RigNet Inc
Q2 2014 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the RigNet Second Quarter 2014 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, CFO. Sir, 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 second quarter 2014 results. Today's conference call was preceded by our earnings release yesterday afternoon after the market 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 second quarter highlights, and then I will provide financial details. We will then open up 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, which describes factors that 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 release. At this time, I will turn the call over to Mark Slaughter.

[Mark B. Slaughter:]

Thanks, Marty. Again, to all our participants around the globe, I want to thank you for joining our second quarter 2014 earnings call. I was pleased with our strong second quarter results, which included record revenue and record EBITDA as a result growth in our core managed services business and the addition of the Inmarsat Enterprise Energy business unit that we acquired early in the year. The integration of this business unit is proceeding on schedule, and customers appear delighted with our expanded capabilities that include global L-band services, microwave services in the U.S. Gulf of Mexico and the coming Global Xpress high throughput satellite platform that Inmarsat is now putting into place. Market conditions for our services remain favorable with the increasing digitization of the oilfields affording RigNet the opportunity to be an integrated technology solutions provider across the life of the field from drilling through production. Speaking briefly through our financials, revenue in the second quarter was a record $80.7 million compared to $75 million in the first quarter, a sequential increase of $5.7 million or 7.5% led by growth in our managed services business but partially offset by a decline in our lumpy telecoms systems integration, or TSI business. The quarter-on-quarter comparison also benefited from Inmarsat's results being included for only 2 months in the first quarter. EBITDA was a record $18.8 million or 23.3% of revenue compared to $16.2 million or 21.6% in the first quarter, a sequential increase of $2.6 million or 16% that was also coupled with solid margin expansion. RigNet provides to the oil and gas industry both managed remote communications solutions and telecoms systems integration services. We provide managed solutions primarily to offshore and onshore drilling rigs, offshore and onshore production facilities and energy maritime vessels. We achieve revenue growth by increasing the average revenue per site, which some call ARPU for average revenue per unit, and by increasing the number of remote sites served. We grow ARPU by adding secondary and tertiary customers at these sites and by selling additional value-added solutions, including associated satellite bandwidth upgrades. We grow count by targeting new and existing sites where our value proposition of reliable networks and superior customer service resonates well with customers. In our core offshore rig market, our network infrastructure is now deployed on more than 1/3 of active and addressable rigs. While we remain optimistic that we can capture additional market share and that the number of active offshore drilling rigs will continue to grow, the real story for RigNet in serving offshore rigs is that increasing digitization of the oilfield likely means more revenue growth going forward will come from ARPU than from site count additions. With this digitization notion as context, RigNet's organic revenue from offshore drilling rigs increased 30.8% compared to the prior year quarter, with approximately 2/3 of the increase coming from ARPU improvement and the remaining 1/3 from an increase in the number of rigs served. As further support for the notion that offshore rig revenue growth will be led by ARPU improvement, our total organic satellite bandwidth purchase per customer increased by approximately 37% over the same period last year, with the majority of the increase being used to serve offshore drilling rigs. Conversely in our more nascent efforts to build presence in international land drilling, global production and energy maritime, our revenue growth in those asset classes over the near to medium term will come more from site additions than ARPU growth, though the same digitization theme still ultimately applies to these step-out asset classes over the long term. Organic revenue from production, energy maritime, international land drilling and other sites increased 13.1% compared to the prior year quarter, with approximately 2/3 of the increase coming from site growth and the remaining 1/3 coming from increases in ARPU. Again, we expect our revenue growth in our newer target areas to be led by site growth as we seek to establish critical mass there. Though over the long term, we expect ARPU to drive growth consistent with that digitization theme that applies across the entire upstream oil and gas business. I now want to mention some of the more notable customer awards in the second quarter and through the month of July. We view significant awards as those having a total contract value of $1 million or more in revenue. Within our managed services business contained in our Eastern and Western hemisphere segments, here are some representative awards

[Martin L. Jimmerson:]

