RigNet Inc
Q4 2016 Earnings Call Transcript

Published: 7 Mar 2017

[Operator:]

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

[Chip Schneider:]

Thank you, Sandra. Good morning, and welcome to today’s call to discuss RigNet’s fourth quarter and full-year 2016 results. With me today is 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 four quarter 2016 earnings. The release is available on our Web site at www.rig.net. Steve will begin today’s call with a review of our fourth quarter business performance, and then I will follow-up with some financial details. Steve and I will then open up the call for the 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 -- 2017 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 Steven Pickett.

[Steven Pickett:]

Thank you, Chip. And thank you to all of our listeners for joining this fourth quarter 2016 earnings call. Today on our call, I’ll provide a high level summary of our fourth quarter financial results, and talk about both are ongoing work to drive operational efficiencies and our efforts to expand over-the-top solutions for customers. In terms of financial results, as outlined in our press release; fourth quarter revenues were $52.8 million; net loss attributable to common stockholders was $3.8 million or $0.21 a share; adjusted EBITDA was $9.4 million; and unlevered free cash flow was $5.7 million; CapEx was $3.7 million, resulting in second half 2016 CapEx total of $5.6 million. Revenue for the quarter was helped by a sale of telecommunications hardware to support and expanded relationship with a large oil and gas customer. I’m pleased with the revenue performance for the quarter, particularly given the continued challenges seen in the offshore rig market. I’m also pleased with our fourth quarter CapEx performance, which decreased by $6.8 million relative to fourth quarter of 2015 spend at $10.5 million. The $1.8 million of CapEx increase relative to third quarter of 2016 was largely due to success based commitments to two large energy customers. To provide a view on the current situation related to offshore rig stacking. At the end of the fourth quarter, RigNet build on a total of 175 offshore drilling rigs. This represents a net decline of 19 rigs, primarily due to stacking. Since we started reporting rig stacking in late-2014, we’ve been notified directly by customers or through public announcements that a total of 106 offshore drilling rigs we serve will be or have been cold-stacked or scrapped, representing an increase of four compared to the prior quarter. By the end of the fourth quarter, we had stopped billing on a total 92 of these 106 rigs. This leaves another 14 rigs that we expect will stop billing. There may of course be additional rigs stop billing during 2017. On a positive note, average revenue per offshore rig increased approximately 1.4%. As an update on our restructuring and our cost cutting activities, in fourth quarter 2016, we initiated additional restructuring, which will result in a reduction of approximately 6% of our workforce worldwide. We expect to substantially complete that plan by June 30, 2017, which should favorably impact our second half of 2017 financial results. For the year-ended December 31, 2016, we have implemented restructuring activities that included reduction of approximately 17% of our workforce in 2016, after taking into consideration the TECNOR acquisition. In terms of our non-employee cost structure, we’ve renewed and are in the process of renewing supply contracts with satellite service providers that will begin reducing our cost of bandwidth starting in mid-2017. We continue to look across our business to find ways to optimize our spent and to drive operational efficiencies that are supported by the new global organization structure that we put into place during the third quarter of 2016. In terms of our efforts to increase our over-the-top portfolio that further supports our customers’ needs, we’ve made solid progress in the quarter. Since our last call, our global sales force has been trained. We’ve engaged with many of our customers on this topic. And we started trials with 10 of customers who are now testing or have tested at least one of our OTT solutions. As a reminder, these solutions will provide a more relevant set of services for both energy and non-energy customers; will drive increases in ARPU; and is expected to improve shareholder value, as either often higher margin services than our traditional managed services. Recently, one of these 10 trials resulted in a new three-year contract that will supplement the managed services we deliver to that customer. And as expected, it is anticipated to drive greater value to our customer and increase ARPU on that fleet. In terms of our managed services business, revenue was flat quarter-over-quarter with $47.2 million, suggesting some potential stabilization in our market. Related to customer activity and since our last earnings call, we also completed a three-year of contract renewal process with two of our large global managed services customers. To further diversify our energy related managed services business, we’ve also increased our focus on growing revenue and production related assets. The hardware of sales that I referenced earlier, which will include recurring revenue component, is an example of the key win in the FPSO market. But we’ll be providing ongoing network maintenance service to this customer on seven such assets after the installations are complete. Under new leadership, our SI&A business is being streamlined and improved processes or being implemented globally. Revenues for the quarter were $5.6 million, up from $3.4 million in the prior quarter. The year-over-year comparisons will markedly improve, relative to the prior quarter, which was negatively impacted -- it was markedly improved relative to the prior year quarter, which was negatively impacted by contract adjustments related to a contractual dispute. In terms of our work to add new capability and additional scale to our business, we continue to look for inorganic opportunities to grow through selective M&A, and we’ll continuously assess prospect as they become available. In closing, during the fourth quarter our team executed well on our objectives to cut costs; to more effectively manage CapEx; to increase free cash flow; to improve our balance sheet; and to further enhance our position with customers, related to over-the-top services. 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, I’ll now turn the call back over to Chip for a more detailed financial review. Chip?

