RigNet Inc
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the RigNet Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Marty Jimmerson. You may begin.

[Martin L. Jimmerson:]

Thank you, Kevin, and welcome to our participants from around the world. We appreciate you joining us today to discuss RigNet's third quarter 2013 results. Today’s conference call was preceded by our earnings release yesterday afternoon, after the markets closed. The release is available from our Investor Relations section on 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 third quarter 2013 highlights, and then I will provide financial details. We will then open the call for a few general questions. Part of our discussion today may include forward-looking statements. Please review the Safe Harbor language found in our press release and in our SEC filings that describes factors which could cause our actual results to differ materially from 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 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 results 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 B. Slaughter:]

Thanks, Marty. Again, to all our participants, I want to thank you for joining our third quarter 2013 earnings call. RigNet made great strides in the third quarter by announcing a wide-ranging strategic alliance with Inmarsat that includes the acquisition of their Energy Broadband business, RigNet becoming a premier global distribution partner in the oil and gas vertical for Inmarsat's coming Global Express high-throughput satellite platform, and RigNet also becoming a global distribution partner in oil and gas for Inmarsat's more traditional L-band services. These moves will position RigNet to offer a wider array of managed remote communication solutions across more geographies for our oil and gas customers. To recap from our last call, we also saw last quarter continued confidence from our core offshore drilling customer base, as Ensco awarded a contract to us to serve 17 rigs emanating from their acquisition of Pride International. Ensco is RigNet's original launch customer, and is RigNet's second largest customer today, over 12 years later. We also were awarded in the quarter 23 lift boats and a field office in West Africa for a multinational offshore drilling client. And in our systems integration business, we were awarded $8 million in new projects from a major offshore production client. Not yet announced until now, is that among the larger successes in the third quarter, we won away from competition a contract to serve 4 floater rigs for a customer operating offshore Norway. We were awarded a contract to serve a newbuild rig for an offshore driller in the Middle East. We won a multi-year contract to serve a major oil and gas operator on a Transocean rig in West Africa. And we also won a multi-year contract to serve a European operator on a floater rig, where we were already serving the driller in Brazil. Lastly, in the third quarter, and subsequent to quarter end, many of our offshore fleet drilling customers upgraded bandwidth on either a regional or individual rig basis. We also saw in the quarter a strong vote of confidence from one of the world's largest and most successful investment companies, as Kohlberg Kravis Roberts, or KKR, announced they are becoming our largest shareholder with about a 28% ownership stake, which they acquired from one of our original private-equity backers. We welcome KKR to our shareholder base, and as recently announced, have increased our board size to 10, and added KKR's Mattia Caprioli, who brings a wealth of international financial and businesses services expertise to our board. Our third quarter was also a record one for quarterly financial results, as we set all-time highs for revenue and EBITDA. Revenue was a quarterly record of $56.9 million and EBITDA was a quarterly record of $14.5 million or 25.4%. Excluding Inmarsat Energy Broadband acquisition costs, net income was a solid $5.1 million or $0.29 per diluted share. Finally, capital expenditures, most of which are revenue-generating investments at the edge, were $9.1 million in the quarter, which was up 75% over last year and up 7.1% sequentially. In the quarter, I was pleased that both our traditional recurring revenue-based managed services and Nessco's project-based systems integration services were up sequentially and in line with our expectations. In our core offshore rig communications business, we continue to see an increase in revenue per rig, which is driven by changes in secondary customer penetration, value-added services and associated bandwidth increases, as well as rig mix. Our offshore rigs dropped by 4 in the quarter, driven by -- primarily by the expiration of a customer contract for some lower-revenue jack-up rigs. But we also added 2 semi-submersibles, 1 newbuild and 1 taken from competition, and we added 3 drillships from the newbuild pool. So while our overall offshore rig market share dropped slightly in the third quarter to 31.1% or 251 rigs served out of a market of 808 active and addressable rigs, we did improve our share of floater rigs, which is a big priority for this management team. Relatedly, I also want to mention that during the quarter, we opened a new office in South Africa to place management, personnel and equipment closer to growing drilling and production activity across sub-Saharan Africa. Turning to our U.S. land rig communications business. The overall market rig count lowered slightly in the quarter from 1,692 to 1,680 rigs. We declined as well, from 261 to 250 U.S. Land rigs served, bringing our rig share down to 14.9% in a highly-competitive market. Non-rig site count in U.S. Land grew slightly in the quarter, mitigating the drop in rigs served. Revenue per site in U.S. Land was steady. This quarter, we have begun separating out site counts in our public reporting that are associated collectively with our strategic initiatives of international land drilling, offshore and onshore production and energy maritime, which are the strategic moves RigNet is making to position itself to be a mission-critical remote communications provider across the life of oil and gas fields. After seeing several quarters of steady growth in site counts for these strategic initiatives, we did experience a drop in the third quarter from 291 to 265 sites served, which can be attributed primarily to the expiration of the same customer contract referenced before, that covered both jack-up and land rigs in one of our international regions. We remain pleased though, overall, with the progress in each of these strategic growth initiatives. As I mentioned earlier, RigNet has entered into a strategic arrangement with Inmarsat, a leading global provider of mobile satellite communications, to acquire their Energy Broadband business and to become a premier global distribution partner in oil and gas for their Global Express and L-band mobility offerings. Subject to satisfaction of customary closing conditions and regulatory approvals, we expect to close on the acquisition of Inmarsat's Energy Broadband business in or before the first quarter of 2014. While we are heavily focused on completing the work streams associated with closing the transaction on that business, we are also up and running with a cross-functional and joint company integration planning effort to ensure that we're both ready on Day 1 to run the combined businesses, but also to have in place our go-forward strategy that fully leverages the combined benefits of the companies on behalf of our oil and gas customers. This planning remains on schedule, and I believe we are well-positioned to integrate and optimize this transaction for the ultimate benefit of customers and shareholders. In closing, I'm pleased with our record-setting performance in the third quarter that was delivered by this management team and our dedicated employees around the world. We remain committed to positioning RigNet to serve the oil and gas industry with mission-critical remote communication solutions across the life of the field, from drilling to production. I remain encouraged by the traction we are gaining in the business organically, as well as looking forward to what the broad strategic relationship with Inmarsat will contribute as it comes into place. One can imagine the rigorous and thorough outsight and due diligence that a company with the resources of KKR could conduct. KKR recently shared with us several quotes on RigNet that they received from their extensive oil and gas customer interviews. My favorite customer quote on RigNet is, and I quote, “RigNet is agile, pragmatic, responsive and they smell like oil people.” I think that really says it all about why our customers choose us. We call it the 5 Rs