Thank you, Mark. Now let me share some more detail about our second quarter 2014 financial results. During the second quarter of 2014, we reported record revenue of $80.7 million, including $19.2 million from the Enterprise Energy business unit recently acquired from Inmarsat. Excluding the Inmarsat business, organic revenue increased $10.1 million or 19.7% compared to the same quarter last year. The increase in organic revenue compared to the prior year quarter was primarily attributable to increases in ARPU from offshore rigs, and to a lesser extent, to increases in sites served, including those from our strategic initiatives. Mark provided in his earlier remarks further details contributing to our organic growth compared to the prior year quarter. Looking at our quarter-on-quarter organic revenue performance, excluding Inmarsat, we were extremely pleased with our managed services business serving offshore rigs and other energy sites, which increased by $4.3 million or 8.5%, though overall organic revenue quarter-on-quarter was flat at $61.5 million due to a revenue decline in the second quarter in our legacy TSI business. Organic revenue from offshore rigs increased 7.2% quarter-on-quarter from both increased ARPU and rigs served. Organic revenue from other sites, including our strategic initiatives, increased 10.2% quarter-on-quarter for the same reasons. Wrapping up with our revenue commentary, our total TSI backlog as of June 30, 2014 was $36.3 million compared to $37.2 million as of March 31, 2014. Adjusted EBITDA was a record $18.8 million or 23.3% of revenue, an increase of $4.9 million or 35.3% over the same quarter last year and an increase of $2.6 million or 16.0% quarter-on-quarter. The increase in adjusted EBITDA resulted from organic growth in our core managed services business and to a lesser extent, contributions from our recent Inmarsat acquisition. We reported total SG&A expenses of $17.9 million compared to $16.4 million in the prior quarter. Acquisition cost were $600,000 in the current quarter compared to $2.3 million in the prior quarter. Excluding acquisition cost, SG&A increased $3.2 million quarter-on-quarter. The increase is primarily attributable to SG&A added from the recently acquired business unit, as well as increases in headcount and associated compensation expenses to support existing and expected growth in our core business and strategic initiatives. We reported consolidated net income attributable to common stockholders of $5.7 million or $0.31 per diluted share. Excluding acquisition cost associated with the recently acquired business unit, net income attributable to common stockholders was $6.3 million or $0.35 per diluted share. Excluding acquisition-related expenses, net income attributable to common stockholders would have been $4.5 million or $0.25 per diluted share in the prior quarter. Our effective tax rate for the second quarter was 37.4% compared to 58.2% in the prior quarter. The effective tax rate was low primarily due to recognizing much lower integration and acquisition costs related to the recent acquisition of Inmarsat's energy -- Enterprise Energy business unit in Q2 compared to Q1, thus, improving the domestic book losses and reducing the amount of evaluation allowances necessary in Q2. Now turning to the balance sheet. As of June 30, 2014, our cash, including restricted cash, was $62.4 million, net working capital was $97.3 million and our debt was $85.3 million. Our debt-to-EBITDA leverage stood at 1.26 as of June 30, 2014. We have $95 million available under our $125 million revolving facility after borrowing $5 million during the second quarter for the Inmarsat business unit acquisition and related expenses. Capital expenditures were $11.6 million in the second quarter, bringing our year-to-date total to $21.3 million, including $1.2 million of expenditures related to our ERP implementation. This compares to $8.5 million in the prior year quarter and $15.1 million for the 6 months ended June 30, 2013. The majority of our capital expenditures continue to represent revenue-generating capital expenditures at the edge. In the first quarter of 2013, we announced 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 have no additional information to provide or report at this time. During first quarter, the company began implementation of a new enterprise resource planning solution. During the second quarter, we completed our workflow design and commenced regional office visits to confirm our processes. We believe we remain on track to go live in early 2015, and we believe the project was still projected to have total capitalized cost of $5 million to $6 million. Wrapping up, we are extremely pleased with our second quarter record financial performance and operational execution. Our integration of the Inmarsat business unit continues as expected. Our core business performed in line with our expectations, and we continue to see favorable market conditions that give us confidence for the balance of 2014. With that, Mark and I are happy to answer your questions. Latoya, please open the line for questions.

[Operator:]

[Operator Instructions] The first question is from Mike McCormack of Jefferies.

[Michael McCormack:]

It sounds like you're a little less cautious I suppose on the rig count issues we talked about in the earlier part of the year, if you could just comment on that. And then secondly, with respect to the offshore ARPU increases, what are you seeing? Is it increased capacity in your SKUs that are being demanded? Or are you seeing ancillary revenue streams coming in from the rigs?

