to be present us with near-term challenges, however it also provides us unique opportunities to strengthen our capabilities, expand our market presence into additional areas such as maritime and channel sales, and emerge as a stronger and better company. I want to personally thank our dedicated employees who have focused and helped us push through the industry headwinds. We believe our story is stronger than just the current commodity prices, and want to emphasize that we have the liquidity and financial flexibility to manage through the current business environment and take advantage of other remote communication opportunities as they arise. With that I will now turn the call back over to Chip for a more detailed financial review.

[Chip Schneider:]

Thank you, Marty. Before I share with you our results for the fourth quarter, I would like to review financial details related to the TSI adjustment discussed earlier by Marty in his comments. We are pleased to announce that we successfully resolved the TSI contractual dispute previously disclosed to you in our Q3 and Q4 2015 filings. The dispute related to a multiyear project commenced in 2013 which was conveyed to RigNet as a part of the business acquisition. As a result of the settlement we reduced the accrued estimated loss from $14.3 million to $12 million for the life of the project. Thus recognizing an incremental revenue of $2.3 million and incremental adjusted EBITDA in the quarter of $2.1 million after $200,000 in additional legal fees. We expect to complete the project in the second quarter of 2016. Moving on to our consolidated financial results for the quarter. As Marty mentioned earlier in the call, during the first quarter of 2016, quarterly revenue was $62.3 million representing an increase of $10.2 million compared to the prior quarter. The increase since the prior quarter is due primarily to the TSI segment increase of $12.8 million, brought about by the TSI dispute settlement partially offset by $2.6 million decrease in managed services revenue. Of the managed services decreased $2.7 million was due to reduced offshore drilling site ARPU as a result of reduced operator utilization, $600,000 was due to -- was attributable to reduced offshore drilling [technical difficulty] primarily the stacking. $200,000 [ph] and $900,000 related to other sites and $500,000 was due to declining activity in our North American land business, which has been directly impacted by the significant reduction in the U.S. onshore drilling activity. The above declines were partially offset by a contribution of 2.1 million in revenue from Tecnor our recent acquisition in Mexico. Compared to the same quarter last year total revenue in the first quarter decreased 15.3 million. Managed services revenue declined 12.7 million or 18.9%. Of this 5.4 million was due to decrease in offshore drilling sites served primarily due to stacking, 3.5 million was due to decreased ARPU associated with our offshore drilling sites primarily from reduced multitenant revenues and 2.7 million resulted from declining activity in our North American land rig operations due to a significant reduction in U.S. onshore drilling activity over the past 12 months. And 3.2 million resulted from other sites of which fewer other sites were served. These declines in managed services were partially offset of the $2.1 million contribution by Tecnor in Q1 2016. TSI revenue declined 2.6 million from the prior year quarter. SG&A expenses were 17.2 million in the current quarter compared to 15.7 in the prior quarter and 23.2 in the prior year quarter. First quarter 2016 SG&A included 1.9 million of executive departure costs, acquisition cost of 200,000 and a net reduction in severance costs of 600,000 that have been added back in adjusted EBITDA. Additionally, first quarter SG&A included 300,000 of CEO search costs and ERP implementation expenses of 400,000 that have not added back to adjusted EBITDA. During the first quarter of 2016 adjusted EBITDA was 10.7 million. Adjusted EBITDA increased 13.9 million compared to the prior quarter. The increase from the prior quarter is primarily due to the TSI segment which increased 16.9 million as a result of the settlement of the TSI dispute partially offset by lower adjusted EBIT and managed services of 2.3 million and corporate of 700,000. Adjusted EBITDA decreased by 6.4 million compared to the prior quarter of 17.1 million. This decrease resulted primarily from lower revenue partially offset by benefits from cost reductions. Quarterly cash earnings were 9.1 million or $0.52 per diluted share compared to 600,000 or $0.03 per share in the prior quarter and 14.3 million or $0.82 in the second quarter last year. Unlevered cash flow as defined as adjusted EBITDA of 10.7 million less capital expenditures of 4.9 million with 5.8 million compared to a negative 13.7 million in the prior quarter and 9 million in the prior year quarter. In the first quarter, we reported a consolidated net loss attributable to common shareholders of 1.3 million or $0.08 per diluted share. In the prior quarter, we reported a consolidated net loss attributable to common shareholders of 11 million or $0.63 per diluted share. In the same quarter of last year, we reported a consolidated net loss attributable to common shareholders of 1 million or $0.06 per diluted share. Our effective tax rates for both the current, prior and prior year quarters were not meaningful due to the aforementioned restructuring and executive departure charged recorded primarily in the U.S. domestic operations which significantly decreased our consolidated pretax book income and thus increased devaluation allowance recognized in both quarters. Turning to the balance sheet, as of March 31, 2016, cash was 52 million. Net working capital excluding cash was 38.7 million and our outstanding long-term debt excluding current maturities of 8.4 million or 67.1 million. At March 31, our gross debt to EBITDA on a rolling fourth quarter basis was 1.34 times and we had 90 million of unused capacity under our $125 million revolving credit facility. To update you on our ERP project, we are pleased to report that we completed our Western Hemisphere go live in 2016. On May 1, 2016, we initiated launch fee of the ERP project in our Middle East and Asia Pacific regions. Total expenditures related to our ERP implementation since inception totaled approximately 7.7 million of which approximately 300,000 were incurred in first quarter of 2016. Wrapping up, the first quarter has been productive but still challenging for RigNet. Clearly, we are satisfied to have resolved the TSI contract dispute and we can now focus on closing out this contract in the second quarter. The first quarter was also impacted by continued deterioration in oil and gas activity executive departure costs, ERP implementation costs and CEO search costs. Over the recent quarters however RigNet has substantially improved its cost structure, systems and processes to better address volatility in its core market with the aim of improving its operating leverage when market conditions do improve. With regard to the oil and gas industry, we're confident that a rebound will occur. Until then we believe that by focusing on key relationships in our business, pursuing new prospects in our maritime and channel sales verticals and continuing targeted cost reductions, we're optimizing our business to compete successfully in the current environment. Importantly, we continue to maintain good cash liquidity and available unused credit capacity, enabling us to meet the requirements of the current market conditions and positioning RigNet for both organic and inorganic opportunities. With that, Marty and I are happy to address your questions. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Alan Klee with Sidoti. Your line is now open.

