RigNet Inc
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Ladies and gentlemen, welcome to the RigNet’s Third Quarter 2016 Earnings Conference Call. My name is Leanne, 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. [Operator Instructions] I will now turn the presentation to Chip Schneider, RigNet’s Senior Vice President and Chief Financial Officer. Mr. Schneider, please proceed.

[Chip Schneider:]

Thank you, Leanne. Good morning and welcome to today’s call to discuss RigNet’s third quarter 2016 results. With me today are Steven Pickett, CEO and President, as well as other members of our executive team. Yesterday, after the markets closed, we issued a press release regarding our third quarter 2016 earnings. The release is available on our website at www.rig.net. Steve will begin today’s call with a review of our third quarter business performance, and then I will follow-up with some financial details. Steve and I will then open up the call for 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 risk and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings. Now, it is my pleasure to turn the call over to Steve Pickett.

[Steven Pickett:]

Thank you, Chip, and thank you to all of our listeners for joining this third quarter 2016 earnings call. Today on our call, I’ll provide a high level summary of our third quarter financial results and I’ll talk about our work in the quarter to drive the three strategic changes I spoke about during our second quarter earnings call. These changes are designed to improve financial performance and increase shareholder value. As a reminder, the three initiatives are to, number one, increase ARPU through the commercialization of what are generally higher margin over-the-top-solutions including SaaS, software as a service; base applications; and cyber security solutions. Two, to diversify our business outside of the energy sector and add scale to improve financial results. And three, to drive operational improvements in every area of our business. As outlined in our press release, third quarter revenues were $50.6 million, and adjusted EBITDA was $8.5 million, both representing declines relative to the prior quarter and the prior year’s quarter. This revenue trend mirrors the trend many companies are experiencing who serve the oil industry. In terms of unlevered free cash flow, I’m pleased to announce that due to our focus on cost reductions and improved operational efficiencies coupled with tighter management of CapEx, we generated $6.6 million of unlevered free cash flow during the quarter, down from the year ago period but up from last quarter’s result of $4.0 million. At the end of the third quarter, RigNet was billing on a total of 194 offshore rigs. In the third quarter, we had a net decline of 16 rigs, primarily due to stacking of rigs in a macro environment that appears to be seeking stability. Our estimated market share for the quarter on active and addressable offshore rigs which excludes those rigs under construction that are cold staked or are working in sanctioned countries was 27.5%, down from a market share of active and addressable rigs of 29.5% in the prior quarter. We believe this decline is largely due to stacking by our customers and rig additions by state-owned rig companies, and is not materially due to competitive losses. Average revenue per offshore rig declined 8.3% due to reduced multi-tenant revenue and pricing pressure in the market. Since we started reporting rig stacking in late 2014, we’ve been notified directly by customers or through public announcements that a total of 102 offshore drilling rigs we serve will be or have been cold stacked or scrapped, an increase of 7 compared to the prior quarter. By the end of the third quarter, we had stopped service on a total of 92 of those 102 rigs. This leaves another 10 offshore rigs that we expect will be leaving surface. We expect that there will be additional rigs removed from service through 2017. Turning back to our three strategic initiatives, we have now established two new business units. One, focused on SaaS applications and cyber solutions, and the other focused on the internet of everything. I’m pleased with the progress our teams have made preparing initial solutions for the market and the work they are doing to leverage our existing capabilities, including leveraging our scale of business and the selective SaaS solutions that we previously made available to customers on a one-off basis. Related to the second initiative, we are actively exploring opportunities to further diversify our business by entering new vertical markets and are leveraging both inorganic and organic growth options. Our work to organically grow our business in maritime and in the mining markets has resulted in new orders valued at approximately $200,000 in MRR, Monthly Recurring Revenue, just this quarter. Related to the third initiative, driving improvement in the operational performance, adjusted EBITDA and growth and unlevered free cash flow speak to some of the progress we’ve made in this area during the quarter. We’ve also found in the process of globalizing our business, meaningful going forward opportunities to reduce our fixed network costs, opportunities to streamline our regional network operation centers, and opportunities to implement best practices across our global field operations, all which will further reduce our cost structure. Additionally, during the third quarter, we substantially completed our implementation of SAP B1 that means CapEx for the project has substantially come to an end, and we will be prepared to capture additional operational efficiencies on this global platform as we move into 2017. As an update on our restructuring activities that is the plan we announced early in the third quarter that is expected to reduce headcount worldwide by 12% and operating cost by $3.5 million, we are on track to substantially complete that plan by December 31st of this year, which we expect will favorably impact 2017 financial results. Through the end of the third quarter, we have completed more than 75% of the planned reductions. In terms of customer contract activity that is activity valued at over a $1 million in TCV or Total Contract Value, we secured the following

[Chip Schneider:]

