RigNet Inc
Q4 2014 Earnings Call Transcript

Published: 3 Mar 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the RigNet Fourth Quarter and Full-Year 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would like to introduce your host for today's conference call, Mr. Marty Jimmerson, CFO. You may begin.

[Martin L. Jimmerson:]

Thank you, Kevin. Good morning and welcome to all of our listeners. With me today is Mark Slaughter, our CEO and President. Yesterday after the markets closed, we issued a press release regarding our fourth quarter and full year 2014 earnings. The release is available in our Investor Relations section of our website. Mark will begin today's call with a review of our 2014 performance, and then I will follow up with some financial details. Mark and I will then open the call up to – for questions. Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for historical facts, all statements that address our outlook for 2015 and beyond, as well as activities, events, or developments that we expect, estimate, believe, or anticipate may or will occur in the future, are our forward-looking statements, which involve substantial risk and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risk and other factors in our SEC filings. Now, it is my pleasure to turn the call over to Mark.

[Mark B. Slaughter:]

Thanks, Marty. Again, to all our participants around the globe, I want to thank you for joining our fourth quarter and full year 2014 earnings call. I was quite pleased that the RigNet team delivered record results in 2014 and finished the year solidly in the fourth quarter, demonstrating that the increasing digitization of the oilfield supports our approach of providing technology solutions across the life of the field. Looking forward, the challenging market conditions in front of us, that include oil and gas prices down significantly since last summer, oil and gas companies curtailing capital spending, and offshore drillers dealing with an oversupply situation, all present RigNet with some market challenges, but they also provide us a unique opportunity to build market share and expand our geographic presence. Our previously announced plan to reallocate a portion of our people investments from our North American land communications business and certain corporate back office functions toward growth areas of our business, strikes the right balance, we believe, between prudence in the near-term while continuing to strengthen our capabilities and market positioning for the future. Further, our strong financial position, consisting of minimal net debt, approximately $90 million of cash available under our credit revolver and the ability to upsize that same credit facility, provides us with financial flexibility we need to execute on our growth plans, both organically and inorganically, under the current market conditions. Speaking briefly to our financials, revenue in the fourth quarter was $86.7 million, with legacy RigNet revenue up 4% over the prior-year quarter. Sequentially, our consolidated fourth quarter revenue was down slightly from the third quarter, with offshore rig revenue growing, but with revenue down from the Telecommunications Systems Integration projects that we served, as well as from some remote sites other than offshore rigs. We did see a small decline for the first time in many quarters in the number of offshore rigs served, but ARPU growth per rig more than offset the declining count, consistent with our view that revenue from offshore rigs is driven more by ARPU growth than rig count additions, as the digital oilfield theme advances. In fact, revenue from offshore rigs compared to the fourth quarter of 2013 increased 16%, with 9.3% coming from increased ARPU and 6.7% earned from an increased number of rigs served. Looking at 2014 overall, full year revenue was an all-time record of $330.2 million, with legacy RigNet revenue growing 13.3% over 2013. Full year consolidated adjusted EBITDA was also a record $73.7 million. Turning towards 2015; the oil and gas industry is indeed experiencing some challenges, which means RigNet will face some market headwinds this year and perhaps longer. With that said, RigNet's business is substantially driven by the number of active and addressable rigs, and more important, their growing data needs, not the day rates that drillers charge operators. Generally speaking, if rigs are working, then we are working. Further, we believe that our customers have leveraged and, particularly during this down-period, will continue to leverage our remote communications and value-added solutions to help reduce their operating and overall costs. Thus, despite lower oil prices and an oversupply of offshore rigs in the market, we expect our core business to continue to see increasing demand for our value-added services offerings. With RigNet serving almost a third of the world's active and addressable offshore drilling rig fleet today, the majority of our revenue growth in this important asset class is driven by meeting the increased data needs of our customers, which results in increased ARPU as we help enable the digital oilfield for our customers. We believe this trend of revenue growth for offshore rigs served will continue. However, for 2015, while there is market uncertainty in the near term, one scenario that we could see is a flat to declining active