[Chip Schneider:]

Thank you, Steven. As Steven mentioned earlier, quarterly revenue was $52.8 million during the fourth quarter of 2016, representing an increase of $2.1 million compared to the prior quarter. Compared to the prior year quarter, total revenue increased $0.6 million. The increase compared to the prior year quarter resulted primarily from SI&A revenue, which increased $10.5 million, partially offset by $9.9 million decrease in managed services revenue. The increase in SI&A revenue was due to an increase in activity associated with SI&A contracts in the current quarter combined with $9.6 million reduction in revenue associated with a contractual dispute in the prior year quarter. SG&A expenses were $14.4 million in the current quarter compared to $12.2 million in the prior quarter, and $15.7 million in the prior year quarter. In the fourth quarter of 2016, we recorded approximately $2.3 million of revenue related to an equipment sale, which is not expected to reoccur. Additionally, we recorded restructuring charges of $0.6 million related to the reduction of an additional 6% of our workforce worldwide. In the prior quarter, we recorded net restructuring charges of $0.8 million, offset by a pick-up of $1.3 million from the reduction in fair value of the TECNOR earn-out. In the previous year quarter, we recorded impairment charges of $1.7 million and net negative restructuring charges of $0.1 million. Restructuring charges, changes in the fair value of the TECNOR earn-out and impairment charges are added back or subtracted as appropriate in the calculation of our non-GAAP measures. GAAP net loss attributable to common stockholders was $3.8 million or $0.21 per share in the current quarter compared to a net loss attributable to common shareholders of $1.7 million or $0.09 a share in the prior quarter, and net loss attributable to common shareholders of $11 million or $0.63 per share in the prior year quarter. During the fourth quarter of 2016, adjusted EBITDA was $9.4 million compared to $8.5 million in the prior quarter, and a negative $3.2 million in the prior year quarter. The increase from the prior quarter resulted from primarily higher revenue coupled with savings generated from cost containment actions. Capital expenditures were $3.7 million in the fourth quarter compared to $1.9 million in the prior quarter, and $10.5 million in the prior year quarter. As a result, unlevered free cash flow as defined as adjusted EBITDA less capital expenditures was $5.7 million compared with $6.6 million in the prior quarter, .and a negative $13.7 million in the prior year quarter. Turning to the balance sheet, as of December 31, 2016; cash was $57.2 million; net working capital, excluding cash, was $26.7 million; and our outstanding long-term debt, excluding current maturities of $8.5 million, declined to $53 million. In December of 2016, RigNet completed its global three-phase implementation of SAP Business 1 and is now optimizing use of this platform throughout its worldwide operations. Wrapping up, our fourth quarter performance was influenced by continued softness in oil and gas activity, restructuring costs and restructuring benefits from previous actions. RigNet continues to make improvements in its cost structure, its systems and its processes, all with a clear objective of improving our operating leverage and scalability for when market conditions do improve. As the oil and gas industry continues to show signs of recovery and 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 becoming more relevant through commercialization of over-the-top services. Importantly, as we pursue new service offerings with our customers, we continue to strengthen our balance sheet by improving our cash cycle, reducing debt, and maintain strong liquidity to better positioning us for organic and inorganic investment opportunities. With that, Steven 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 the line of Tom Dillon with William Blair. Your line is now open.

[Tom Dillon:]

Can you provide a little more detail around what additional services or a better service you can provide your customers that can lead to that ARPU growth?

[Steven Pickett:]

Let me comment on additional services we can provide. As I think I talked in previous calls, the Company historically has developed applications that were often developed on a one-off basis, and we’re going through the process to fully commercialize those and make them available broadly to our entire customer base, while we’re adding to that portfolio. The applications we broadly put into three buckets; one bucket is related to applications that create a safer environment on a rig; another set of solutions is related to providing entertainment services for people who work on the rigs. So as an example somebody might be deployed on the rig for a two week period of time and that clearly, we want to make that off time for them as satisfying as possible. Because the happy crew of course is a more productive crew, so another category is around concept of crew welfare. And then the third category of best solutions is related to helping optimize the performance of the operation itself. And so, broadly speaking, those are the kinds of solutions that we provide. Those solutions might include deploying sensors on rigs that provide real-time information about localized weather conditions. As an example, that might be used by helicopter pilots to determine how to more safely land on a rig. They might include video applications that might support monitoring of activities and assets on the rig, and might include delivery of video content for entertainment services. So, those were a couple of examples of services beyond traditional communication services that we’re actively talking to our customers about.

[Tom Dillon:]

And then with regards to better services, with industry satellite launches happening over the next 18 months or so. Is there the opportunity to sell potential better data speeds going forward?

