RigNet Inc
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good day ladies and gentlemen, and welcome to the RigNet First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would now like to introduce your host for today's conference, Marty Jimmerson, RigNet Chief Financial Officer. You may begin.

[Marty Jimmerson:]

Thank you Kevin and good morning, everyone. We appreciate you joining us today to discuss RigNet First Quarter 2013 results. Today’s Conference Call was preceded by our earnings released yesterday afternoon after the market closed. This release is available from our investor relation section of our website. Today’s conference call should be considered together with our earnings release and related financial information. With me on today’s call is Mark Slaughter, our CEO and President. Mark will open this morning’s call with a review of the first quarter 2013 highlights and then I will provide financial details. We will then open the call up for a few general questions. Part of our discussion today may include forward-looking statements. Please review the Safe please and in our SEC filings that describe factors that could cause our actual results to differ materially for those projected by us in our forward-looking statements. Also we will mention financial terms such as adjusted EBITDA and other non-GAAP measures of financial performance. We believe that the presentation of these non-GAAP financial measures provides useful information regarding additional financial and business trends relating to the company’s financial condition and result of operations. A reconciliation of GAAP and non-GAAP measures has been provided in our earnings press release. At this time I will turn the call over to Mark Slaughter.

[Mark Slaughter:]

Thanks Marty. To our listeners from around the world, I want to welcome you to our first quarter 2013 earnings call. Our RigNet team, I am pleased to report that first quarter of 2013 was another record quarter for our financial results. I was also pleased that we showed growth in both our core services to the offshore drilling industry and in our step out growth initiatives that position RigNet to serve the oil and gas industry across the light of the field. Speaking briefly to our financials, our first quarter revenue was a record $52.8 million including improved contributions for Nessco Systems Integration business that we acquired last summer. Adjusted EBITDA was a quarterly record of $12.6 million and net income improved to $3.7 million or $0.22 per diluted share. As the vast majority of our capital expenditures are revenue generating investment at the edge, they can serve as a leading indicator of future results, much as contracted backlog in our systems integration business. RigNet reported capital expenditures in the quarter at $6.6 which was primarily represented by success based capital expenditures but also included the buildup of spare equipment for expected future opportunities and commenced with an update to our global trust of network that will increase the capacity and redundancy. In our core offshore rig communications business, the overall market count and active and addressable rigs during the quarter from 771 to 780 led by improvement in the number of fixed jack of rigs. We showed growth in the quarter the number offshore rigs served from 237 to 245 increasing our global share of addressable offshore rigs to almost 31%. This improved global share with fixed and floating rig served as we captured those new goals and existing rigs up the quarter. On (inaudible) front we’re tracking 78 offshore rigs with floaters and premium jack up that are expected to be delivered in 2013. We have already won 21 new built rigs or 27% so far this year and are working hard to (inaudible) in excess for current global share during the year. Our ARPU improved slightly in the quarter which was driven by improvements in secondary customer penetration, sales and value added solutions and bandwidth as well as rig mix. Our sales and performance pipelines are made very strong in offshore. In our U.S. land rig communications business the overall market rig count lowered slightly in the quarter from 1758 to 1743 rigs as gas directed drilling declined faster than the improvement in oil directed drilling. We decline this well from 282 to 271 U.S. land rigs served between our share values to just under 16% in a highly competitive market, slightly offsetting the counts decline we saw improved ARPU coming from the combination of increase of sales of value-added solution and improved rig mix. Looking forward in U.S. land we have added new management on top with a clear directive to improve performance and competitiveness regardless of underlying market conditions or competitive dynamics, this includes the new Vice President for the Western hemisphere hailing from (inaudible) services industry and a new general manager over our U.S. business. Already this year we have won a fleet wide contract for a (inaudible) US land driller and are putting finishing touches to major expansion our of Lafitte super service center. Our other site count grew by 33 to 608 sites in the quarter brining our overall physical site count to 1124 physical sites served around the world. These are on other to capture the counts from our strategic growth initiatives field officer supporting offshore drilling as well as completion in production sites in our U.S. land business. Turning to some of our strategic initiatives in offshore production we won number of floating production facilities fixed platforms and accommodation vessels in the first quarter that planned to our results going forward. This included a key platform where an offshore Equatorial Guinea for a Nessco customer that we are treating as a pull through with. Also in April, we won four FPSO's in Brazil that are owned by long time and large Nessco clients again providing credence to our acquisitions fees disregarding Nessco. In Energy Maritime, our most competitive stepout area, we remained relatively flat in the quarter but in April we landed a contract to serve 40 vessels in the Gulf of Mexico for an Energy Maritime vessel operator. In our international land stepout initiative we continue to show progress in the Midwestern area both from the drilling side as well as serving oil through a services companies in support early completion of production. This is also a growth area along with new ultra deep water market that has caused us to expand our geographic footprint both from customer pull opportunities as well as proactive entry based on our own research. Our Nessco systems integration business was a strong contributor in the quarter. We also had important SI project wins in January, March, April and already in May total sum 14.4 in additions to backlog from the beginning of the year. As you know our remote communications service model takes us to every quarter of the globe and this involves working as in difficult places. Recognizing these risks, our team at RigNet takes compliance very seriously and on the compliance front our internal compliance program has recently detected potential violations of U.S. sanctions and export regulation by one of our foreign subsidiaries in connection with certain of our customers rigs that were moved in the territorial waters and countries that are sanctioned by the United States. Following the investigations by outside council, we’ve self-reported the matter to U.S. authorities and we will continue to cooperate with them fully in the future. While we were disappointed to find potential violations we are generally pleased that our compliance programs have brought the issue to our attention. Marty will have some additional color a bit later in his part of the prepared remarks. In closing, I am pleased with the solid performance of the first quarter by the management team and our dedicated employees around the world as we deliver record financial results and gain traction of both our core services to offshore rigs and the stepout areas of our growth strategy. As RigNet sticks to serve the oil gas industry with remote communications solutions across the life of the field from drilling to production. As we continue to evaluate M&A opportunities that may jump start elements of our strategy, I am equally encouraged by the high business activity we are experiencing around the globe here in the second quarter which gives me confidence in our direction and market outlook for the year. With that, I’ll turn the call over to Marty for more detailed financial review. Marty?

