RigNet Inc
Q4 2013 Earnings Call Transcript

Published: 6 Mar 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the RigNet Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Marty Jimmerson. You may begin.

[Martin L. Jimmerson:]

Thank you, Latoya. And welcome to our participants from around the world. We appreciate you joining us today to discuss RigNet's Fourth Quarter and Full Year 2013 Results. Today’s conference call was preceded by our earnings release yesterday afternoon after the markets closed. This release is available from the Investor Relations 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 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 Harbor language found in our press release and in our SEC filings that describe 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 Fourth Quarter and Full Year 2013 Earnings Call. I was very pleased with our strong fourth quarter results, which included record revenue and EBITDA, reflecting continued strong growth in our core offshore rig communications business that also provided good momentum, rather, entering the new year. Subsequent to year end, we closed the Inmarsat strategic transaction at the end of January, and have integration efforts well underway. We are delighted with our new long-term relationship with Inmarsat that includes our acquisition of their Enterprise Energy business unit, as well as our becoming a premier distribution partner in oil and gas for their Global Xpress and L-band service platforms. This transaction brings us broadened services and capabilities that will better serve our customers, and positions the company to enhance returns to stockholders. Looking forward, we are maintaining a positive view of the market environment as we advance our strategy of becoming it technology solutions provider across the life of the field. Speaking briefly to our financials, full year 2013 revenue was a record $220.7 million. Excluding Nessco, which was acquired in July 2012, our organic revenue growth over the prior year was a healthy 21%. Adjusted EBITDA was a record $56.2 million, showing strong growth of 28.9% over the prior year. RigNet also reported net income attributable to common stockholders of $16.3 million, or $0.93 per share, an EPS increase of 32.9% over 2012. Finally, mindful that the majority of our capital expenditures are revenue-generating investments at the edge that can serve as a leading indicator of future results, RigNet reported record capital expenditures of $31.9 million last year, an increase of 50.5% over 2012. Our fourth 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 $59.7 million and adjusted EBITDA was a quarterly record of $15.2 million, or 25.5%. Excluding Inmarsat and Energy Broadband acquisition costs, net income was a solid $6.7 million, or $0.38 per diluted share. Finally, capital expenditures were $7.7 million in the quarter, which was up 45.3% over last year, though down 15.4% sequentially. RigNet has now grown to the point that by the end of last year, we were serving our oil and gas customers on 1,127 remote sites in more than 45 countries on 6 continents. In our core business of serving offshore rigs, we were serving 262 rigs, an increase of 11 over the prior quarter, which represents a 32% share of the active and addressable offshore rig market. In the quarter, we grew that overall market share and also grew our share of jack-ups, as well as drillships and semi-submersibles. The rig acts [ph] in the quarter, included a newbuild drillship, 5 newbuild jack-ups and another jack-up rig won from a competitor. ARPU for offshore rigs was up 20.9% year-over-year. ARPU also grew in the quarter, and that comes from any combination of improved secondary customer penetration, sales of additional products and services, including associated bandwidth, and improvements in rig mix. Looking forward in the offshore rig market and against the backdrop of increasing demand for rigs, we do see a small and temporary oversupply of rigs that may persist over the next 12 to 18 months. We do not view this as a downturn in the industry that we serve. Rather, it is seen more as a pause or change of pace. This small oversupply may manifest itself in reduced day rates that drillers charge operators, and that impact on day rates may be more pronounced for older rigs versus the newest-generation rigs that are spec-ed for the harshest and most demanding conditions. There may also be some acceleration of retirements of the oldest rigs over this period. RigNet's business is driven by rigs actively drilling, not the range they charge operators. Thus, we expect any impact on RigNet from this temporary rig oversupply issue to be muted. And in fact, this shift to the active rig portfolio toward newer rigs could actually be considered bullish for RigNet, as we generally are able to charge higher day rates due the great data intensity of newer rig operations. Turning to our U.S. Land rig communications business. I was encouraged by the improved performance in the quarter as we grew both market share and count, though ARPU was down slightly. For the first time in several quarters, our rigs served grew from 250 to 266, representing an improved 15.6% market share of a slowly growing market. And January showed continued improvement. In fact, we grew at 6x the market growth rate in the quarter based on the counts of rigs served. Other sites in U.S. Land, such as production sites and completion jobs also grew in the quarter. External forecasts suggest this market may grow as much as 4% this year, which gives us further confidence that we can continue to grow this part of our business in 2014. We've 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 technology solutions provider across the life of oil and gas fields. After seeing several quarters of steady growth and site counts for these strategic initiatives, we did experience another drop in the fourth quarter from 265 to 253 sites served, which can be attributed primarily to the expiration of the same customer contract records in the earlier quarter that covered both jack-up and land rigs in one of our international regions. We remain pleased overall with the progress in each of these strategic growth initiatives. Our vision of RigNet is to become a technology solutions provider across the life of the field from drilling to production. To that end, we are providing managed communications and telecom systems integration solutions to operators, drillers, oilfield services companies, energy maritime vessel owners and engineering construction firms that are across drilling rigs, production facilities and energy maritime vessels. The technology solutions notion is a broadening of our offerings within upstream of oil and gas, potentially even beyond traditional remote communications, but with the proviso that such services leverage the global remote communications network we have in place. While it can also be called a high-tech oilfield services firm strategy, expansive breadth of our offerings for our customers that is not expected to compete in any meaningful way with the oilfield services industry, as we seek to widen the traditional demarcation for upstream energy remote communications providers. And we expect to execute against this strategy, both organically and inorganically. 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 of oil and gas for the Global Xpress and L-band mobility offerings. The transaction was closed on January 31, and we are now well into the implementation phase of our post-acquisition integration planning. I can report that we remain on schedule and our new combined management team is working well together. Most of the integration work in that transaction will be centered in North America. Our Gulf of Mexico region now consists of our existing VSAT operations, coupled now with the acquired microwave network that has a WiMAX overlay, along with our new L-band offerings to offer our customers a completely differentiated array of end-user solutions and access technologies that provide reliable and robust service for mission-critical operations. In the continental U.S., we are combining our U.S. Land drilling communications business with that acquired from Inmarsat. In addition, we're going to have that same region management team oversee the M2M SCADA business that we acquired that serves the midstream pipeline industry, pursuing deeper integration and coordination opportunities between these upstream- and midstream-focused businesses. Finally, the acquired systems integration business from Inmarsat, which is based in Houston, is being integrated into Nessco's systems integration business based in Aberdeen, Scotland, to create a global telecom systems integration business positioned to serve the oil and gas business -- or industry around the world. We're quite excited by the potential of this global SI business, as well as the revenue pull-through potential it provides into our managed communications business. We are also working on soft integration of the RigNet and Inmarsat businesses. It is my belief that great companies have 3 things