[Martin L. Jimmerson:]

Thank you, Mark. Now let me share some more detail about our third quarter 2013 financial results. During the third quarter of 2013, we reported record revenue of $56.9 million. Revenue increased $5.6 million or 10.8% quarter-on-quarter. The increase in revenue compared to the prior quarter was primarily attributable to systems integration, or SI projects, and continued growth in revenue per site from our core business of serving offshore rigs. As Mark mentioned earlier, our growth in revenue per site continues to be driven by changes in secondary customer penetration, value-added services and associated bandwidth increases, as well as rig mix. Revenue increased $9.0 million or 18.6% compared to the third quarter of 2012, primarily due to SI projects, continued growth in our core business of serving offshore rigs and traction with our strategic initiatives of serving offshore production facilities, energy maritime and international land sites. Adjusted EBITDA increased $0.5 million or 3.9% quarter-on-quarter, to a record $14.5 million in the third quarter of 2013. The increase was primarily attributable to revenue and margin growth in our core offshore business and contributions from SI revenues during the quarter, partially offset by bandwidth increases and headcount additions to support our continued growth. Adjusted EBITDA increased $2.1 million or 16.6% as compared to the prior year quarter, primarily due to increased sites served, improvement in average revenue earned per site and contributions from SI. Adjusted EBITDA margin decreased to 25.4% in the third quarter from 27.1% in the second quarter of 2013, and decreased slightly from 25.8% in the prior quarter. As we discussed during our first quarter earnings call, our internal compliance program detected potential violations of U.S. sanctions regulations by one of our foreign subsidiaries. We continue to work with authorities on this matter, and given the partial government shutdown earlier this month, now expect that the first quarter of 2014 could be the earliest that we may have additional information to report. Based upon the information available at this time on the compliance matter, we made no further financial adjustments during the third quarter and continue to believe the range of penalties that we may ultimately incur associated with these potential violations will be within the same range of $0.2 million to $1.5 million. The company accrued an estimated liability in the first quarter of $0.8 million for such potential penalties. We did not incur any significant legal expenses on this matter during the third quarter. Our total legal expenses incurred on this matter remain at $0.9 million through the first 9 months of the year, leaving our total charges, including estimated fines and penalties, at $1.6 million. We continue to caution that we may incur future legal fees and related expenses, and the fines and penalties may be higher than we have estimated, and the investigation may require significant management time that detracts from running the business. Now turning to our reportable segments and leading with Americas. This segment generated revenue of $13.9 million in the third quarter, which was up 5.7% quarter-on-quarter and up 6.4% over the same quarter last year due to higher offshore site counts and average revenue per rig, partially offset by fewer U.S. Land rigs served. Compared to the second quarter of 2013, we commenced service on an additional drillship in Brazil and noted an increase in average revenue per offshore rig served. The Americas' adjusted EBITDA was $5.1 million in the third quarter compared to $4.9 million in the prior quarter, an increase of $200,000 or 5.9%. Americas' adjusted EBITDA margin increased slightly to 37.0% from 36.9% in the prior quarter. Wrapping up the Americas, we announced earlier this year that we had landed a contract to serve up to 40 vessels in the Gulf of Mexico for an energy maritime vessel operator. As of September 30, 2013, we had installed on 15 of these vessels and we are in the process of installing on 4 additional vessels. In October, this operator informed us that it had sold its business to another vessel operator. We do not expect to install on any additional vessels under this arrangement, and the new vessel operator has requested that we remove our equipment from the existing installations. We are currently in discussions with the customer and do not believe that the final outcome will result in any material adverse financial result related to the current sites being served. Next, Europe/Africa generated revenue of $26.3 million, an increase of $3.2 million or 14% over the prior quarter. The increase in revenue was primarily attributable to SI revenues that increased $2.9 million during the quarter, and increased revenue per site. We stated previously that our SI business can fluctuate quarter-on-quarter due to the timing of projects. We believe our SI business remains solid with contracted backlog that was $23.6 million as of September 30, 2013, which was up from $19.3 million as of June 30, 2013. We view backlog as a key sign of health in the business and a leading indicator, but remind everyone that it is project-based, and can fluctuate due to project timing. Europe/Africa adjusted EBITDA was $6.5 million in the third quarter compared to $8.8 million in the