[Mark B. Slaughter:]

Yes. I think our view has been the same with respect to offshore rigs. As long as they are activity drilling, that supports our business model. So a lot of the headwinds that we see in offshore drilling for the drillers themselves are really a matter of slight oversupply in the market against the backdrop of still increasing demand. That's what we hear from our customers and see in the marketplace. So as long as those rigs are working and not stacking, and we believe they'll continue to work as long as they're generating positive cash and covering their variable cost, we believe that's supportive of our business model. And so that -- and I think or second -- we were encouraged by our second quarter results, which will continue to improve, which I think is supporting the assertions we've made about how our business model interacts with the offshore drilling community. With respect to offshore ARPU, I think it just -- again, we see the digitization playing out, that there's increasing bandwidth needs at the edge. That's something that we believe will continue for us. We're supporting that with various services around that bandwidth and then customers themselves are also using bandwidth for their own purposes that we support through our networks. So that's a theme that really drives our offshore rig business, which is growing demand at the edge for services and associated bandwidth.

[Operator:]

The next question is from Tim Horan of Oppenheimer.

[Timothy K. Horan:]

Good quarter. Just had 2 quick questions. One, can you discuss the microwave network in the Gulf and how optimistic are you about being able to monetize that and maybe other areas to kind of deploy it in and now that you've had more time to look at the technology, what kind of maybe speeds and coverage you can get with it? And then secondly, on the value-added services side, can you maybe give a little more detail on some products that are -- you're optimistic about or that customers are demanding? Maybe is it more in the machine-to-machine side or more cloud-based or any color there would be great.

[Mark B. Slaughter:]

Yes. We're very, very excited about the microwave network. It is a network that covers 25,000 square miles in the U.S. Gulf of Mexico, and in fact, spanning the majority of the Gulf of Mexico shelf. It has something called a terrestrial wireless overlay for last mile connectivity to it. But what it offers is very high-speed throughput and low latency, more approaching what you would find in a terrestrial network. So it has a lot of advantages over traditional satellite. It is aimed at the production market today. We are talking to our drilling operators about extending that network back into the drilling community. And I even had one customer at a recent launch wanting to talk to us about extending that into the deepwater market, which we have been experimenting with to serve deepwater rigs with microwave as a primary, with satellite then moving to a backup role. So it's a very, very attractive asset primarily serving production today that we think has applicability into the drilling market. Also with some of the mobility features we are introducing into the network, it will also serve the energy maritime vessel community and so, we're excited. Longer term, we certainly acquired an asset, but what we really have acquired are the skills and know-how around terrestrial wireless technology that we believe can be exported to overseas markets over time where there's enough oil and gas concentrated activity to justify such investment. So it really supports the notion that we're agnostic around backhaul methods. We're not just a satellite provider. We will find the best-of-breed solution for our clients wherever they are in the world. With respect to value-added solutions, that really drives our business model. We're not just a transport provider to and from rigs of data. We're trying to provide solutions at the edge, and that goes back to the very inception of RigNet. What we had done with the acquisition of Inmarsat and our strategic alliance with them is bring in assets such as a microwave network, but also our L-band distribution partnership and the coming Global Xpress offerings all bring additional capabilities. And I think in the near term, where we're focused is trying to integrate those capabilities within our existing portfolio of solutions. For example, where we provide broadband satellite or VSAT services to offshore rigs, we can now introduce L-band offerings as integrated fail-over and backups. In the case of jack-ups, that can keep communications going during rig moves. Or otherwise, it can serve as a separate network to improve the redundancy and reliability of our solutions. As we integrate those and build those bundles and introduce those into the marketplace, we'll move onto an additional solutions that continue to meet the needs of our clients.

[Operator:]

Your next question is from Veny Aleksandrov of FIG Partners.

[Veny Aleksandrov:]

Great quarter. My first question is on the Western hemisphere. You had a very strong quarter there. Can you give us a little bit more details, what's happened, new clients or much more bandwidth per week? Just a little bit more details on it.

[Mark B. Slaughter:]

Yes. We're certainly pleased with the Western hemisphere's performance. Several things are going on, but probably chief of which is the addition of about 70% of the Inmarsat business into the Western hemisphere and into Lafayette and the Gulf of Mexico in our U.S. land business. We've also been able to rotate our management team and get full-time executives against each of the business areas. We rotated, as you saw in a recent press release, a strong manager in the Middle East back to run our Gulf of Mexico business. That's going to give us increased focus both on serving our customers, as well as completing the integration activities. And then we've moved one of our managers also into full time over our North American land business, which includes our land business plus the smaller business acquired from Inmarsat plus the SCADA/M2M business serving the pipeline industry. And so as we get full-time attention from our management teams, we think that's going to be positive. The deepwater market is also robust in the Gulf of Mexico, and I think we're benefiting from some of that increased activity in our ability to serve that market with distinction.