and addressable offshore rig market count, meaning that our offshore rig revenue growth rate this year could be moderated with ARPU up and count could be flat to down over this period. As mentioned before, we will continue to pursue opportunities during this period to increase our market share by geographic expansion, broadening business with existing customers and pursuing new customer relationships. Longer term, we are quite excited about the mix of technologically advanced offshore rigs that will emerge from this industry downturn, forcing into early retirement many older mechanically-based rigs. The resulting rig mix will have higher data needs and will be able to search for oil and gas in more remote and harsh environments where our services become even more mission critical. I now want to mention some of the more notable customer awards in the fourth quarter and into the month of February that will play into our future results. We view significant awards as those having a total contract value of $1 million or more in revenue. Some representative awards include; for a major oil and gas operator, we were awarded a multiyear managed communications contract on a new-build FPSO that will work in the deepwater Gulf of Mexico. The win of this deepwater production vessel is particularly gratifying as they represented a revenue pull-through from our TSI business, which had performed a Telecom Systems Integration project earlier on the vessel. For one of our major offshore drilling clients, we were awarded multiyear contracts for two new-build drill ships. And for a midsized offshore driller, we were awarded a multiyear contract to serve an existing semisubmersible rig that had previously been served by a competitor. For an offshore driller operating in Mexico, we were awarded a multiyear contract to serve a new-build jackup rig. And finally, we received multiyear contract renewals, each with higher ARPU for bandwidth increases or additional value-added services for a jackup rig and three energy maritime vessels. We announced back in 2013 that Ensco had given RigNet a 17-rig award that emanated from their acquisition of Pride International. And we have reported progress against that award each quarter since then. I can report that we activated a total of eight rigs during 2014. However, Ensco has announced that one of those rigs will be cold stacked. We currently expect that as many as six more rigs will be converted to our services during 2015. Plus, we ultimately expect to activate up to 13 rigs of these 17 rigs as Ensco has publicly announced they are cold-stacking or expect to sell the remaining four rigs. This will be our final report on this 2013 rig award from Ensco. As I mentioned there in the beginning of my remarks, we announced on February 19 a resource reallocation plan to shift a portion of our resources from the North American land rig communications business and certain back office support functions to expand global a sales team and boost business development and global expansion initiatives. This shifting of resources will provide a better alignment with the current business environment and also improves our positioning for future growth. There are some net savings from this reallocation of people investment, which Marty will cover a bit more in his remarks later on. And we are also now looking to our supply chain for additional savings. But the point I want to make is that we see this market dislocation as an opportunity to build strength and capabilities for the future. With that said, we will continue to monitor market conditions and remain ever prudent in our management of the business and our cost structure. With the increasing digitization of the oilfield, our strategic intent is to become an integrated technology solutions provider across the life of the field from drilling through production. We want to evolve from just enabling the digital oilfield to participating more directly in it in direct support of our oil and gas customer base. This technology solutions notion is a broadening of our offerings within upstream oil and gas, potentially even beyond traditional remote communications, to allow our customers to leverage resources through greater use of technology-centric solutions. Our vision for the RigNet of tomorrow includes bringing forward solutions that leverage our global network in areas such as remote collaboration, workflow and knowledge management, subsea communications and asset tracking and utilization. We will look for opportunities to execute against this strategy both organically and inorganically as we move forward. In closing, I was pleased with the record year delivered by our dedicated employees around the world. Despite any near-term market headwinds, we remain firmly committed to our strategy of addressing the digital oilfield as a mission critical technology solutions provider, helping our oil and gas customers to operate in a more productive, efficient and safe manner. I remain encouraged by the progress we are making, and I look forward to leading additional organic and inorganic moves that expand our technology solutions portfolio, enhance our capabilities, broaden our geographic footprint and position us overall to continue to serve our customers with distinction. With that, I'll now turn the call back over to Marty for a more detailed financial review. Marty?