prior quarter, a decrease of $2.3 million or 26.3%. The decrease is primarily related to SI projects that were impacted by both timing and margin profile during the quarter, increased expenses related to upfront investments in bandwidth and headcount for expected future business, and to a lesser extent, foreign exchange losses. A few examples of future expected work include the previously-announced West Africa lift boat awards, Pride awards and the opening of a new office in South Africa to support our growing business in sub-Saharan Africa. Adjusted EBITDA margin percentage has decreased in Europe/Africa to 24.7% in the current quarter compared to 38.2% in the prior quarter, primarily due to the change in revenue mix between managed services and systems integration. For the final segment, Middle East/Asia Pacific generated revenue of $16.7 million in the third quarter, an increase of $1.6 million or 10.3% quarter-on-quarter. Our increase in revenue, as compared to the second quarter of 2013, was primarily attributable to increased revenue per rig and improvement in our offshore rig mix. During the third quarter, the Middle East/Asia Pacific region offshore rig count declined by 1. However, we noted a mix improvement and increased revenue per rig that we serve, accounting for the increased revenue quarter-on-quarter. As Mark noted earlier, during the third quarter, we completed a 3-year contract with a customer under which we provided service to 5 offshore jack ups and 28 international jack up rig -- international land rigs, excuse me. All of these sites previously served were in the Middle East/Asia Pacific segment, and the total revenue recognized from this contract in the third quarter was $100,000 compared to $500,000 in the second quarter of 2013. The customer elected to consolidate its global communications under another provider. Middle East/Asia Pacific adjusted EBITDA was $9.5 million or 57.0% of revenue in the third quarter compared to $6.7 million in the prior quarter, an increase of $2.8 million. As a reminder, during the second quarter, we have re-classed $1.1 million of year-to-date expenses associated with the compliance matter discussed earlier to Middle East/Asia Pacific from corporate. As a result, Middle East/Asia Pacific adjusted EBITDA was $6.7 million in the second quarter, including the re-class of first quarter expenses associated with the compliance matter. Excluding expenses associated with the compliance matter, adjusted EBITDA and adjusted EBITDA margin would have been $8.3 million or 54.6%, respectively, in the second quarter of 2013. Turning back to the total business results, we reported total SG&A expenses of $14.0 million in the third quarter compared to $12.6 million in the second quarter. The increase is primarily attributable to Inmarsat acquisition-related expenses, partially offset by the lower compliance matter expenses. We reported consolidated net income attributable to common stockholders of $2.1 million or $0.13 per diluted share in the third quarter compared to $4.9 million or $0.28 per diluted share in the second quarter. Excluding the Inmarsat acquisition-related expenses, net income attributable to common stockholders would have been $5.1 million or $0.29 per diluted share in the third quarter. Our effective tax rate for the third quarter was 51.7% compared to 34.2% in the prior quarter. The increase in our effective tax rate is primarily due to Inmarsat acquisition-related expenses. Now turning to the balance sheet. As of September 30, 2013, our cash, including restricted cash, increased to $51.7 million from $50.8 million as of June 30, 2013. Our restricted cash, which secures performance bonds related to our SI business, decreased $100,000 during the quarter to $2.1 million. Our net working capital was $68.1 million. Our debt was $54.2 million. And we had no borrowings outstanding against our $10 million revolving facility. Our bank debt to adjusted EBITDA leverage ratio was 1.0x. On October 3, 2013, we entered into a second amendment and restatement of our term loan. The amendment and restated agreement provides for a $60 million term loan facility and a $125 million revolving credit facility, which includes a $15 million sub-limit for issuance of standby letters of credit. The company had $54.6 million outstanding immediately before this new agreement, and $60.0 million outstanding balance immediately after giving effect to the second amendment and restatement. The term loan facility matures in October of 2018, and requires quarterly scheduled principal payments of $2.1 million, commencing March 2014 through October 2018, with the remainder due at maturity. The revolving credit facility matures in 2018, with any outstanding borrowings then payable. Borrowings under both the term and revolving facilities carry an interest rate of LIBOR plus an applicable margin ranging from 1.5% to 2.5%, which varies as a function of the company's leverage ratio. Wrapping up, we are very pleased with our third quarter financial and operational performance, and look forward to finishing 2013 with strong momentum into 2014, including the closing of the acquisition of Inmarsat's Energy Broadband business as soon as possible. With that, Mark and I are happy to answer your questions. Kevin, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from Brett Feldman with Deutsche Bank.