[Veny Aleksandrov:]

And then the TSI business, you gave on the backlog $36.3 million. How far in the future does this backlog go.

[Martin L. Jimmerson:]

Veny, I think the actual number is $36.3 million. And the backlog can range over a period of time. But I think you can assume it's over a period of 12 to 24 months, and some of that backlog will go out further.

[Operator:]

The next question is from Brandon Dobell of William Blair.

[Brandon Burke Dobell:]

You guys or Marty mentioned that the contract in the Barents Sea for 8 megabytes, is that typical, atypical? And I guess from two points of view, if it's a new contract, is that the kind of conversations you're having from people that are kind of starting up fresh with you guys? Or if it's an upgrade or a renewal, were they using a lot less bandwidth previously? I guess I'm just trying to get a sense of how relevant that comment is for what you're seeing across the rest of the offshore portfolio.

[Mark B. Slaughter:]

Yes, thank you for asking that question, Brandon. The average bandwidth per customer per rig today is around 1 meg. So this is a very, very high amount of bandwidth, and that's why we wanted to point that out for investors. And then there's been an external study that we show in our Investor Relations, a presentation, that by 2017, the average bandwidth per customer is expected to be a bit over 2 meg. What we say seeing anecdotally is that we see some customers well in excess of that and this is one of those examples. Our records aren't such that I can say that's a world record, but it's certainly one of the highest bandwidths per offshore rig. It's also extraordinary in the sense that we're at 75 degrees North. So the ability to even close a link that far North from a geostationary satellite also speaks to our engineering team in Norway. So we're especially skilled and serving the Arctic region from Alaska across the Barents Sea and the Kara Sea. So that's a particular expertise of the company, and we're quite pleased. We hope to be able to issue a press release providing a little more coverage around this particular performance by the company.

[Brandon Burke Dobell:]

Okay. And then looking at the non-offshore parts of the business. If you were to stack up international land rigs and then maybe, let's call it, production facilities and then maybe it's FPSO plus onshore LNG facilities, how would you rank those in terms of, let's call it, the largest potential contribution to growth recognizing that there's going to be all kinds of ranges on what could happen? But if you were to, I guess, rank them by country, your [indiscernible] but also your confidence around executing on those opportunities, how should we think about that as a growth driver in the next couple of years for you guys?

[Mark B. Slaughter:]

It's a great strategy question in where do you set your priorities. When I think in multi-dimensions with you here, one is the asset classes we serve. So offshore drilling rigs is our absolute inner core business. We also serve the U.S. land rig market and have just under a 20% market share of that business. And then we have our TSI business, which we've talked about that we've assembled through acquisition. So those can be considered the core businesses. Step outs, we think international land rigs, the production market, onshore and offshore around the world and energy maritime are each equally sized markets. However, there are some relative attractiveness comments you can make. RigNet being what it is, international land drilling is going to be closest to how we can perform because we do it quite well in the U.S. land market, so our ability to do this overseas, we think is superior to a lot of providers out there. The challenge is, is that there are only pockets of land activity if you put Russia and China off to the side, and we operate today in the largest U.S. land market, but are looking -- where we're active in the offshore arena, we're looking at certain markets in the Middle East and somewhat in Latin America and somewhat in Asia for pockets of land drilling activity that we believe we can support. The next attractive one is production. We're serving the drilling market with distinction. It's a natural corollary to move across to the production side of the business, which is more operator-centric. A lot of our acquisitions, you could argue, when you think about Nessco and even Inmarsat and its microwave network have investments towards capabilities that allow us to complete more directly in the production space. It's a very, very large market, both floating and fixed in both onshore and offshore and we're excited about the potential in that market. Last is international -- excuse me, energy maritime vessels. Again, these are the vessels large and small, seismic through OSVs and subsea construction vessels that play across the upstream oil and gas space. And we believe it's a natural corollary again for us to step into that market, mindful though that the degree of competitive intensity is much higher as a result of general maritime providers also competing in this space. That said, the energy maritime subvertical within Maritime is the most attractive vertical, and we think we bring some natural references into that space and plan to compete and compete well in that business long term. The other dimension is customers. And we serve drillers, operators and service companies. Our core activity is serving drillers and capturing operator and service company business on the sites where we serve. However, operators at the end of the day are funding all activity, and we have a lot of emphasis on improving our relationships on a global basis with a lot of the major oil and gas companies. And I should mention that oil field services companies, though the smallest of those 3 segments, is actually the fastest growing. And it represents a lot of opportunities for us, though their high mobility has created some challenges for us. That said, our L-band offerings that we have today, the coming Global Xpress which is a global network capability, are really going to allow us to serve oilfield services companies much better as we move forward.