[Martin L. Jimmerson:]

Thank you, Mark. Now let me share some more detail about our fourth quarter and full year 2013 financial results. During the fourth quarter of 2013, we reported record revenue of $59.7 million. Revenue increased $2.9 million, or 5% quarter-on-quarter. The increase in revenue compared to the prior quarter was primarily attributable to increases in sites served 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 $10.4 million, or 21.2%, compared to the fourth quarter of 2012 primarily due to 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 as well, to the lesser extent, SI projects. Adjusted EBITDA increased $800,000, or 5.2%, quarter-on-quarter to a record $15.2 million in the fourth quarter of 2013. The increase was primarily attributable to revenue and margin growth in our core offshore business during the quarter, partially offset by bandwidth increases and head count additions. Adjusted EBITDA increased $3.4 million, or 28.7%, as compared to the prior quarter, primarily due to increased sites served, improvement in average revenue earned per site and contributions from SI. Adjusted EBITDA margin increased slightly to 25.5% in the fourth quarter compared to 25.4% in the third quarter, an increase from 24.0% in the prior year quarter. Now let me turn to the financial results for the full year ended 2013. Total revenue for the year increased to a record $220 million -- $220.7 million. Excluding Nessco, that was acquired in July of 2012, our organic revenue growth over the prior year was a healthy 21%. Gross profit, excluding depreciation and amortization, increased 26.3% to $101 million for the year. Gross profit margin decreased to 46.1% in 2013 from 49.9% in the prior year, primarily due to SI being included for the full year of 2013. Adjusted EBITDA for the year increased $12.6 million, or 28.9%, to $56.2 million. Adjusted EBITDA margin decreased to 25.5% in 2013 from 27% in the prior year. Our strong growth year-over-year of revenue, gross profit and adjusted EBITDA was driven primarily by increases in sites served and continued improvement in revenue earned per site and, to a lesser extent, SI. Revenue per site benefited from increases in bandwidth, additional operators and service company penetration and additional value-added services being provided. As we discussed during the First Quarter Earnings Call, our internal compliance program detected potential violations of U.S. sanction regulations by one of our foreign subsidiaries. We continue to work with authorities on this matter and expect that the second 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 have made no further financial adjustments during the fourth quarter, and continue to believe that the range of penalties that we may ultimately incur associated with these potential violations will be within the same range of $200,000 to $1.5 million. The company accrued a reserve in the first quarter of 2013 of $800,000 for such potential penalties. Our total legal expenses incurred on this matter were $1 million during 2013, leaving our total charges, including estimated fines and penalties, at $1.8 million. We continue to caution that we may incur future legal fees and related expenses. 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 portable segments, and leading with Americas. This segment generated revenue of $14.8 million in the fourth quarter, which was up 6.5% quarter-on-quarter and 15.3% over the same quarter last year due to higher site counts and average revenue per rig led by the Gulf of Mexico and Brazil. Our U.S. Land business improved slightly compared to the prior quarter but down over the same quarter last year, primarily due to lower site counts. Americas adjusted EBITDA was $5.5 million in the fourth quarter compared to $5.1 million in the prior quarter, an increase of $400,000, or 7.8%. Americas' adjusted EBITDA margin increased slightly to 37.5% from 37.0% 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. In December, we reached a resolution whereby we received $875,000 in settlement of services rendered and recovery of invested capital. I can report that the majority of the settlement was treated as recovery of our invested capital. Next, Europe/Africa generated revenue of $26.8 million, an increase of $500,000, or 1.9%, over the prior quarter, and up 12% over the same quarter last year. Our core business performed well in the current quarter compared to the prior quarter and prior year quarter. SI revenues declined by $600,000 in the current quarter compared to the prior quarter, but increased $1.5 million compared to the prior year quarter. 