[Brett Feldman:]

I was hoping to ask a couple of questions here about competition that you alluded to them a little bit during your comments. So for one, I think I heard you mention you won a Transocean rig, and I thought that was interesting because they signed a master agreement with one of your competitors a few years ago. So I was hoping we could get a little color on how it is you won the rig, and maybe whether there are some additional Transocean opportunities coming up before that big contract gets renegotiated? And then, you lost a little business as well. And I was hoping maybe we could get a little more color on who you lost the business to? We've usually thought about one principal competitor. I'm wondering if you're seeing someone else, especially as you branch out a bit beyond just serving rigs, and if any of that was related to pricing?

[Mark B. Slaughter:]

Yes, thanks, Brett. Regarding Transocean, we actually serve some of the -- probably about 4 rigs today directly for Transocean. Most of these relate to their acquisition of Aker -- Aker's rig business a few years ago, and we have retained those contracts. We also, in at least a couple of cases, and including the one I mentioned on the call here, we have overbuilt another provider, the other provider, by serving the operator only under a multi-year contract. So that's why we have that situation with Transocean. And in -- regarding lost business, I think what we want to point out is, it is unusual, we're seeing a drop in our offshore rig count and we view that, certainly, as temporary. But that was primarily tied to 1 particular client with the expiration of a contract in an international region, with the company deciding globally to consolidate under the other provider. And it's also a client, I would offer, that is really not looking for managed services, really more for bandwidth at a markup. And that was the principal reason we did not retain that business.

[Brett Feldman:]

Got it. And then you had an interesting scenario, where a customer that you were in the process of installing got acquired and decided they didn't want to -- the acquiring company didn't want to use your services. Do you know what they're doing instead of using RigNet?

[Mark B. Slaughter:]

Likely moving to the provider that's providing for the acquired company. We believe we have a pretty strong position. But beyond that, I don't want to make any further comments.