[Brandon Burke Dobell:]

Okay. And maybe digging in one step deeper into the operators, and you mentioned that one customer, 5 rigs and a land rig and a remote office. Maybe the pipeline there for getting operators as customers, how do you feel about that as an opportunity looking out this year and next? And has the Inmarsat deal helped you or -- in specific ways that you can identify for us, either accelerated growth or given you a broader coverage of going after operators?

[Mark B. Slaughter:]

Yes, Brandon, great questions today. In terms of kind of the cadence of business development activities, yes, we really see no change. It's still remaining positive for us. And certainly as we look forward, we see no reason to deviate from that view. We recognize today in sort of listing out those awards here in the quarter, that that's a data point, not a trend. What I would say, it's a generally consistent quarter in terms of our business development activity.

[Operator:]

The next question is from Jason Kraft of Cato Partners.

[Jason Kraft:]

I don't -- I guess this is the tough love portion of the conference call. I just wanted to clarify a few things because I -- I guess we haven't quite heard through the Q&A kind of what's been going on out there in the offshore drilling market. And a lot's happened with the drillers over the past quarter, and I just want to make sure expectations are, I guess you could say, sober enough, given what's changed with respect to these offshore drillers. If you look through the conference call transcripts of the Nobles, ENSCOs, Heroes of the world, we've heard for the first time the term cold stack or wheel cold stack impairments considering cold stacking. And I know you don't generally give forward guidance, but is your favorable market condition comment contingent on this forward kind of what's happening with those top customers or is this just what you feel today? I just want to get a sense on if you guys have really looked into the future, especially in the 2015, giving these headwinds from these customers. And then I had a follow-up and a clarification on the Pride rigs.

[Mark B. Slaughter:]

Okay. Yes, Jason, let me maybe answer that by going back to 2008, 2009, which was an ultimate stress test of our business model offshore. During that period, we saw the oil and gas price collapse, we saw U.S. land drilling contract by 70% in 8 or 9 months. And what we saw in that period in 2009 was a continued growth in our offshore business. So there was both a contraction in demand and supply in offshore drilling, and yet, at the end of the day, our business kept growing, albeit just at a slightly slower rate. And then in 2010 picked all back up. So we feel given that -- and there were some stacking of jack-up rigs in that environment as well, but we were able to offset that through the additional rig site growth as well as ARPU growth at the edge. And so we think, given that, that our business model is somewhat or heavily insulated against oil and gas movement or even a situation where the offshore drilling industry itself and offshore drillers are somewhat pressured on day rates. So if we move to the current environment, what's different about today versus the 2008, 2009 environment is you still have a robust demand for offshore drilling. What has happened is that the offshore drillers collectively have slightly overbuilt capacity, and that capacity has to be absorbed into a growing demand environment over the next few months and maybe next couple of years. We stay in very close consultation with our key clients. We also stay involved with investment research and other industry research to make sure we follow this well because it's so key to our success. But our view is going to be that as long as rigs are working, that we will continue to have a robust market for our services. Now what you've noted is that there could be some stacking, some retirement of really old rigs as new rigs come on board and it may ultimately impact things. And to the extent that rigs are stacked, that does affect us. However, we went through a much more stressful period in '08 and '09 and kept growing, and I would just offer that as a counter to the current situation, which is more of a -- what we view as a temporary oversupply of rigs into the market.