[Alan Klee:]

Could you talk about any future action plans on rightsizing cost cutting and capital expenditures?

[Chip Schneider:]

Alan, good morning. We are constantly evaluating our cost structure and I think a lot of progress in looking at where we can cut cost. So there is going to be continuous improvement from our perspective, that’s not something we’re going to do periodically and walk away. This is a constant activity for us and I expect that this will continue throughout 2016 as it did in 2015. From a CapEx perspective we have worked very hard to focus on our CapEx and target the use of CapEx in those areas where it makes the most sense. We have reinvigorated our look at free cash flow and so we’re looking at all angles of the cash cycle and cash [ph] CapEx is certainly an important part of that and doing everything we can to invest where we think it make sense, but at the same time improve our cash flow and cash generation so that we can continue to weather the storm.

[Alan Klee:]

Would that mean do you think that you have the ability to cut cost to maintain profitability through the down cycle?

[Chip Schneider:]

Absolutely. I think we’re constantly looking to optimize the company for the environment that we’re operating in today. So we are certainly aware of the environment around us and we are doing all we can to meet the challenge that that brings for us. But like I said earlier, we are constantly reevaluating our cost structure and we’re reducing CapEx where we can.

[Marty Jimmerson:]

Alan, Marty here. Just to echo what Chip’s saying. Our largest operating expense is our bandwidth cost we’re continuing, we’ve been very successful in improving the cost effectiveness, maintaining a high utilization factor and we think that’s another opportunity that we’ll continue to benefit in reducing cost as we move forward.