[Brett Feldman:]

Okay. And then just another question, if you don't mind, because you've done Nessco, you've got the Inmarsat deal looking to close. Those are solid businesses. In some cases, they increase your distribution potential. Where do you feel you are, particularly in terms of Nessco, in terms of really leveraging that as a channel and not just a new business to be in?

[Mark B. Slaughter:]

Right. We acquired Nessco as an engineering shop to give us more credibility, more capability in the offshore production arena. And we've already seen, since acquiring it in the summer of '12, some prove-out of our investment thesis, particularly with our desires to pull through revenue. We have won business in Brazil and in West Africa directly as a result of either projects on which Nessco had worked as a systems integration provider or as a result of the strong relationships and credibility they brought. And so we feel very, very comfortable about that business. We are learning the SI business, which is project-based and lumpy, but we feel we've got a good, solid backlog in that business, very committed to it. But really what we're after is the pull-through recurring revenue at high margins that is more typical for RigNet. We are going to be adding to that business with Inmarsat. Inmarsat has a parallel business called EIS, in their language, Engineering and Integrated Services. That will be merged with Nessco's SI business, and will give us wider geographic coverage for the SI business and a wider set of capabilities, and some extension from upstream to downstream energy. They have done some very large projects, particularly LNG train facilities in West Africa that we think are quite attractive.

[Operator:]

Our next question comes from Veny Aleksandrov with FIG partners.

[Veny Aleksandrov:]

My first question is on the revenue per site. The revenue per site increased and you commented that you have second client penetration, but also bandwidth expansion. And part what I want to talk on, as much as you can, is it just in pockets of markets? Is it on individual rigs? Or do we have clients saying, "I need more bandwidth for my whole fleet?"

[Martin L. Jimmerson:]

Veny, it's Marty. Good to speak with you. And so -- we were having a little trouble hearing you, but I think your question was related to revenue per site, the increases associated. And while we're not giving any specific commentary as to how much the increase was secondary operator penetration, value-added services, it is across all 3

[Veny Aleksandrov:]

Just a very technical question. Your tax rate was a little bit lower and I guess it's because of the combination of markets you're serving. Can we take these and assume it's going to be kind of the same for the rest of the year?

[Mark B. Slaughter:]

CapEx? Are you asking about CapEx? we're having trouble...

[Veny Aleksandrov:]

Tax rate. I'm sorry, I have no idea why you cannot hear me, tax rate.

[Martin L. Jimmerson:]

Yes, on tax rate, again, it's a very kind of complex and difficult area. In the simple way that I think about it, it will be impacted negatively by the Inmarsat-related acquisition expenses in terms of when those expenses will be deductible. I think that the clear answer is, those are current-period expenses that won't benefit us for future tax purposes until later on. And so you're taking a book hit, but you're not getting the benefit of it. So I would say, we feel -- without the Inmarsat-related expenses in the third quarter, we would have been in line with the prior quarter, if not possibly slightly better. And we'll continue to be impacted at the tax rate by Inmarsat.

[Veny Aleksandrov:]

Okay. And the last question, and I hope you hear this one, in terms of Nessco, you gave us the backlog. But can you remind us, I know that it's lumpy, but usually, how many months does the backlog cover?

[Martin L. Jimmerson:]

Yes. Typically, what we've seen since the time that we've acquired it is the backlog will run 6 to 9 months. And we can tell you that, as of the end of September, that our backlog is consistent with that. Again, it continues to be one of the fun exercises for Mark and myself and our other management team is that the RigNet business is recurring. It's sticky. You can feel it and see the lands[ph] every single day. The SI business is a longer lead item. A good example is we're looking at a project right now, a very significant project, a bid opportunity that is a decision at some point in 2014, and you probably don't start the work until 2015. So the SI business is a longer lead item to get it in the pipe, and when you do get it in the pipe, it will generally take about 6 to 9 months to bleed off.

[Operator:]

[Operator Instructions] Our next question comes from Tim Horan with Oppenheimer.

[Timothy K. Horan:]

Did you give out what the Nessco revenues were in the quarter? Did I miss that?

[Martin L. Jimmerson:]

We did not give the specific number. We said that there was increases associated with it.