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 $20.8 million as of December 31, 2013, which was down from $23.6 million as of September 30, 2013. We view backlog as a key sign of health in the business and a leading indicator that will remind everyone that this is project-based and can fluctuate due to project timing. Europe/Africa adjusted EBITDA was $6.4 million in the fourth quarter, compared to $6.5 million in the prior quarter, a slight decrease of 1.1%. The decrease is primarily related to SI projects. Adjusted EBITDA margin percentages decreased in Europe/Africa to 24.0% in the current quarter compared to 24.7% in the prior quarter, and increased from 22.9% in the prior-year quarter. For the final segment, Middle East/Asia Pacific was our best performing segment in the fourth quarter and full-year 2013, and generated revenue of $18.2 million in the fourth quarter, an increase of $1.5 million, or 8.7% quarter-on-quarter, an increased 44.6% over the prior year quarter. Our increase in revenue, as compared to the third quarter of 2013 and prior quarter, was primarily attributable to increased sites served and revenue per rig, as well as improvement in our offshore rig mix. Middle East/Asia Pacific adjusted EBITDA was $10.0 million, or 55.0% of revenue in the fourth quarter compared to $9.5 million in the prior quarter, an increase of $500,000. Turning back to the total business results, we reported total SG&A expenses of $13.5 million in the fourth quarter compared to $14.0 million in the third quarter. The decrease is primarily attributable to lower Inmarsat acquisition-related expenses, partially offset by increased professional fees. We reported consolidated net income attributable to common stockholders of $5.4 million, or $0.30 per diluted share, in the fourth quarter compared to $2.3 million, or $0.13 per diluted share, in the third quarter. Excluding Inmarsat acquisition-related expenses, net income attributable to common stockholders would have been $6.7 million, or $0.38 per diluted share, in the fourth quarter. Our effective tax rate for the fourth quarter was 21.7% compared to 51.7% in the prior quarter. The decrease in our effective tax rate is primarily due to reduction and release of certain tax reserves. Our effective tax rate was 35.6% for the full year in 2013 compared to 42.1% in 2012. Now turning to the balance sheet. As of December 31, 2013, our cash, including restricted cash, increased to $61.7 million from $51.7 million as of September 30, 2013. Our restricted cash, which secures performance bonds related to our SI business decreased $300,000 during the quarter to $1.8 million. Our net working capital was $77.6 million, our debt was $60.0 million, and we had no borrowings outstanding on the $125 million revolving facility. As a reminder, on October 3, we entered into a second amendment and restatement of our term loan. The amendment and restated agreement provided for a $60 million term loan facility and a $125 million revolving credit facility, which includes a $15 million sublimit for an issuance of standby letters of credit. The company had $54.6 million outstanding balance on its term loan immediately prior to this agreement, and $60 million outstanding immediately after giving effect to the second amendment and restatement. The term loan facility matures in October 2008 (sic) 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 October of 2018 with outstanding borrowings then payable. Borrowings under the term and revolving facilities carry an interest rate of LIBOR plus inflectable margin ranging from 1.5% to 2.5%, which varies as a function of the company's leverage ratio. Wrapping up, we are extremely pleased with our fourth quarter 2013 and full-year financial and operational performance and continue to see strong momentum into 2014, including the impact of the acquisition of Inmarsat's Energy Broadband business that we closed on January 31. With that, Mark and I are happy to answer your questions. Latoya, please open the lines for questions.