Thank you, Steve. As Steve mentioned earlier, quarterly revenue was $50.6 million during the third quarter of 2016, representing a decrease of $4.3 million compared to the prior quarter. The decrease in revenue was primarily due to a $3 million decrease in managed services revenue coupled with a $1.3 million decrease in TSI revenue. With regard to the managed services decrease, $1.4 million was attributable to reduced offshore drilling sites served due primarily due to stacking; $1.4 million was due to reduced offshore ARPU, resulting from reduced operator utilization. Compared to the prior year quarter, total revenue decreased $15.7 million, of this, managed services revenue declined $13.6 million and TSI revenue declined $2.1 million. With regard to the managed services revenue, $6.5 million of the decline was due to decreased offshore drilling sites served, primarily due to stacking and $4.9 million was due to decreased ARPU associated with our offshore drilling sites, primarily from reduced multi-tenant revenues; a decrease of $5.5 million from other sites, $1.8 million resulting from declined activity in our North American land rig operations due to significant reductions in U.S. onshore drilling activity over the past 12 months; and Maritime sites declined $1.1 million. Production sites declined $0.5 million and international land sites declined $400,000. The declines in managed services were partially offset by $7.1 million in revenue contributed by TECNOR year-to-date in 2016. SGA&A expenses were $12.2 million in the current quarter compared to $15.5 million in the prior quarter and $15.7 million in the prior year quarter. In the third quarter, we reported net restructuring charges of $800,000 offset by a pickup of $1.3 million, from the change in fair value of the TECNOR earn-out. In the previous quarter, we reported restructuring charges of $1.1 million, impairment charges related to intangible assets of $400,000, CEO search cost of $200,000, and ERP implementation cost of $600,000. In the previous year quarter, we recorded impairment charges of $12.6 million and restructuring charges of $1.3 million. Restructuring charges, changes in the fair value of the TECNOR earn-outs and impairment charges are added back or subtracted as appropriate in the calculation of our non-GAAP measures. To add more color to the third quarter restructuring charge of $800,000 it consists of $1.8 million in charges associated with the reduction of 73 employees, partially offset by a pickup of $1 million related to favorable outcome on real estate restructuring activities. The real estate restructuring activities consist of a net reversal of $500,000 of charges previously accrued in cost of services, resulting from a contractual lease assignment for all states at one of two facilities near at the [indiscernible] Louisiana. The reversal of $300,000 charges previously accrued in cost of services could dismantle our former operating teleport, the reversal of $500,000 of charges previously accrued in G&A expense associated with the sub lease of our Downtown Houston office space at better rates than initially estimated, partially offset by 300,000 of current period lease exit cost associated with the recent movement of our Downtown Houston Network Operations Center to another site. Restructuring charges are added back to net loss to calculate our non-GAAP measures. GAAP net loss attributable to common stockholders was $1.7 million or $0.09 per share in the current quarter compared to a net loss attributable to common stockholders of $4.8 million or $0.27 per share in the prior quarter and net loss attributable to common stockholders of $10.9 million or $0.62 per share in the prior year quarter. As of note, the net loss of $1.67 million for this quarter includes the $1.3 million benefit from the change in fair value of TECNOR earn-out. During the third quarter of 2016, adjusted EBITDA was $8.5 million compared to $8.6 million in the prior quarter and $14.5 million in the prior year quarter. The decrease resulted primarily from lower revenue partially offset by savings generated from cost containment actions. As of note, we have subtracted the $1.3 million benefit from the change in fair value of the TECNOR earn-out in our calculation of adjusted EBITDA. We are pleased to report that capital expenditures grew $1.9 million in the third quarter compared to $4.7 million in the prior quarter and $6.1 million in the prior year quarter. As a result, unlevered free cash flow as defined as adjusted EBITDA less capital expenditures was $6.6 million compared to $4 million in the prior quarter and $8.4 million in the prior year quarter. Turning to the balance sheet as of September 30, 2016, cash was $57.2 million, net working capital excluding cash was $30.6 million, and our outstanding long-term debt excluding current maturities of $8.5 million was down to $60.1 million. In August, RigNet substantially completed its global three [ph] phase implementation of SAP B1 and is now optimizing use of its platform throughout its operations. Wrapping up, our third quarter performance was influenced by a continued deterioration in offshore oil and gas activity, restructuring costs, restructuring benefits, and lower CapEx. In recent quarters, RigNet has substantially improved its cost structure, its systems and its processes to better address challenges in its core market, all with the clear objective of improving our operating leverage and scalability for when market conditions do improve. As the oil and gas industry converges on greater stability, we firmly believe that by focusing on key relationships in our core business, we have opportunities to develop new revenues with existing customers by which having more relevant through commercialization of over-the-top and IoT services, opportunities in new vertical such as maritime and mining, and continued optimization of our business operation. Importantly, we continue to maintain suitable cash liquidity and unused credit capacity enabling us to meet the requirements of current market conditions and further positioning us for both organic and inorganic opportunities. With that, Steve and I would be pleased to address any questions that you may have. Operator, please open the line.

[Operator:]

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

[Alan Klee:]

The dropping CapEx, could you talk about that a little bit more, and is that -- like in the current environment, is that where we should be thinking the run rate is now?