[Timothy K. Horan:]

So is it -- got you. Can you maybe give us a little bit more clarity on it? Is it up from the second quarter materially? Or just up a little bit?

[Martin L. Jimmerson:]

Yes. I would say, ballpark, about half of the increase quarter-over-quarter was associated with SI. Actually, it was a little bit higher than that, a good portion of it. We were impacted during the quarter due to project timing, as well as we did have 1 lower-margin project in the quarter that was part of the transaction when we signed up the business. And we are starting to feel the effects of that. So again, the business continues to be stable. We will -- as a reminder, Tim, we will be -- once we close on Inmarsat, we will -- we expect to start reporting the SI business as a separate segment, which would include Nessco and both the SI business from Inmarsat.

[Timothy K. Horan:]

Okay, great. And then on the broadband side, can you talk about maybe what trends you're seeing over the last couple of years in terms of year-over-year growth, and is it accelerating or decelerating?

[Mark B. Slaughter:]

I think we see the growth rates very steady. The markets we serve, outside of U.S. Land, remains strong. We see no reason to deviate from the strategy or from our performance trends at this point in time.

[Timothy K. Horan:]

Can you give us a rough idea, has that been kind of 10% growth year-over-year, 30% growth year-over-year?

[Mark B. Slaughter:]

We are probably closer to the lower. Generally, it's been mid-teens.

[Timothy K. Horan:]

Great, great. And lastly, have you had any conversations with customers on the Global Express and L-band. Do they plan on keeping their existing facilities and using that to complement on more broadband? Or are they worried about the reliability of the service? Maybe just how you think they are thinking about it?

[Mark B. Slaughter:]

Yes. We think it's very important for RigNet to be positioned to offer high-throughput satellite. For the non-technical people, it's more bandwidth for less cost. It is going to be a step change in capability. And it was very important for RigNet to have a position at the table, even in advance of the satellites being launched, to be able to offer this when it comes out in 2015. So we have answered that by striking this wide-ranging arrangement with Inmarsat. We believe there will be at least 2 other high-throughput satellite provider offerings in the oil and gas space. Our agreement on both sides with Inmarsat is not exclusive, meaning they could name another distribution partner and we can also sign up for other high-throughput offerings as well. I think you could expect that. We'll have a, as we always do, a wide range of backhaul or access technologies available to best meet the needs of our customers.

[Timothy K. Horan:]

And are your customers interested in the product, do you think? Will they shut off their existing satellite service and move to the new service or will they use both?

[Mark B. Slaughter:]

Well, when you're talking about the end customers, the operations people on the rigs, they don't really look under the hood. But we really are partnering with the IT departments of our oil and gas customers, and they are interested in how we construct the end-to-end solutions. And we'll be careful. We'll trial this new technology. It's got to earn its way into the portfolio. We're working with mission-critical communications, so we're going -- but we're very confident it will work. But we're going to have to work very carefully with our IT departments and our customer bases to trial and to make sure it does work.

[Timothy K. Horan:]

Okay, great. And then on the value-added services, what services are popular at this point or anything kind of new out there?

[Mark B. Slaughter:]

Well, we tend to think of services in 3 buckets. One is going to be related to crew welfare, and that's everything from entertainment to things such as telemedicine. Then, there's also rig productivity. The rig cannot charge its day rate to the operator unless that rig is operational and operating safely. And then, thirdly, is anything associated with the reservoir. And so that's where you get into realtime services where, in effect, you're connecting the office to the drill bit. And all of those, we think, are ripe opportunities. Around that, we hear this a lot, is that network security is absolutely key. And that's going to be important on offshore facilities, that you maintain network security. And we offer a resold service there for proactive network monitoring and pursuit, if indeed there is some hacktivism out there. And also, anything video-related. We're seeing video deployed more and more at the edge, which is obviously a fairly big bandwidth hog, plus we get to manage the video devices on that network. And from our -- from an investor standpoint, win with 2 revenue streams associated with video services.

[Timothy K. Horan:]

Great. Sorry, the last. How many rigs do you have more than one competitor on? Is that number increasing or decreasing?

[Mark B. Slaughter:]

That -- well, we generally believe that -- well, we call it overbuilding, where there's a second provider serving another customer. It's fairly rare, I will say, probably less than 5% of the cases out there. In the Gulf of Mexico, we have especially set up to overbuild rigs, so we serve the operator with quick-deploy units. And as I mentioned in the call today, at least in one case, we have overbuilt another provider to serve an operator on a multi-year basis. And given the fact it's multi-year, we were able to justify it from a single customer, the capital investments to serve that operator. So it is rare, but we will look for those opportunities to earn our place onto the rig.