[Marty Jimmerson:]

Thank you, Mark. Now, let me share some more detail about our first quarter 2013 financial results. During the first quarter of 2013, we reported a record revenue about 52.8 million, revenue increased 3.5 million or 7.2% quarter-on-quarter. The increase in revenue compared to the prior quarter was primarily attributable to systems integration work; excluding Nessco our organic revenue increased 4.8 million or 15.4% compared to the first quarter of 2012 primarily due to increases inside or and increasing demand for our services. As of March 31st 2013, we were billing globally on 245 off shore drilling rigs. An increase of eight, from December 31st 2012, and up 12 from March 31st 2012; as of March 31st 2013, we were billing on 271 US onshore drilling rigs, a decrease of 11 from December 31st 2012 and down 52 from March 31st 2012. Globally we were billing on 608 other sites which is an increase of 33 of December 31st 2012 and an increase of 115 from March 31st 2012. As a reminder, other sites include completion and production sites in US lands; drilling completion and production sites in International land markets, off shore production sites, Energy Maritime Vessels and man camp field offices and shore basis. Adjusted EBITDA increased 800,000 or 6.8% quarter-on-quarter to a record 12.6 million in the first quarter of 2013. The increase is primarily attributable to increased contributions from systems integration during the quarter partially offset by increased SG&A salaries expense and additional proficiencies. Adjusted EBITDA increased 40.3 million or 36.0% as compared to the prior year quarter primarily due to increased sites served, improvement in average revenue earned per site and contributions from Nessco systems integration business. Adjusted EBITDA margin decrease slightly to 23.9% in the first quarter from 24.0% in the fourth quarter of 2012 and 29.7% in the prior year quarter. Excluding the charges related to our potential compliance matters that I will discuss later in more detail; adjusted EBITDA for the first quarter would have been 13.7 million or 26.0% of revenue. Now turning to our reportable segments and leading with Americas, this segment generated revenue of 12.4 million in the first quarter which was down 3.1% quarter to quarter due to fewer US land rigs served and up 4.8% over the same quarter the last year as it was also site calls and average revenue per site, partially offset by the lower US land rigs served. Americas' adjusted EBITDA was 5.4 million in the first quarter compared to 5.5 million in the prior quarter, a decrease of 100,000 or 1.9%, Americas' adjusted EBITDA margin increased slightly to 43.6% from 43.1% in the prior quarter. Next Europe Africa generated revenue of 27.6 million in the first quarter an increase of 3.7 million or 15.3% over the prior quarter, the increase in revenue was primarily attributable to systems integration work, our SI backlog was 19.9 million at March 31st 2013 which was down from 21.2 million as of December 31st 2012, our March 31st 2013 backlog excludes a $5 million project signed in April of 2013 and a 1.2 million project signed already here in May. We view backlog as a key sign of the health in the business and a leading indicator but remind everyone that it is a project based (inaudible) business. Europe Africa adjusted EBITDA was 8.3 million in the first quarter compared to 5.5 billion in the prior quarter an increase of 2.8 million or 50.8 %, the increase is primarily related to increased systems integration revenues. Adjusted EBITDA margin percentages increased in Europe Africa to 29.9% in the current quarter compared to 22.9% in the prior quarter. For the final segment, Middle East Asia Pacific generated revenue