[Martin L. Jimmerson:]

Thank you, Mark. Now, let me share some more detail about our fourth quarter and full year 2014 financial results. During the fourth quarter of 2014, we reported revenue of $86.7 million, including $24.6 million from the Enterprise Energy business unit acquired from Inmarsat at the beginning of the year. Excluding the Inmarsat business, organic revenue increased $2.4 million or 4% 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 increases in sites served, offset slightly by decreased revenue of $3.8 million. Revenue from offshore rigs compared to the fourth quarter of 2013 increased 16%, with 9.3% coming from increased ARPU and 6.7% earned from an increased number of rigs served. Looking at our quarter-on-quarter revenue performance, total revenue decreased $1.2 million or 1.3%. The decrease is primarily due to a decline of $0.5 million from our TSI business segment and $1.9 million from other sites, offset by increased revenue from offshore rigs. Revenue from offshore rigs increased 1.1% quarter-on-quarter from increased ARPU of 3.7%, but was offset by fewer rigs served. The number of offshore rigs we were serving as of December 31, 2014 declined by seven compared to September 30, 2014. Four rigs were decommissioned as a result of cold stacking and the remaining three were attributable to rigs on which we were only serving the operator to finish their drilling programs. Revenue from other sites was impacted during the quarter by lower telephony charges, equipment sales and mix of sites served. Adjusted EBITDA was $18.5 million or 21.4% of revenue, an increase of $3.3 million or 21.9% over the same quarter last year, and a decrease of $1.6 million or 8.1% quarter-on-quarter. The decline in adjusted EBITDA in the fourth quarter compared to the prior quarter is attributable to the decline in performance of our TSI segment and increased professional fees associated with a canceled corporate development project. Now let me turn to financial results for the year ended 2014. Total revenue for the year increased to a record $330.2 million. Excluding the Inmarsat acquisition, our organic revenue growth over the prior year was 13.3%. Consolidated gross profit, excluding depreciation and amortization, increased to 39.4% – increased 39.4% to $142 million for the year. Gross profit margin decreased to 43.0% for 2014 from 46.1% in the prior year, primarily due to margin dilution from the addition of the Inmarsat business, offset by improvements from organic operations. Consolidated adjusted EBITDA for the year increased $17.6 million or 31.2% to $73.7 million. Adjusted EBITDA margin decreased to 22.3% in 2014 from 25.5% in the prior year, again, primarily due to margin dilution from adding the Inmarsat business to our mix. Our strong organic 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. Revenue per site benefited from increases in bandwidth, additional operators and service company penetration from additional value-added services being provided. We reported total SG&A expenses of $22.0 million in the fourth quarter compared to $19.4 million in the prior quarter. The increase in SG&A is primarily related to a reclassification of accrued Inmarsat expenses from cost of revenue to SG&A, and increased professional fees. Excluding both items, our SG&A was flat quarter-on-quarter. During the fourth quarter of 2014, we recognized $2.7 million in impairment of goodwill related to the TSI business segment. Such impairment was the result of a test performed as of December 31, 2014. Despite increases in our pipeline of sales opportunities, orders were less than revenue, which caused our contracted backlog to decline throughout 2014. We ended 2014 with $17.0 million of contracted backlog compared to $20.8 million a year ago, excluding Inmarsat, which closed in January 2014. This circumstance resulted in a reduction of our cash flow projections and the revision of our internal forecast, which reduced the estimated fair value of our TSI business segment below its carrying value. Commencing with the fourth quarter of 2014, we are introducing cash earnings and cash EPS as a new financial metric that will provide management with – and investors with additional views of our core operating performance. Cash earnings and cash EPS are non-GAAP financial measures. Cash earnings were $14.0 million or $0.78 per diluted share in the fourth quarter of 2014 compared to $14.8 million or $0.83 per diluted share in the prior