[Steven Pickett:]

Yes. The short answer is, there is an opportunity to sell more bandwidth. The other observation I’ll make that you’ve probably already made is that there is a complementary nature to what we’re doing in terms of adding new types of services and the availability of more bandwidth. So, our hope is that as we provide new services that our customers to use to enhance their business, that will actually drive the need for more bandwidth. And so, hopefully, there is indeed bit of a cycle that goes on around adding new services and then having a need for more bandwidth in order to be able to support those services and so on. So, yes, that’s one element of improved services. The other thing I would share with you is that our move to implement a global organizational design; we believe is creating a better customer experience; is creating more commonality in how we perform; and therefore more consistent level of service to our customers around the world. So, Tom, does that answer your questions?

[Tom Dillon:]

And then just a quick follow-up, you spoke to certain customers reducing bandwidth in ‘17. Can you just speak to the driving factor within that?

[Steven Pickett:]

Say that again, I’m sorry -- rephrase your question.

[Tom Dillon:]

You spoke to certain customers reducing bandwidth in 2017.

[Chip Schneider:]

We talked about bandwidth cost. We were reducing bandwidth cost. And that’s a key part of our cost structure with bandwidth.

[Steven Pickett:]

By the way, thanks for bringing that out in the event we just said it incorrectly or inaccurately. But yes, there is -- our two big costs are related to bandwidth and related to people of course, and people make our business work. So, it’s a really important part of our cost structure. But we’re very much focused on see what we can do to drive down that bandwidth component of our cost of goods sold. And we have opportunities to do that through 2017 through some contract renegotiations.

[Operator:]

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

[Allen Klee:]

Can you give us some color on expectations of CapEx and if working capital is likely to be a use or a source of cash in ’17. Thank you.

[Steven Pickett:]

I think we’ve made a good effort in ’16 in managing our CapEx. We did see some success based CapEx toward year-end, which is always good to see, as we deploy new equipment for new contracts or renewed contracts. The outlook for ’17, we are continuing to be very vigilant in how we manage our CapEx. We do have the opportunity to reuse some of our equipment that’s been selected on stacked rigs over the past year or two. So, that may help us with our CapEx spend. Additionally, we will have very little, if any, CapEx related to SAP in ’17. SAP is complete now. The only potential expenditure there would be for any upgrade or anything we do there. But for the most part, the SAP CapEx is behind us and we did see some of that in ’16 as we also did in ’15. But for ’17, we don’t expect to see much in the way of SAP or non-success based type CapEx. We will have a few things that we’re going to do internally to upgrade our networks, and so forth. But it should be minimal relative to past years. So, not expecting a spike in CapEx, and we will the watching this very carefully. The working capital, it’s a good news/bad news thing. We are working very hard on the cash cycle, which all things being equal, and there is no change in the market this year. We would probably see some improvement in working capital, meaning reduction in working capital employed. However, if we do see an increase in sales, I would expect that we would have a use in working capital, which would be a welcome opportunity. But I do expect that we will be maybe seeing a little bit of both, I’m hopeful. And we are managing this on a very close basis. We’re putting in resources that we believe can help us drive our DSOs and our DPOs more effectively, and help us improve that cash cycle more so than has trended in the past.

[Allen Klee:]

Thank you. And I may have missed some of what you said about your cost cutting plan. Did you say you cut 6% of the sales force during the quarter? But then you also said that something about how some of it will continue through the first half of ’17 and then get a benefit in the second half. Could you maybe go through that? And if I can get some sense of what that benefit could be. Thank you.

[Steven Pickett:]

Sure. So I’d comment on a couple of things. One, our total reduction through rightsizing in calendar year ’17, including the TECNOR acquisition of course, and that was a reduction of about 17% of our workforce. In the fourth quarter, we also put together a plan to implement further restructuring that we have begun to implement here in the first quarter that will reduce workforce by an additional 6%. And that is expected to be completed by the end of second quarter. Therefore, having an effect, we expect to have an effect in the second half of the year. I should also clarify that that wasn’t sales specifically, that was a reduction in worldwide workforce.

[Allen Klee:]

And then finally, with the completion of the ERP contract. What type of benefits are you expecting from that?

[Chip Schneider:]

Allen, it’s difficult to quantify at this point. We’re rebuilding processes. We do expect to gain some efficiency through this overtime. But we’re rebuilding processes to utilize the capabilities that our new platform provides us. So, I don’t really have a number I can give you to that.

[Allen Klee:]

Okay, thank you so much.

[Steven Pickett:]

Allen thanks for the question. I’ll also add, we’re certainly pleased that we’re on one system now rather than multiple. So, we’re of the opinion that should help us streamline what we do in many areas of the businesses.

[Operator:]

And I’m showing no further questions, at this time. So, I would like to return the call to Mr. Steven Pickett for any further remarks.

[Steven Pickett:]

Great. Thank you, Sandra. And thank you all for joining the call. We appreciate your interest in RigNet, and I look forward to reporting on further progress in the business on our next call. In the meantime, if you have further questions or comments about this call or other topics. Please don’t hesitate to reach out to our Investor Relations contact or to Chip or to me directly. So, again, thank you for joining. We appreciate your interest in RigNet.

[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.