[Operator:]

[Operator Instructions] And the first question is from Brett Feldman of Deutsche Bank.

[Brett Feldman:]

During your comments, you noted about a pause in the global rig market. I was hoping we could just revisit that. I'm curious sort of why you are making the observation, is it simply you're looking at industry databases and you see this happening, and you just want to get prepared? Or have you actually experienced some disruption in trends during the first quarter you think we need to be prepared for as we update our models?

[Mark B. Slaughter:]

Yes, Brett. I think -- thanks for the question. It's not just rereading materials. We're talking our customers attending energy focus industry conferences, it is a topic in the offshore drilling industry today. But what we see is something different. It's not a demand-led slowdown for offshore drilling. It's really a temporary oversupply. There is -- it's against a backdrop of increasing demand for offshore drilling. But what's happening is that the industry appears as slightly overbuilt, and over the next 12 to 18 months, we'll need to absorb that capacity into the growing demand environment. But what is interesting is that this may, as I talked about in my commentary, might drive some more acceleration of retirements from the lower end of the fleet, the older rigs. But that said, we tend to view that as bullish for us, because as we move to these newer rigs these are generally stepping out into the most hazardous and harsh environments requiring more data, and there's more data intensity, which generally leads to higher day rates on these vessels.

[Brett Feldman:]

So just as like a practical modeling exercise, does that mean we should probably assume that maybe your rig count goes down in the near term although it's not necessarily that disruptive to revenue because the trade-off is you're losing lower day rate and you're winning higher day rate?

[Mark B. Slaughter:]

No. No, I do think it's going to be that pronounced. As I talked about, our model is driven by active drilling rigs. And so to the extent that there's a slight oversupply that the first impact will be that day rates that drillers charge operators will drop, theoretically, down to what's called the economic shutdown point where they can't cover their variable cost. And there's a lot of room there before that happens. So we don't necessarily see a decline in active drilling rigs. As we're talking about, this is not demand-led, it's a slight oversupply. We expect the rig activity to remain strong, but what we do see is it may not be at the same sort of growth rates it has been. And again, as long as the rig is working, we're going to be drawing our day rates from drillers and operators and service companies. So I think it's more of -- and the way, I just came from a recent Investor Conference and talked directly with some of the CEOs of these drilling companies, they see it more as a pause or a change of pace as opposed to some sort of lower demand contraction of the market.