[Alan Klee:]

And lastly you talked about how you’re looking at some similar verticals as new growth areas. Could you just expand on that at all?

[Chip Schneider:]

So the two that we highlighted are maritime and channel sales. First of all, Maritime, we’ve been in the business serving, what I will describe as a low number of units. But it really was derived from been in the energy space. There’re hundreds of thousands of vessels around the world both in energy and in general maritime and we think through our network infrastructure, our competency, and our relationships around the global that this is a natural step up for us if you just take your DNA hat off which is really oil and gas. We’re very pleased with the progress here in the first quarter where we signed up 24 new vessels. We’ve also renewed and extended some services on other vessels that we were already previously serving and we’re encouraged that this is a large market opportunity going at it organically, I wouldn’t expect the needle to move as quickly as you could if you were able to get a large inorganic opportunity to really kick start it, but we’re prepared to go at it organically. Channel sales is a very new initiative that we just started here in January. It's an opportunity to step out into new geographies that we don’t otherwise serve today or the customer opportunities are smaller in nature that we wouldn’t necessarily focus on today. So, from a geographical expansion, plus we have a network of services and solutions in our arsenal if you will that would make the natural extension to try and sell some more of that indirectly. We still see that our primary channel and distribution band direct sales, but the indirect nature would be another avenue. I do not want to comment on any additional seeds that we’re planning right now, but we are exploring other verticals. As stated in the first quarter what we’re going to do is whenever we focus on we’re going to commit to it and so that we don’t become distracted by having too many different verticals that we’re trying to play in.

[Operator:]

Thank you [Operator Instructions]. Our next question comes from the line of Tom Dillon with William Blair. Your line is now open.

[Tom Dillon:]

Can you talk about how you’re managing your commercial commitments, whereas current satellite utilization and how should we think about that -- those costs directionally over the next 12 months? Thanks.

[Marty Jimmerson:]

Great question, both Chip and I will tag-team this one. He’s stepped in very quickly in identifying it since this is our largest cost item on our COGS line and it's a great opportunity. Interestingly our utilization of bandwidth has remained consistent with our prior utilization and so we're very pleased with that. And from a strategy perspective, we are being very diligent about any renewals of bandwidth both in terms of ensuring that they are contract duration matching at a minimum or shorter than any contracts that we're signed up with customers as well as continuing to ensure that any bandwidth that we may have -- any excess bandwidth we have around the globe that we've identified the opportunity to port it over, so that we're not buying new bandwidth. So the Company is laser focused on this. Additionally, we think the right objective here is to think shorter term in bandwidth rather than longer term. The market seems to favor that from a pricing perspective, but it does come and go but that's our strategy right now as think about shorter term than longer term.

[Chip Schneider:]

As Marty said bandwidth cost is next to people it’s probably our largest cost of doing business and we are keenly focused on looking at different ways to work with that and work with our partners. We got a lot of partners on the bandwidth side and I think they understand the circumstances of the industry. I think they understand the circumstances of their market and our market. And we found I think an interest in working together amongst our vendors and so we will continue to create partnerships with them and work with them to reduce costs because at the end of the day that is one of the biggest costs of our business. And we do have opportunities as contracts come up for renewal and so forth, and we will view those opportunities as a chance to get closer to our vendors and partners and see what we can do to offer the absolute best service to our customers, but perhaps at a lower cost point.

[Tom Dillon:]

Okay then an unrelated follow-up, I was just curious about how's your visibility into the timing around those rigs that risk coming off line, China getting the cadence of this is it pretty tough?

[Marty Jimmerson:]

Tom that's a great question, I think we're all trying to get our hands around that. I think our customers continued to be surprised by operators releasing rigs and the decisions that they're making. So from a cadence and velocity perspective, I don't think we're in a position of providing any insight. We monitor it very closely and we would like think that will closer to the trough than perimeter way.