quarter. For all of 2014, cash earnings were $56.2 million or $3.14 per diluted share, an increase of $11.4 million or $0.59 per diluted share compared to 2013. In the fourth quarter, we reported net income attributable to common stockholders of $1.9 million or $0.11 per diluted share. Excluding the impairment of goodwill of $2.7 million, net income attributable to common stockholders was $4.6 million or $0.26 per diluted share. Net income attributable to common stockholders was $5.9 million or $0.33 per diluted share in the prior quarter. Our effective tax rate for the fourth quarter was 66.7% compared to 44.5% in the prior quarter. Our effective tax rate was higher in the fourth quarter, primarily due to recognizing additional domestic valuation allowances or provision in the fourth quarter related to excess tax benefits of our non-cash compensation, as well as recognizing a valuation allowance in our Norway operations. Our effective tax rate for the year ended December 31, 2014 was 49.1%. We reported $15.4 million of income tax in 2014 compared to income taxes paid of $10.6 million. The company is focused on evaluating strategic tax alternatives available to us that would optimize both our future cash and book tax expense. Now, turning to the balance sheet; as of December 31, 2014, our cash including restricted cash was $67.8 million, net working capital was $108.7 million and our debt was $86.1 million. Our gross debt-to-EBITDA leverage stood at 1.17 times as of December 31, 2014, while our net debt leverage was 0.26 times. As of December 31, 2014, $90 million was available under our $125 million revolving facility. Capital expenditures were $9.1 million in the fourth quarter, bringing our 2014 total for capital expenditures to $40.4 million. This compares to $10 million in the prior quarter and $31.9 million for the year ended December 2013. We announced earlier this year that the company began implementation of a new enterprise resource planning solution. During the fourth quarter, we commenced super user testing and training. We currently expect to complete final user acceptance testing during the first quarter of 2015 and commence go live procedures during the second quarter of 2015. Based upon this timing, we project total capital expenditures will be approximately $6 million, representing a substantial investment in our systems to standardize and strengthen the backbone of our global growing operations. Total expenditures related to our ERP implementation were $2.0 million in the fourth quarter and $4.5 million for the full year in 2014. In connection with the resource reallocation plan that Mark addressed earlier, RigNet expects to take a one-time charge of approximately $6.2 million in the first quarter of 2015 for facility closures, employee severance expenses and related matters. Approximately two-thirds of the charge relates to facility closures and the residual is attributable to severance. On an annualized basis, and once the expansion of our front-line efforts are complete and in place later in the year, we expect to achieve annualized net savings of approximately $1 million to $2 million. Wrapping up, we are pleased with our fourth quarter financial performance and operational execution. Our core business performed in line with our expectations despite indications late in the fourth quarter that the macro environment of the oil and gas industry was deteriorating. The decline of the macro environment has accelerated in the early stages of 2015 with our U.S. land drilling market responding the quickest with rig activity declining approximately 1,200 rigs as of last week. In 2014, our US land business accounted for 5% to 10% of our total revenue. The macro environment has also impacted the offshore drilling market. Since October 1, 2014 through last week, we have been notified or expect to be notified of 24 offshore rigs that will or have been cold stacked or scrapped, which represented approximately $5 million of our 2014 revenue. Mindful that we will continue to closely monitor market conditions, this experienced management team, which has managed through previous cycles, will be ever prudent in sizing our company to the current business environment while continuing to pursue our company for the long – continue to position our company for the long-term best interest of our customers, employees and stockholders. With that, Mark and I are happy to answer any questions. Kevin, please open the line for questions.