[Brett Feldman:]

Okay. And then if you don't mind, I'll ask some questions about the Inmarsat deal. When you announced the closing, some of the financials, particularly historical financials, look like they were adjusted a little bit. I was hoping we could just get a little background there. Was that the result of an audit or their pieces of the business that you ended up not taking on?

[Martin L. Jimmerson:]

Brett, good morning. It's Marty. The answer is that it was primarily related to the business that we did not bring along, which was the Russian business. The rest of the numbers were in line with what we thought they were back in August.

[Brett Feldman:]

That's a good call on the Russian business. Okay, and then the last one, here. With regards to the Global Xpress platform, just give us a sense as to how you expect to see your business with them ramp. What have your customers said about that? And maybe you could just give us an example of some of the capabilities you can support using that platform versus what you're doing now?

[Mark B. Slaughter:]

Yes. We're very excited. It's important for RigNet to be positioned across one or more of the high throughput satellite platforms that's coming into place. Inmarsat has successfully launched the first of a planned 3 satellites. It's now moving its way into operational status, and we're on schedule with Inmarsat to see that service become operational at some point next year. So we're excited about that. You can expect RigNet to certainly be pushing that particular set of capabilities out there, but we may be, and in fact, and I think you'd expect us to be on more than one high throughput satellite platform before the end of the day. What it will offer is, in simple terms, is more throughput and a lower price point. It's a more effective and efficient use of the satellites' space segments towards our customers. And we think that will unleash additional demand for bandwidth such that we can allow more application use and higher bandwidth use at the edge where we're quite excited about the potential. Because it's KA-based, it's going to be slightly more susceptible to rain fade, so we're going to aim it geographically into non-rainy areas. So obviously, the Middle East is a key area. But also we're going to be coupling it with the iDirect service. We're going to be aiming it where we have iDirect hubs today, our North American land business, a good part of the Gulf of Mexico shelf. In various regions around the world we run iDirect hubs, and we'll aim it there. And then finally, from a customer standpoint, we think it's ideal for the oilfield services industry, which is our third customer set after drillers and operators, yet represents a customer set that's really growing faster than the other 2. And we think this is very well set to serve the nomadic needs of the oilfield services industry as those companies run from well to well, site to site, doing their remedial work. So we're quite excited. We think it's going to be an excellent addition to the portfolio, and it's going to provide us some excellent differentiation as we address the oil and gas industry.

[Operator:]

The next question is from Veny Aleksandrov of FIG Partners.

[Veny Aleksandrov:]

Mark and Marty, my first question is on the Pride rigs. I know that you have started probably picking up some of these. How many did you pick up in the quarter and did the schedule change? Or it's still the same as we had before?

[Martin L. Jimmerson:]

Veny, it's Marty. Thanks for the question. The answer is we're still on track, although maybe behind 30 to 60 days. The delays are not related to RigNet, but it's more of a timing of when the rigs arrive at the shipyard for our installation. As of -- we were not billing on any of the 17 previously announced wins from the Pride rigs as of year end. As of today, we are installing on 3 of the 17 rigs. We expect to start installation on an additional 3 rigs during the second quarter, and we believe that we will have all of the 17 commissioned by the first quarter of 2015, or virtually there. So still pretty much on track, maybe just kind of 30, 60-day delay on some rigs.

[Veny Aleksandrov:]

So this pretty much means that the upside that we saw in Q4, none of that is from any Pride rigs, right? If I understand correctly.

[Martin L. Jimmerson:]

That is correct.

[Mark B. Slaughter:]

Yes. That's on the common.