[Steven Pickett:]

Our CapEx is dropping off, one, as you see, the contract level off, the new contracts level off from in the past, our spending has come down. We are also no longer spending on SAP B1. So, there are number of things that are coming together to help us manage CapEx much more effectively. On top of that we’ve improved our processes internally and we’re managing our capital equipment much more effectively now.

[Alan Klee:]

Okay. And in terms of kind of your customer count by different types, while off shore was down, the rest of the areas were either stable or up sequentially with maritime actually a pretty big jump sequentially. So, I was just wondering for the non-off shore drilling area, if you could maybe comment on kind of what’s going on there that’s kind of on the positive side, it seems?

[Steven Pickett:]

I guess the good news is production has been pretty stable, productions of different business from drilling. We expect that as production starts up on some of these sites, it will continue in many cases, particularly offshore. So, we have not seen a lot of variation in offshore production sites. Maritime is a market that we’ve targeted. So, we’ve actually gone out to spend more effort on obtaining new maritime sites. So that’s an area of focus, and it’s not necessarily driven by drilling per se. International land, quite honestly, international land has not suffered nearly as badly as U.S. land has. We continue to see U.S. land opportunities but international land has been pretty stable over time. So, we continue to compete effectively in that market. On U.S. land, we are starting to see some opportunities arise as that market picks up. So that’s more or less what’s happening outside of the offshore drilling space.

[Chip Schneider:]

And Alan, maybe I’ll add two comments to that. First of all, in terms of CapEx, I think part of the improvement in terms of CapEx is related to the effects of our move to a global structure, organizational structure and that is certainly also as a result of some better visibility of our worldwide inventory to our operations around the world. Also in terms of non-offshore activities, we’ve also made some progress in the mining sector as well, nothing material in terms of financial results, but I’m pleased with the progress that the sales team is making related to entering and assessing that market.

[Alan Klee:]

Okay, great. And also I noticed gross margins also improved sequentially and I was wondering if that’s something you think is sustainable?

[Chip Schneider:]

So, I think to some degree it is. We are looking at other costs in our P&L that can be addressed over the next several quarters and we do see a potential to address cost in our network or fixed network, as well as staffing which we believe there are still opportunities as we globalize our business there continue to be efficiencies that we can harvest from realignment of our Company’s operations. So, I would say between continued opportunities to reduce staffing, the globalization of our business, which takes some of the slack out of what sometimes occurs in regional structures and the fact that we are now focusing on fixed network costs and where we do see tangible opportunities to reduce cost, we’re going to continue to focus on and trying to keep these margins as healthy as we can.

[Operator:]

And our next question comes from Tim Horan with Oppenheimer. Your line is open.

[Ray McDonough:]

Thanks guys. This is Ray McDonough on for Tim. Just as a quick follow-up. You’ve done a great job on cost rationalization, both on OpEx and CapEx, as you’ve talked about. As you kind of look into 2017 and beyond, do you think this is sustainable? I’m just wondering how do you try to balance cost controls with investing for eventual turnaround. And just as a follow-up, can you quantify how much of the CapEx drop off this quarter was from the SAP implementation?

[Steven Pickett:]

Yes. So, let me start with some comments about our ability to respond the market that turns around. We feel confident in our ability to respond. As I mentioned in my prepared comments, we will not only respond by growing the business again by bringing on full-time employees, we will start by leveraging our supply chain and adding resources on a variable cost basis in order to address the increased demands that would then actually come to the business. And in terms of SAP, Chip do you want to take that.

[Chip Schneider:]

Yes. On SAP, Ray, we think it’s probably about $0.5 million or so for the quarter that has come out of CapEx as a result of that.

[Ray McDonough:]

Great, thanks. And then just on the offshore rigs, you mentioned that you have seven additional rigs that should be coming offline that you’ve been notified about. It seems to somewhat have slowed from prior quarters? Do you have any expectations as you move into 2017 of what the pace or what declines might be as the additional seven and any signs of kind of reaching a bottom in terms of rig declines?

[Steven Pickett:]

I think we’re looking at all of the same indicators that you are. We’re seeing -- we just came through the earnings cycle for a number of our customers. And I think we’re seeing that people are still cautiously optimistic that sometime in 2017 there should be a leveling out of business. We’re hopeful that that extents to our business as well. But we are seeing some land rigs go back to work obviously and there is talk that the first wave of offshore rigs will be the jack-up fleet. And so it’s hard to call a bottom on this but I do think there is a lot of good research out there that’s starting to come to your conclusion that sometime next year we may see a bottom to this.

[Operator:]

[Operator Instructions] At this time, I am showing no further questions. I would like to turn the call back over to Mr. Chip Schneider for closing remarks.

[Chip Schneider:]

We would like to thank you for joining us this morning for our third quarter earnings call. We look forward to talking with you at the end of the fourth quarter after the end of the year. Thank you very much. Bye now.

[Operator:]

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