[Operator:]

Our next question comes from Steve Birenberg with Entermedia Growth Partners.

[Steve Birenberg:]

I hopped on a little late, so I apologize if this has been asked, but could you give some concrete examples of how having KKR as a lead shareholder might impact the future of the company in terms of growth or opportunities?

[Mark B. Slaughter:]

Well, KKR is now our largest shareholder, but they bought a position from a Nordic private investment house that had been in the syndicate for some time, including back in our private days. They remain an investor, a large investor and important investor, but we represent all shareholders and so we will listen to their input as we do to all investors. But at the end of the day, it's an independent company. With that said, we have been excited about the expertise of Mattia Caprioli. As we looked at his particular background, we were confident enough to increase our board size by 1 and have invited him, and he's accepted an offer to join our Board of Directors at this point in time. And we've announced that. Well certainly, they are a different type of investor, they're not institutional. We expect them to provide us advice and we'll certainly listen, but we do represent all shareholders. One thing I think that they do offer maybe that's a little different than institutional, is they have fairly good industry knowledge, M&A expertise, financing capabilities. They, in many cases, are aggregating third-party spend across all of their portfolio of companies. And so in certain cost categories, we can tap into buying volumes that, as a small company, we otherwise could not. Everything from airfares and rental cars and hotels to certain electronics that we purchase within the company or for our customers. So obviously, we're very excited to see what that might offer to us in terms of margin improvement and return on investment payback, et cetera. So we're in the early days of that relationship, but the key is that we represent all shareholders. This is not a controlling position that KKR has in the company.

[Steve Birenberg:]

Okay. Do you see -- KKR, in their press release at the time, talked about their excitement about investments in the energy and energy service space? Do you see them as -- do you see RigNet as one of those investments or potentially a platform for KKR to use to expand their reach, granted on a -- as a minority shareholder?

[Mark B. Slaughter:]

I certainly can't speculate. That would be a question you'd have to direct over to KKR. I think they were excited about us because of the intersection of oil and gas technology and services, and they see us as really being right in the middle of that intersection and with good long-term fundamentals. That's the way we believe that we're positioned very well to serve the oil and gas industry. So I can't -- all we have visibility to is their investment in us and nothing else.

[Operator:]

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

[Martin L. Jimmerson:]

Kevin, we'll hold for just a second. We maybe have time for one more question. If there's...

[Operator:]

[Operator Instructions] Our next question comes from Max Chee with Millennium.

[Max C. Chee:]

I was wondering about the mix shift and the fall off in jack ups. I guess, could you make a comment on what's going on in the industry in terms of overall rig counts and the retirement of older rigs, and how that may impact your mix going forward?

[Mark B. Slaughter:]

Well, that's an interesting question on many layers. The particular impact on us with the count drop was tied, as I mentioned before, to a single customer contract that expired and was related only to jack-up rigs. As I mentioned also in the commentary, we added several floaters, these are semi-submersibles and drillships, to the billing engine for the quarter, but we also announced several awards that will benefit future quarters. So there is a very robust newbuild schedule that generally, over the next 2 to 3 years, runs at about 120 to 150 or so rigs being constructed. Most of those are added to the denominator of active and addressable rigs as they come onto the market. But at the lower end, there will be some retirements. And the industry -- having gone to some recent drilling conferences, the industry talks about bifurcation and the ability with the latest-generation equipment, and particularly with floater rigs, are able to command a higher day rate than for older-generation equipment that they can't work in as in deep waters, super-deep waters, ultra-deep waters, or in as harsh environments. So given that, we are trying to match where the industry is going. We generally earn higher day rates for that premium equipment because it's working in more exploratory areas, where the need for information is critical to decision-making in operational performance and safety. So we're just, in effect, following the market.

[Operator:]

And I'm not showing any further questions.

[Martin L. Jimmerson:]

Kevin, thank you. And to, again, our participants, thank you for joining our third quarter earnings call, and we look forward to speaking with you in the new year with our 2013 results, which will be probably in late February or early March. Thanks, again.

[Operator:]

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.