[Veny Aleksandrov:]

Okay. And then going back to the increase in revenue for site or for rig, I know you mentioned some details, but can you talk a little bit more in terms of the bandwidth expansion? Are the clients requiring more now and is this a trend that you see going forward?

[Martin L. Jimmerson:]

Yes. And so the trend, Veny, it continues to be that it starts with what additional services the customers are requiring the need for bandwidth. And then as we add bandwidth, there's additional equipment that we can add to help improve the performance out on the rig itself. And so there's a combination of both bandwidth and additional equipment that we're -- we add to our services that we offer that assist the customers, and it all gets built in to a day rate. So I would not want you to draw a correlation that is just bandwidth or just equipment. Think of it as a complete bundled service solution for our customers.

[Veny Aleksandrov:]

Okay. And lastly, the new acquisition. Just in terms of technicality. How are you guys going to report it? Now Mexico is mixed in with everything else, is this going to be mixed in again with the regional revenues, or what's sort of your thinking going forward?

[Martin L. Jimmerson:]

Yes. And, I think, we spoke to this previously. We do anticipate starting with the first quarter 2014 release of earnings, that we will change our reporting segments to formally be inclusive of the Eastern Hemisphere as one segment, the Western Hemisphere as the second segment, and then systems integrations, which will be the third segment. And systems integrations will include the previously acquired SI business from Nessco, as well as the systems integration business from Inmarsat. We think 2 things

[Operator:]

The next question is from Mike McCormack of Jefferies.

[Michael McCormack:]

Maybe just another quick comment on the rollout of Global Xpress. You guys identified, obviously, certain geographies and weather areas that are better. Will this be an overlay on existing sites? Is there a rip-out involved? Or is this really focused on new sites as you build out? And then secondly, just thinking about the ARPU increases, can you give us a sense for how much of that came from secondary customers versus addition of value-add services?

[Mark B. Slaughter:]

Yes, let me get to your second question first. Yes, we do track it, and do track the various leverage you could pull to grow ARPU per site and you've identified the various areas. It's adding additional secondary customers to the mix. It's cross-selling value-added solutions that includes bandwidth. It can include mix changes, because in cases of offshore rigs you have different types of rigs out there that have different bandwidth and revenue profiles. We have that data. We really generally haven't disclosed the relative movement of that, but that's something I could tell you, as a management team, we watch fairly religiously inside the company. As regards the rollout of the Global Xpress service, we indeed do expect that to supplant some of our existing sites today. An example will be the U.S. Land market, where we would expect to blanket the KA Global Xpress service across that market so it will substitute away from the currents of Ku offering that we have. So that's one area. But when we think about the oilfield services industry, we do expect this to be incremental. In other words, we will use this great technology also to support growth in sites, not just supplanting existing sites that we have. We think maybe last would be our core offshore drilling rig market, maybe the last to see Global Xpress, particularly in the deepwater markets for semi-submersibles and drillships. Where that may work its way onto the rig, initially, is through crew welfare-type offerings as a separate network, not mission-critical, but meant to preserve crew morale and productivity. And we will work with that technology there, and carefully validate it in the sort of environments that exist in the deepwater offshore markets.

[Michael McCormack:]

Can you just remind again on the bandwidth capabilities of the Global Xpress versus the core product currently?

[Mark B. Slaughter:]

There's no real difference in bandwidth limitations. It will -- we will be supplying that via the iDirect modems. It will not -- it's really more on a throughput basis, there's going to be a different cost or price point to it. And based on that, there's no technical limitations as to the upside. In other words, we're not limited to certain bandwidth profiles to offer the service. Today, I'll just offer, we're still an average of about 1 MB per customer worldwide. That's a trend that's moving up, but that's where we are today.

[Operator:]

And the next question is from Brandon Dobell of William Blair.