[Jason Kraft:]

Okay. Yes, helpful, helpful comment. And then just on Pride, ENSCO talked about that they were impairing 8 rigs, and I know you mentioned the 4 that are going to be available for sale. But of the 8, are all those Pride rigs? And also, if you look at Street models for the guys who cover the drillers, there's a lot of guys that are -- I would call, maybe you've taken a Draconian view, but they're assuming that those 8 rigs all get cold stacked through 2015. So I know that everyone is just kind of throwing stuff on the wall and trying to predict, but I just want to frame it to make sure that expectations are, I guess, set properly as we transition because it seems like each quarter, there's this new news flow coming. And I know it's hard to predict, but I just want to make sure that everyone's on the same page.

[Martin L. Jimmerson:]

Thanks, Jason. I believe that the majority of the rigs that ENSCO took the impairment on were primarily related to the Pride acquisition. I'd be happy to go back and look at it, but that's my understanding.

[Operator:]

[Operator Instructions] The next question is from Barry Kaplan of Maple Tree Capital.

[Barry A. Kaplan:]

I just had one quick question. I'm trying to better understand the profitability dynamic of the TSI business, which kind of seems to jump around all over the place from quarter-to-quarter, where you have the revenue declines from $15.6 million to $10 million to $11 million, sequentially, but the gross profit goes from $2.7 million to $3.3 million. I just -- I'm trying to understand and think about how to predict the margin -- gross profit margin going forward on that business.

[Martin L. Jimmerson:]

Thanks, Barry. As we've stated before, the Systems Integration business is lumpy in terms of kind of when the revenue comes in based upon where you're at in the project. We were experiencing kind of a different project profile earlier in the year and late last year, and I think that accounts for kind some of the improvement, a different mix here in the current quarter. I also think the business is actually starting to perform a little bit better as we're more -- better focused on projects that we're looking at. I think we've been fairly consistent. We think this is, overall, a business that can kind of perform in the mid-teens EBITDA level. But we are integrating the Inmarsat EIS business, which we're hopeful that will lift us in our prior experience. So hopefully, that helps and answers your question.

[Operator:]

And the next question is from William Alpaugh of Simmons & Company.

[William Alpaugh Jr.:]

You all had a nice quarter from Inmarsat. Can you all go over some of the highlights on the implementation and your plan going forward, whether it's changed or not? And do you see any additional growth?

[Mark B. Slaughter:]

Well, yes, I mean the Inmarsat -- let me see if I can answer this. This is Mark. The Inmarsat business is being integrated. The chief assets are going to be the microwave business in the Gulf of Mexico, the SCADA VSAT business in North America or Continental U.S. Those are the chief business areas. We have indicated that it has a slower growth profile than core or legacy RigNet. What we're working on is we integrate the teams and integrate the assets in the portfolio. We're certainly going to expect over time that we're going to improve the growth rate of those parts of the business as they're integrated. And we should see some margin improvement towards the core performance of RigNet at the gross margin and EBITDA lines.

[William Alpaugh Jr.:]

Okay. Focusing on site count. U.S. onshore decreased quarter-on-quarter, while total U.S. rig count was up quarter-over-quarter. Can you provide us some color on your decline and your outlook for the U.S. onshore, as well as the growth offshore in the other site, specifically for offshore how much growth was in Eastern versus Western and the outlook each?

[Mark B. Slaughter:]

Yes. Well I can certainly address on U.S. land market side, we did see some improvement in market rig counts for the quarter. Our rigs served did drop, so our market share did drop slightly. However, ARPU was up strongly, and our revenue has been improving as you trend that in that business, which today is a very, very small part of our business. We continue to be supportive of our U.S. land business. We operate it through 13 service centers. Our rate against the major oil and gas properties across the continental U.S. and particularly supporting the shale or unconventional drilling activity that is revolutionizing the oil and gas industry the U.S. We like the market and we've increased management focus on it. We have the additions now with Inmarsat's land drilling business to integrate, so we believe that's going to provide us some more scale and capabilities. And we have an M2M/SCADA market rate against the midstream pipeline business that we believe over time can also generate some additional synergies and even revenue opportunities when you think about aiming not just at drilling, but also completion and production activity in upstream. As the offshore business, we feel that's performing quite well, growing ARPU at the edge, as well as continuing to add rigs. So our outlook continues to remain strong for offshore.

[Martin L. Jimmerson:]

And then William, this is Marty, just wrapping up. We do not publicly disclose our counts by reporting segment. And so I appreciate you asking, but we view it as pretty competitive information.

[Operator:]

The next question is from Josh Rosen of Act II Partners.