of 12.8 million in the first quarter an increase of 300,000 or 2.2% quarter on quarter, our increase in revenue as compared to the fourth quarter of 2012 is primarily attributable to energy mirror time vessels returning to work from seasonal declines. Middle East and Asia Pacific adjusted EBITDA was 6.7 million in the first quarter compared to 6.6 million in the prior quarter an increase of 100,000 or 1.9%, Middle East Asia Pacific adjusted EBITDA margin declined slightly to 52.3% from 52.4% in the prior quarter. Turning back to the total business results, we reported total SG&A expenses of 12.5 million in the first quarter of 2013 compared to 11.2 million in the fourth quarter of 2012, an increase of 1.3 million. This increase primarily is attributable to increased compensation expenses resulting from new hires and increased stock compensation expenses. As Mark mentioned earlier our internal compliance program has recently detected potential violations for the U.S. sections regulations by one of our forum subsidiaries. We hired experienced outside council to conduct the investigation and we incurred legal expenses of 300,000 as of March 31st, 2013. We may continue to incur significant legal fees and related expenses and the investigations may involve management time in the future. Based upon the information available at this time, we currently estimate that we may incur penalties associated with these potential violations within a range of 0.8 million to 1.5 million. The company has approved a reserve in the first quarter of 0.8 million bringing our total charges related to this matter to 1.1 million during the first quarter. Reserve estimate is based on our internal investigation and no assurance can be given as to what if any penalties the authorities will impose or whether the authorities will identify or allege additional violations or remedies. Some of our recent efforts to ramp up our internal compliance capabilities appear to be justified as we continue to work in some difficult environments around the world. We reported consolidated net income attributable to common stockholders of 3.7 million or $0.22 per diluted share in the first quarter compared to 3.4 million or $0.20 per diluted in the fourth quarter of 2012. Our effective tax rate of first quarter was 40.0% compared to 34.6% in the prior quarter. Excluding charges recorded in connection with the potential violations of U.S. sanctions, net income attributable to common stockholders for the first quarter will depend 4.8 million or $0.28 per diluted share can be effective tax rate would have been approximately 35%. Now turning to the balance sheet, as of March 31st, 2013 our cash including restricted cash decreased to 57.2 million from 62.5 million as of December 31, 2012. Our restricted cash which secures performance bonds related to the Nessco systems integration business decreased by 300,000 during the quarter to 2.5 million. Our net working capital was 64. 7 million. Our debt was 58.9 million and we had no borrowings against our $10 million revolving facility. Our bank debt to adjusted EBITDA leverage ratio was 1.2 one times, and our net debt was essentially zero. During March the company amended its term loan to bear a reduced interest rate of LIBOR plus a margin ranging from 2.0% to 3.0%. Based on a ratio of funded debt to adjusted EBITDA, we estimate the revision will save the company, $100,000 in annual interest expenses. Wrapping up, we are very pleased with our first quarter financial and operational performance and we look forward to the remainder of 2013. With that we are now happy to answer your questions. Kevin please open the line for questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of (inaudible) with Jeffries