[Brandon Burke Dobell:]

Probably going back to the question about the deepwater space. Maybe some color on some of the puts and takes around older spec or lower spec jack-ups, higher spec jack-ups. And I guess, I'm trying to figure out how much exposure you guys have to rigs that are certainly 20 years and older, if not 10 years or older. Did you see any of the jack-ups, lower spec jack-ups in the quarter get retired, so those customers took them out of commission that was a headwind to the rig count? And then kind of on a prospective basis, how do you think about your fleet mix and how it lines up with your comments, Mark, about retirement of old or lower spec rigs? Do you see risk in things rolling off in '14 or '15 that we should be aware of?

[Mark B. Slaughter:]

One thing we've always known -- these are great questions. One thing we've always known is that the newbuild market is not fully additive to the denominator. There's always going to be some retirements at the lower end. But my comment was is that we might see some acceleration, but that said, the denominator's still growing, we believe, but not maybe at the same pace as history, right? So this is a -- this is just a temporary oversupply that has to be absorbed. So I think we really see that way. We've begun to look at the sites we serve, at the rigs we serve, on that sort of bifurcation basis, that's a big term in the drilling industry today. Where newest generation rigs, as well as relative drilling performance can drive the difference in the day rate they're able to earn from an operator for a drilling project. And so you see, just like you hear in the airline industry, a lot of people tie up the age of their fleets to their safety and operational performance in terms of negotiating with their customers, to put their rigs to work. And many of the drillers believe they captured premium rates based on the newest technology out there. So we understand where we're positioned in that world. We believe, particularly with the customers that really are with us, that they are the newer fleets out there, they're the ones also building the latest-spec jack-ups and drillships and semi-submersibles. We like our position in the market and believe that while we feel obligated to tell our investor-base about these light headwinds that are in the industry, we think we're well-positioned to navigate through it quite well.

[Brandon Burke Dobell:]

Right. To take it out one step further, I know in the past you guys have talked about the NOCs not being a great customer base because they tend to do more stuff in-house as probably in the offshore market, in particular. Given how important Brazil is, kind of the overall landscape for rigs and platforms going forward, and because Petrobras obviously is very involved there, how do you guys see the Brazilian opportunity the next couple of years? Do you see Petrobras acting differently than maybe a traditional NOC and looking for partners on the communications side? Or do you see that only -- that market share opportunity only happening where they've got a partner on a rig or a partner on a platform or project where you've got an existing relationship with?

[Mark B. Slaughter:]

Yes. Brazil is an exciting market. It's also a tough one to compete in because we haven't always had, particularly with Petrobras, the operator up-sell opportunities on the rigs that we serve. And of course, in the most recent periods, you've seen OGX file bankruptcy, a large Brazilian independent. And there's a bit of topsy-turvy nature to that market. That said, though, it's a highly attractive deepwater play. And we believe, for the long term, is an area we want to be at, particularly because our top customers are there, but we also, long term, fundamentally believe it's an attractive geological basin that we need to be there to serve. So given that though, you're right. In the emerging market national oil company customer base, in many cases, they have the capabilities -- maybe not quite at our level, but they have the capabilities to serve themselves. And that's always been a challenge across Latin America and in Mexico, in Saudi Arabia and in China, where some of these national oil companies can't do what we do. And it's been a bit of a challenge at times to try to convince them to have the RigNet Kool-Aid and allow us to do a more professional job of serving their field operation. That said, we continue, I think, to make some progress. I think with respect to Petrobras specifically, there are situations, they're in Brazil, but we are serving them. In some cases through the driller, with the driller providing them the bandwidth, in some cases, directly. And we see that as more of a continuum, and we continue to move along in that continuum and serving them.

[Brandon Burke Dobell:]

Okay. And then final one for me. You mentioned a pretty good number of newbuilds added in the fourth quarter, and it sounds like that momentum continued in the first. Any sense for us of what those contracts look like relative to newbuild that you are adding in the early part of '13 to early part of '12 from a bandwidth or kind of contract structure point of view? I guess I'm just trying to figure out how the market is transitioning for these newbuild deals as opposed to cross-sell deals that you guys are working on?