[Josh Rosen:]

Just a few questions. The way that you talked about, Mark, how many of those are actually included in the Q2 site counts or contributed to revenue during the quarter? Or are those kind of more forward-looking wins?

[Mark B. Slaughter:]

You're talking about the ENSCO rig additions?

[Josh Rosen:]

Just the list of wins that you mentioned at the beginning.

[Mark B. Slaughter:]

Yes. No, no. Those wins are forward looking, right? Those were awards in the quarter that will play into future quarters.

[Josh Rosen:]

Got it. You talked about a fleet increase -- increasing their bandwidth across their fleet. Can you just give us an order of magnitude? Are they going from 1.2 to 2.4? Kind of where are they in terms of kind of the bandwidth increases? I mean is that a similar magnitude to what we saw, I think, it was a year or so ago when you had some other fleets that were upgrading their entire fleet?

[Mark B. Slaughter:]

Yes, I think the way to answer that is, it is in the same order of magnitude increase. These clients are generally upgrading across their fleet and then after a period of time, they're doing it again. This is based on growing demand at the edge, which is one of our theses around the attractiveness of the upstream oil and gas industry for our services. And so this is yet another major customer doing this fleet-wide to support the needs of the operations folks at the edge. And so the way I'd characterize it, another similar upgrades to ones we've seen in the past. And it's a trend we expect to continue as it's our thesis that bandwidth, these continue to be underserved and there's just growing demand for that at the edge.

[Josh Rosen:]

Okay. Just a clarification on the Pride rigs. In terms of the -- so you mentioned 4 of the, I guess, 17 original ones were being sold. The other ones, do you have visibility that you're definitely going to be installing on those? And then, anything else that they could be cold stacking or selling would be in the bucket that you were never awarded in the first place?

[Mark B. Slaughter:]

Yes. There's a lot of different moving numbers there, but there were 17 originally awarded last year. We've installed and are active on 3 of those today, and we've said that there should be another 6 that will be activated between now and the end of the year. So that leaves 8 rigs that would be in 2015 or beyond. And we've said of those 8, there are 4 that ENSCO has announced they are selling. 2 of those or 2 of those 4, are actually, I think cold stacked today, as I was looking at the information prior to the call. Even rigs that are being sold, we'll continue to track and if they're active, we would love to serve them even if under a different owner. So that's maybe the way I would describe it. But beyond that, there are some additional rigs that you might call former Pride rigs that go beyond the 17 we've talked about. And we certainly believe that there's an opportunity for RigNet to pick up those down the road as well as long as we continue to perform for ENSCO, which we certainly are very focused on doing.

[Josh Rosen:]

Okay. That clears that up. And then just, I might have missed this, Marty, did you disclose what the EBITDA contribution from Inmarsat was and what just beyond that and the core business?

[Martin L. Jimmerson:]

Yes, Josh, we did not. And that's primarily because we're already starting to integrate the business and management teams and what I think you could assume is that the contribution in the third quarter was consistent with what we stated the business would do on an annualized basis. So the business is performing. We'll be able to provide clarity on revenue for the next several quarters through the end of the year, but thereafter, you're going to see effectively a fully integrated business.

[Josh Rosen:]

Okay. And just lastly on cost. I think in Q1, you had actually mentioned in the call that you expected margins to tick down a little bit and what we saw is actually a substantial increase in margins. Was there, I mean, something that kind of came in to surprise you on the expense side? Or I mean should we expect you to kind of keep tracking towards your historical margins as we go forward through this year and next year?

[Martin L. Jimmerson:]

Yes, I think -- as I think back to the first quarter, we were specifically commenting that Inmarsat would be in for a full 3 months in the second quarter, not 2. That business performed in line with where we thought it would be, and maybe slightly up but not materially. The driver of the increase in margins was the growth in our core business and the strength of our revenues. And while we had some visibility to that, again, we can't control the timing when the revenues come on, et cetera, so we were very pleased with the quarter.

[Josh Rosen:]

And just kind of on a go-forward basis, I mean should we expect that you continue to see scale benefits and come towards your historical margins?

[Martin L. Jimmerson:]

I wouldn't change my model materially. Give us chance to continue to demonstrate our performance and stay tuned.

[Operator:]

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

[Martin L. Jimmerson:]

Again, we'd like to thank everyone for joining us today, and we look forward to speaking to you after our third quarter earnings. Have a great day.

[Operator:]

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