[Operator:]

Thank you. And our next question comes from the line of Tim Horan with OPCL. Your line is now open.

[Tim Horan:]

When the market does turnaround do you think we'll see the land rig kind of ramp up first and what kind of lag do you think we can have on the offshore?

[Marty Jimmerson:]

Fair question Tim. The land business is as we've discussed in the past is in a cycle, it's going to be the first asset that's get laid down, it's also going to be the first asset that gets picked up when activity remains. As I am sure you've noted in our earnings release, our other sites have declined from 493 sites as of last year's first quarter down to 287 that's in line with the decline in the U.S. land business and that's what attributable to that decline. I think as of last week, we were below 400 U.S. land rigs working. So the answer is that's contributed to decline there, it's a lower revenue number. Our suspicion or our expectation is that land rig can and will go back to work sooner than the offshore rigs will. The drilling costs are cheaper. The breakeven costs are lower on land and they can get commodity to market quicker. So I would say that when it does turn that we would expect the land business activity to be a sign that we were getting there. With respect to offshore drilling, that's a much harder question and it's more complicated in the sense that amidst the rigs that are prepared to go -- that are in service and ready to go back to work, they can mobilize the rig to a location and start drilling as they have crews and their equipment has been maintained while it's been inactive. The rigs that have been stacked for a period of time anywhere from several months to a couple of years, we're talking probably hundreds of millions of dollars to put them back to work and probably six months, minimum three, possibly nine months to get them back into service. I think as many of our callers may be aware, there was a drill ship that was recently auctioned for $65 million and that's compared to a brand new drill ship which is typically 500 million to 600 million or more. But the expectation is that that drill ship is going to have stacking costs while it’s waiting for the market to recover and some of the public announcements that we’ve seen have indicated that while the purchase price is 65 million the stacking cost and reactivation cost could be probably $200 million to $250 million. So, you’re going to end up seeing a drill ship all in when the market returns that you’re going to be in on at $0.50 on a dollar of a new drilling rate. Those decisions will not be made quickly and swiftly, I suspect that the drilling rig owners will want longer term contracts to ensure that it justifies putting the capital to work and they would not return the rigs to work for a three months job, they’ll need longer term contracts to justify the utilization of capital.

[Tim Horan:]

So do you have a sense when you talked to your land drillers what price point they want to see before they start drilling again? And maybe as the thinking for the offshore and I’m assuring offshore guys are going to want higher price point, just any color there?

[Marty Jimmerson:]

Just directionally again it's going to be easier for the land operators to go back to work. They already have that acreage in place and so you can probably pick up land rigs that at a reasonable rate today, if not better. The offshore drilling I suspect talking to our customers that depending on weather it’s shallow water or deepwater what will really drive the decision will come down to how comfortable is the operator and we’re assuming that it’s a major operator. How comfortable are they that the volatility of oil has somewhat stabilized. If oil were to spike to $60, I don’t necessarily think you’re going to see a bunch of majors running out and drilling right away because you couldn’t -- until we get some stability in the price of oil it may not change. But it certainly will help to get there, maybe they take on smaller projects until they get the comfort level that the majority volatility is over with.

[Tim Horan:]

And just lastly I know you talked about 77 total potential cold stack rigs that you’ve been notified of. I am assuming there is going to be more notifications to come, do you have a rough idea when you mean -- you do the analysis, I mean I know it's hard to predict. But how many more we could potential see or will they -- maybe a little bit more color around that or little bit of maybe more sense? Thanks.

[Marty Jimmerson:]

Tim, it's hard to predict. Yes we’d like to think we’re closer to the trough than not and I think that’s going to dictate where the cold stacking stocks.

[Operator:]

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Chip Schneider for closing remarks.

[Chip Schneider:]

Okay, thank you, Chelsea. I would like to thank everyone for joining us today. And from me and Marty we appreciate your interest in RigNet and look forward to talking to you next quarter. Thanks very much.

[Operator:]

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