[Mark B. Slaughter:]

Yes. Yes, Brandon. That's an interesting question. We really see no change in terms of term or price levels. In general, bandwidth use of the edge though, is trimming up. I haven't specifically gone back to look at, say new builds installed on in Q4 by asset class back to Q1, to see if there's an increase. But in general, with our customers are approaching us time and time again for additional bandwidth at the edge, I mean, that's certainly the trend and we continue to see that. So again, I think that operators, if you look at drillers, day rates can move dramatically, in tight markets up, in surplus markets down. Our pricing generally doesn't move on the same basis. We have a lot of customers that don't even bid out their service because we're so mission-critical and we're a small price to pay, if you will, for very reliable service. And by the same basis, we don't take advantage of these pricing situations if our market gets tight. And we tend to stay in those steady states in terms of our pricing out the marketplace.

[Operator:]

[Operator Instructions] And the next question is from Tim Horan of Oppenheimer.

[Jim Shaughnessy:]

It's actually Jim Shaughnessy on for Tim. I just -- I don't know if -- I'm not sure if I heard you guys correctly. Did you say that you would looked to be on the other hybrid satellite technologies, all of them at the end of the day? Is that what I heard you say?

[Mark B. Slaughter:]

Yes, that's correct. I mean, one of the things is we're very, very excited to be on the Inmarsat Global Xpress platform. But at the end of the day, we're agnostic as to back haul technology and our studies indicated that there'll be other high throughput offerings that we believe will play into the oil and gas space. Intelsat's EpicNG platform, for example, that Intelsat is our strongest satellite partner today, and it's going to have a Ku-based offering but one that's going to also play, we think, a major role in the oil and gas vertical. A bit more of a fringe player, but interestingly, is O3b networks, they have a meter -- satellite that offers a high throughput but, coupled with low latency, almost terrestrial network latency. And even though it only works between the 45 latitudes, we believe it's going to be a factor in the oil and gas space. So I think over time, you could expect to see announcements from us as an agnostic provider that we'll have more than 1, perhaps all 3, high throughput satellite offerings in place in the portfolio. The Inmarsat commitment is there, but it does afford us room to have others in the portfolio over time.

[Jim Shaughnessy:]

Great. And then second, and I guess the extent you can outline some of the low-hanging fruit that you expect to be able to capture from Inmarsat over time?

[Mark B. Slaughter:]

Well, the low-hanging fruit around synergies? One of the things we did in terms of organization is we picked the organization up front. So we were very clear with Inmarsat the people that we believed we needed and the people that would stay with Inmarsat. And based on that, we don't expect any material changes to the workforce on that basis. We brought over what we need, we were able to see that pretty closely. So that part will not be there. But we see opportunities, certainly in space segment, in network, in facilities, to consolidate. And we're clearly pursuing some cost synergies along those dimensions to improve third-party spend and facilities cost.

[Jim Shaughnessy:]

Great, and then lastly, I know you guys said that bandwidth demand is down about 1 MB, and I feel like that has been fairly consistent. I know, it's kind of -- you've been saying it's an upward trend, but can you generally say where that's been accelerating or kind of staying steady? Is that range still in sort of the 15% to 20% per year? Or is it -- am I thinking about it correctly?

[Mark B. Slaughter:]

I think that -- I think it's steady. The one thing I'd point to you, though, is with the advent of high throughput satellites there could be a step change in demands, right? Because we're going to be having a higher throughput at lower cost offering in there, and our belief is that demand is elastic. That at levels sufficient, that we're going to see volume increases above the drop in price, if you will, such that we're going to unleash some demand out there, tap into some latent demand. And so we're pretty excited about that. So that's the one step change that I think sort of in the 2015, 2016 time frame, you could see the bandwidth growth rates accelerate.

[Operator:]

There are no further questions at this time. I'll turn the call back over for closing remarks.

[Martin L. Jimmerson:]

Thank you, Latoya. Again, to our listeners and participants, thank you for your interest in our fourth quarter and 2013 results, and we look forward to speaking with you when we announce our first quarter earnings. Have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.