[Unidentified Analyst:]

I have actually three questions. One is on the international land side. Is that business as volatile as the U.S. land? Second is a follow up on that, how much of the international land particularly in Europe, in Middle East and Africa is in areas where there is a lot of war on terror activity happening? And the third relates to the rise of deepwater spur and the regulations that followed thereafter. In terms of how much of that, the additional regulations and the additional reporting requirements have flowed through your ARPU growth to date. And if there is scope of further growth coming stemming out from additional reporting requirements.

[Marty Jimmerson:]

Yes, it was a good question. Thanks very much. On international land we are very excited about that market. That’s why we are in the highly competitive U.S. land business because you know learning how to perform well in that business, we could dividend out those capabilities to attract the international markets. We find in international land that we have longer contracts, higher day rates and generally more attractive markets. And your questions about the Middle East obviously some concern given some of the Arab spring activities and we have certainly grown in the last few years beyond a strong base Qatar which is mostly in offshore market into several land markets across Middle East and also looking at North African and Central Asia as part of that expansion. We are excited about the prospects, we are in some areas of security concern but we think we’ve taken appropriate steps to protect employees and generally pretty excited about the opportunities from Oman to UAE to Iraq and other markets that are quite exciting. Regarding ultradeep water, I think a couple of themes around that one is, the number of ultradeep water market that’s expanding rapidly, it used to be the golden triangle of the Gulf of Mexico, Brazil, and West Africa and now its expanding maybe three to four fold around the world. Those are some of the highest bandwidth demands that we have out there. A lot of interest from operators and drillers around productive and safe operations, a lot of this is exploratory so lot of interest for real-time services and just the reliability on our offering is absolutely key in that overall equation, so we’re very attractive to that US especially about maybe security or safety concerns. While we can't delineate that specifically for you, we can tell you those demands are embedded in the demand for our services and given in prior quarters, we’ve seen some ARPU lift from bandwidth increases in associated service and that’s trend and we certainly expected to see continue.

[Operator:]

Our next question comes from Vinny Alejandro with Sig Partners. You may ask your question. Your line is open.

[Vinny Alejandro:]

My first question is on the Nessco side; Nessco had some very impressive quarter and is doing very well. You added to backlog. Does this mean that this segment is getting more predictable and not as lumpy as you expected as before?

[Marty Jimmerson:]

I wouldn’t say that we were certainly pleased with the improved contributions of the quarter but we see our business but really lumpy, you know, it’s a project based business like a recurring revenue business that dominates our business model today, this is business you’ve got to get out there and earn, it works often, you got be adding to that backlog. that’s there we have a very good sales pipe, we’re seeing good converge of that sale pipe in the first quarter and through early May into our backlog it’s a business that I think we’re still learning about and so I would cautious in first quarter to be extrapolating that the way you could our recurring revenue business, it came in probably will be lumpy going forward.

[Vinny Alejandro:]

And then my next question is on the offshore rig which you guys won, your eight off shore rigs this quarter any of them priced rigs?