[Operator:]

Our first question comes from Michael McCormack with Jefferies.

[Unknown Speaker:]

Hi, guys. This is Tudor (23

[Mark B. Slaughter:]

Okay. So, Tudor (23

[Unknown Speaker:]

The – just your visibility on future cold stackings. How much head time do you have? And further, of the 7 you lost in the fourth quarter, how many of the 24 – or how many of the 7 are including those 24?

[Mark B. Slaughter:]

Yes. Tudor, (24

[Martin L. Jimmerson:]

And then, Tudor (25

[Unknown Speaker:]

For EBITDA?

[Martin L. Jimmerson:]

Oh, for EBITDA, we did not provide that information in this call.

[Unknown Speaker:]

Thank you.

[Mark B. Slaughter:]

Yes. Thanks, Tudor (25

[Operator:]

Our next question comes from Ben Schuman with Drexel Hamilton.

[Benjamin Schuman:]

Hi, guys, thanks for taking the questions.

[Mark B. Slaughter:]

Ben, how are you?

[Benjamin Schuman:]

Good. Good. Can you maybe – I will take a shot at asking this. Can you give us a sense at how site counts and organic growth are trending here two months into Q1?

[Mark B. Slaughter:]

Well, we've just really reported through Q4. I mean, I think the market data on how counts are going are readily available from third-party services. And we're not, I think, prepared at this stage to talk about the impact beyond what we've shared here where Marty talked about the active US land rig count today, that's continued to decline, but it's a very small part of our business. And then we've talked about the offshore rigs and what we've been notified of cold stacking of rigs.

[Benjamin Schuman:]

Okay, great. Fair enough. And then you talked about pressure on day rates not really affecting you guys as much. But are you being asked to give any pricing concessions out there in this environment? And if so, can you help quantify those?

[Mark B. Slaughter:]

Yes, it is a great question. Certainly, the industry, and this is broadly speaking, is looking all across the supply chain, right, to change the well construction cost curve, right, in the current pricing environment to deliver sufficient profitability for the oil and gas operators who put their capital at risk. And you could say, at one level, we're not going to be immune to that. But where I think things are a little different is we're such a small part of that cost equation. And secondly and probably more importantly, our technology can be used to reduce well construction costs at the edge through the use of remote technology. And so, a lot of our conversations with our clients are really focused on how we use that technology to help them reduce cost, and that's really been the focus of a lot of our discussions.

[Benjamin Schuman:]

Okay, great. And then Marty, one last one here on CapEx. How can we think about potentially lower organic growth or certainly lower site additions showing up in the CapEx line in Q4? Looks like it was still in line with historical level despite the lower growth, although I suppose the ERP rollout drove some of that and will continue to drive that. But excluding the ERP rollout, how could we think about CapEx in a lower site growth environment?

[Martin L. Jimmerson:]

Well, I think CapEx definitely could be impacted. What we don't know or you would need to make your own assumptions would be what will be the actual new-builds delivered, what's the mix of those rigs, what additional organic growth can we get from customers that we don't serve and what type of rigs those are. So not giving specific guidance, but hopefully that points you in the right direction.

[Benjamin Schuman:]

All right, great. Thanks, guys.

[Operator:]

Our next question comes from Veny Aleksandrov with FIG Partners.

[Veny Aleksandrov:]

Good morning. My first question is on the Inmarsat part of the business that you acquired this year. So, with everything going on in the marketplace, are we still targeting the 8% to 10% EBITDA margin on this side? I know that everything is kind of blended right now, but is there a space for margin improvement?

[Mark B. Slaughter:]

Yes. Well, speaking to 2014, we were very pleased with Inmarsat becoming part of RigNet at the end of January and its performance over the balance of the year. We haven't specifically broken that out versus 2013 when it was owned by Inmarsat. But I think it's fair to say that we move the company forward in terms of its growth rate and its EBITDA percentage performance, not to RigNet's standard levels, but certainly an improvement over where it had been performing to the best of our knowledge. And we were quite pleased with that addition. And then, strategically, we're – of course, we're just very delighted about the enhanced capabilities it brings to RigNet overall, which we really believe makes us a differentiated provider, completely differentiated provider in the marketplace.

[Veny Aleksandrov:]

Thank you. And then my next question is on a sentence that's from your press release that challenging market conditions present you with opportunity to build market share and expanding your – the geographic presence. Can you elaborate on that? Do you think you're going to be able to get new rigs or just provide more bandwidth for the rigs existing? What's – what's behind this trend?