[Marty Jimmerson:]

That’s a great question; we kind of anticipated that, that might be as we look forward to some progress last quarter there. Those conversation continue, I think it was pretty clear to us and pretty and probably to our investors that there won't be one mass shift of those rigs across to RigNet. We will continue to, we are very confident of our relationship with Nessco. They are our longest client, our launch customer and we continue to look for opportunities to expand our relationship with them. That said, we were excited to be adding to our offshore account in the quarter and it was both from the jack-ups and floaters and both from new builds as well as competitive what we call competitive graphs, in other taking rigs from competition, so we were just very pleased with our execution in the quarter.

[Vinny Alejandro:]

That’s great and one last from me is the 40 maritime vessels that you won in the Gulf of Mexico, I am very impressed by that as well, is this a long term contract?

[Marty Jimmerson:]

I guess it is a term contract but I won’t give the length here but we thought it was a pretty strong win in a stepout area that we think is the most challenging for us. There are a lot of players in Energy Maritime compared to some of the other market. so our team has been working hard, we have very robust sales pipes about where earning our way into that market maybe more so having to that than we are in some of the other stepout area. So we are very pleased with that win in April and will play in terms of results going forward.

[Operator:]

Our next question comes from Tim Horan with Oppenheimer.

[Tim Horan:]

A little bit more, may be color on bookings, not as just at Nessco but on the core business and may be ARPU’s, just trying to get a sense frankly of the revenues of more of the legacy business in second quarter was, you kind of have been flat for two quarters here but did you exit the quarter at the same kind of 36 million run rate of the legacy business or did you kind of have enough wins here that you start to grow again. I know there's a lot of moving parts because you have the threshold that’s down in the U.S. just a little bit more color how we should think about the second and third quarter thanks.

[Marty Jimmerson:]

When we see the rigs that we had along with the decline in the U.S. land, I think that’s kind deluding or coming to the conclusion the business is flat, if not flat we haven’t talked about it but the quarter does have two fewer days than it did in the fourth quarter. But the business continues to be solid and we think our organic growth continues.

[Mark Slaughter:]

The account is really an end of quarter count so the addition of the rigs was not fully reflected throughout the quarter. Secondly, there are lot of times, rigs; when you go to work or serving just the driller so there can be additional revenue uptake as we capture the operator in another secondary customers and cross sell additional services; so we didn’t see it was with the great count addition in the quarter; we didn’t see the full revenue impact from that in the quarter.

[Tim Horan:]

So, either one way at the end of the quarter was a million or two above what you posted in the quarter, is that safe to say?

[Marty Jimmerson:]

Yes and we are not going to give specific guidance on it but it was a higher number.

[Tim Horan:]

Great and then the same thing on the EBITDA side, you just have EBITDA margins in the low 30% range prior to the Nessco acquisition and obviously the absolute numbers are up quite a bit but can you give us some trajectory on when you can think you will get back to those low type 30% margins or how we should think of the rest of the year anyway?

[Marty Jimmerson:]

Good question; it comes at the decision of how we continue to invest for the future in the long term benefit for our shareholders in the company. We build staff here in the quarter, we will continue to evaluate opportunities throughout the year and we may continue to add strategic resources where we think it's necessary and so again, while we are not providing any further guidance in terms of what we announced in Nessco, but I think that we signaled that margins may come down into the mid 20% range for a while until they start ticking back up and that's just more of a function of when we make our strategic investments in our overhead.

[Mark Slaughter:]

Yes and on the blend down of the Nessco contributions which are low margins?

[Tim Horan:]

So reading between the lines it sounds like this is probably; roughly of this level of margins was probably good for the year as you invest for growth and that will expand over time.

[Marty Jimmerson:]

Stay tuned. Clearly there could be some upside here, we are not we are not showing our hand here, we got a unique market in front of us and we continue to see opportunities that we may continue to investment in.

[Tim Horan:]

And just two other questions; on the threshold side, who do you think you were losing share to in the US?

[Marty Jimmerson:]

That's the lowest barriers to entry business we face. There are both direct competitors, regional players that compete, we also have our largest offshore provider who competes for that market and then you have a range of broader bundled players who offer either living quarters or drilling related services who offer remote costs, so they're a range of providers. We believe we're the largest and one that covers all active drilling basins today, but it is a business with low barriers to entry and therefore we're fighting it out everyday, but that said, we're pleased with our teams performance though I have added to doubly to the management staff up top with clear directives that we want to see that share moving back up.

[Tim Horan:]

Great, I know Nessco part of the rationale for the acquisition was to enter the upstream market a little bit more, so that's helping that maritime win or maybe you can talk about when we should start to see some of the fruits on that.

[Marty Jimmerson:]

The fruits of Nessco.

[Tim Horan:]

Sorry, entering the upstream market.

[Marty Jimmerson:]

Well, I am not sure we see it that way it was really acquired as an engineering house to help us capture recurring revenue streams in the offshore production market, so maybe you call that upstream on the production side. We do think some of the engineering skills can actually play into the drilling side of the business. with some of our design work we're seeing some very complex installations on some of the deep water rigs today and some of that additional engineering expertise may help us, but it's really an opportunity to get some advanced positioning with customers and with projects where we can hopefully be there to capture the recurring streams long term and in my prepared remarks I did cover the fact that we've already seen some early pull through wins with the customer in one case and with a specific project in another that hopefully converted to the higher return recurring revenues that we love to see.

[Tim Horan:]

You saw a lot of activity there and are fairly optimistic?

[Mark Slaughter:]

I think we remain confident in that business and certainly I think it's lending a lot of credence to our original investment pieces in the business and we remain confident about that choice.

[Operator:]

Our next question comes from Travis Bartlett with Simmons and Company.

[Travis Bartlett:]

I just wanted to follow-up on the earlier pride question. I understand that any shift that occurs is probably gradual. But can you frame for us the opportunity set looks like in the event that you can convert all the rigs, maybe just kind of discuss what the revenue potential is there?

[Marty Jimmerson:]

Well, given the fact that the mix is more heavily deep water than jack up or as is just the converse with the Insco legacy fleet, I think it's fair to say the revenue potential exceeds that of Insco today and Insco's our second largest customer so it’s obviously a very, very big thing and we're very focused on it, probably even job one, but at the end of the day Insco has got a range of issues that it's working through with respect to its post-merger integration with Pride and I think at the right time we'll turn to visit these issues with the rigs. We are confident and believe in a single provider, our 11 years of loyal and reliable service we think plays very strongly in that situation and we continue dialogue.

[Travis Bartlett:]

And then second one here more of a housekeeping question but just to clarify on the SG&A increase during the quarter, you guys incurred a legal expenses of what looks like $300,000 during the quarter and next quarter there could potentially be $800,000 to $1.5 million in addition to what was reported here in Q1, is that the way to think about it or was the timeframe for the increase not necessarily Q2.

[Marty Jimmerson:]

Just to restate it, during the quarter we incurred a total of 1.1 million of charges that included the 300,000 of legal expenses and the reserve estimate of 800,000 that offset the estimated 1.0 million of professional fees we incurred in the fourth quarter associated with our legal entity restructuring. So quarter-over-quarter the potential violation expenses offset the reduction of the legal entity restructuring project.

[Travis Bartlett:]

And then last one here just shifting gear towards the balance sheet, I kind of wanted to get your updated thoughts on uses of cash going forward. I noticed that debt was smartly reduced during the quarter. Is that something that we should expect more going forward?

[Marty Jimmerson:]

For the time being, we’re going to continue to look for organic opportunities, we’re scheduled to amortize about 2.4 million of quarter in debt and so subject to our organic plan and what we come up with our corporate development efforts that as you know that we build resources there within a last six months and assure you they are not just sitting around twiddling their thumbs. So, it could be they come up with something potentially.

[Operator:]

(Operator Instructions). I am not showing any further questions.

[Marty Jimmerson:]

Kevin, thank you and to all of our listeners again thank you for tuning in and we look forward to talking to you after our second quarter results probably in late July or early August.

[Operator:]

Ladies and gentlemen, that concludes today’s presentation you may now disconnect and have a wonderful day.