[Mark B. Slaughter:]

Right. Well, in downturns like this, it's an opportunity, for a company like RigNet, to not only take a near-term view, but a long-term view to strengthen capabilities and overall skill sets, et cetera, for the future. So, that's one part of it. But also in the near term, we can turn up the sales and business development activities, both to grow the business with our existing customers, as well as to seek new logos and new clients that can position us well for the future. So, we view it as an opportunity to lean in and not just hunker down, right? We'll certainly be prudent. I think that's a message we're trying to take to the market. We're very cost conscious in these sorts of environments, but we're also quite aggressive from a sales and business development standpoint. And we expect to try to build our business and increase our market share for the inevitable upturn in the business.

[Veny Aleksandrov:]

Thank you.

[Martin L. Jimmerson:]

Thanks, Veny.

[Operator:]

Our next question comes from Tim Horan with Oppenheimer.

[Tim K. Horan:]

Hi. Thanks, guys. At a real high level, I'm just trying to figure out what the trends are for 2015. But the $86.6 million revenue in the quarter, do you think this is kind of a good run rate for next year? At a high level, should it kind of grow from here? Should it decline based on what you know right now? And then, Marty, on the EBITDA margin, the 21% is kind of quite a bit below the last two quarters; you were 23.5%. Can you give us a little bit more color why that was? And maybe the same thing for 2015, what you would expect would be kind of a better margin for 2015 or a margin for 2015. Because I kind of assume that you would really be able to slash expenses if you saw a slowdown in volume growth in the business model. Thanks.

[Mark B. Slaughter:]

Yes. Tim, I'll take the first and maybe, Marty, can take the second one around margin percentage. The way we think about is, this is principally a recurring revenue business if you set aside the TSI business, which is project-based. And so, generally speaking, the fourth quarter would indeed be an indicator of how we step into 2015. That said, there is a fair amount of market uncertainty. But what I can comment on, there's a lot of business that we are pursuing. We talked about the CapEx that we spent in the fourth quarter that will play into future results. The question is more around our existing base of business. And Marty pointed out, some of the rigs that have stacked, some of those results would play into 2015. So, there's a little bit of uncertainty, kind of uncertainty around the results, but we still see a business that is strong for us and a lot of business development opportunities in front of us.

[Martin L. Jimmerson:]

And then, Tim, with respect to the EBITDA percentage for the fourth quarter, it was – that percentage was impacted by the results of our TSI business, which is separately disclosed in earnings release in segment (32

[Tim K. Horan:]

So, Marty, just so we have a base line, what do you estimate the normalized margins were in the fourth quarter if you normalize for those two events?

[Martin L. Jimmerson:]

I don't have a specific number on it, but I'd say if you normalize TSI based upon the prior quarters and back out the $700,000, I think you can get to a reasonable number.

[Tim K. Horan:]

Okay. Thank you.

[Operator:]

Our next question comes from Walt Chancellor with Macquarie. Walt A. Chancellor - Macquarie Capital (USA), Inc. Hi, good morning. I wanted to touch on the Inmarsat acquisition and the performance in Q4. It looks like a pretty meaningful ramp in revenue from 2013 run rate type levels, and as well as earlier in the year. What really drove that sequential improvement?

[Mark B. Slaughter:]

Well, I think at its simplest, the Inmarsat business joined a business that does what it does, remote communications to the oil and gas business. So, we provide a particular focus and integration of their capabilities with RigNet's capabilities. So, we were able to achieve some growth in our – the L-band business that we provide to our customers, to the microwave assets, et cetera, that we brought on board. And we now have a much wider set of capabilities to bring to our oil and gas customers. So, we're pretty excited. It's a very talented workforce that's come across as well. And I think they've been excited to, in effect, join a company that does what they do in serving our oil and gas customers with our mission-critical services. Walt A. Chancellor - Macquarie Capital (USA), Inc. Great. I appreciate that color. And then I guess if we think about geographically, the Gulf of Mexico market in particular, I know you acquired some assets as part of that transaction in that market. When we think about the headwinds and tailwinds in that market, the shelf drilling activity has fallen pretty aggressively. And I think you've seen some cold stacks associated with that, but the deepwater market looks like one of the stronger markets. Moving forward, you got the FPSO win. I guess, how do you see that landscape playing out for you over the 2015, 2016-type timeframe? Do you see more opportunities than risks? And what's the plan to accommodate the shift, the continuing shift from the shallow water to the deepwater in that market?

[Mark B. Slaughter:]

Well, yes, first of all, let me maybe attack it from this point. The chief asset we acquired from Inmarsat in the Gulf of Mexico was a microwave network with a WiMAX overlay that covers about 25,000 square miles across the shelf. It is a production network primarily, so it's going to be, we believe, very stable in this sort of environment, if not, allowing us some growth opportunities. There is the ability to aim that at the drilling market such as it is in the shelf today. Also, we've been working to extend that microwave network into the deepwater Gulf of Mexico using stabilized microwave technology. And in doing so, that is a preferred method to serve, on a primary basis, deepwater rigs, as well as FPSOs that are out there, and then VSAT or broadband satellite, moves to a secondary or backup capability. So, it's a much preferred solution and so we're trying to extend that network into deepwater to – to – it really address, as you point out, the robust activity in the deepwater. Walt A. Chancellor - Macquarie Capital (USA), Inc. Great. And then, one final one from me. As we approach launch on Global Xpress and your product offering there, how are the customer conversations, preliminary as they may be, progressing at present?

[Mark B. Slaughter:]

Well, I think we – what you've seen with Inmarsat is the second of the three satellites that have been launched just going through its kind of operational testing up in space today. The third is, we launched, I believe, in May and we expect commercial service to be available late in the year. We have done some testing already in the Middle East, what we call alpha testing that we move into beta testing shortly, where we're testing it and testing it with some friendly customers to fine-tune the service. But so far, we're quite pleased with where this is or how it's progressing. We would tell you that it is one capability that we offer to our customers. We are generally agnostic around backhaul; will pick the best method available. But we think Global Xpress will be an important part of our portfolio of access technologies to remote sites, particularly in LAN settings for the oilfield services industry and perhaps even energy maritime, which is one of our strategic growth initiatives. So, it's going to be an important part of our business. Walt A. Chancellor - Macquarie Capital (USA), Inc. Excellent. I appreciate the color. Thank you.

[Mark B. Slaughter:]

Yes.

[Martin L. Jimmerson:]

Thanks, Walt.

[Mark B. Slaughter:]

Thanks.

[Operator:]

Our next question comes from William Alpaugh with Simmons & Company.

[William R. Alpaugh:]

Good morning, guys.

[Martin L. Jimmerson:]

Hey, William. How are you?

[William R. Alpaugh:]

Good. Most of my questions have been answered, but just a quick one on SG&A. It had a jump in the quarter. And what was the reclassification – what was reclassified? And should we expect a similar number going forward?

[Martin L. Jimmerson:]

The reclassification related to Inmarsat was a difficult transaction in terms of understanding all the costs. We had a general framework and so throughout the year we were accruing the cost in COGS. And as information became available, we reclassified it into the fourth quarter. And so, going forward, I don't have any comment on that in terms of what it will be or not, it is more reflective of 2014.

[William R. Alpaugh:]

Okay. And so, in the Western Hemisphere, you saw a nice jump in gross margins, was that the same result?

[Martin L. Jimmerson:]

Well, actually, part of it's that, but we also did start to benefit from some bandwidth savings that we've been focused on throughout the year. And so, we started to see some synergies from those efforts in the fourth quarter.

[William R. Alpaugh:]

Okay. That's it for me. Thanks, guys.

[Mark B. Slaughter:]

Yes. Thanks, William.

[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:]

Again, to all our listeners, we thank you for listening in for our 2014 earnings call. And we look forward to speaking with you after our first quarter 2015 results. Thank you and have a great day.

[Operator:]

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