RigNet Inc
Q1 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the RigNet First Quarter 2015 Earnings 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. As a remainder today's conference call is being recorded. I would now like to turn the conference over to Mr. Marty Jimmerson, Chief Financial Officer of RigNet. Sir, please go ahead.

[Martin L. Jimmerson:]

Thank you, Candice. Good morning and welcome to all of our listeners. With me today is Mark Slaughter, CEO and President. Yesterday, after the markets closed, we issued a press release regarding our first quarter earnings. The release is available in the Investor Relations section of our website. Mark will begin today's call with a review of our first quarter 2015 performance, and then I will follow up with some financial details. Mark and I will then open up the call for a few 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:]

All right. Thanks, Marty. Again, to all our participants from around the world, I want to thank you for joining our first quarter 2015 earnings call. The RigNet team delivered solid results in the first quarter showing that the increasing digitization of the oilfield supports our approach of providing digital technology solutions across the life of the field from drilling through production. The mission critical role of our remote communications solutions is at the heart of RigNet's robust performance even as the oil and gas industry continues to adjust to a lower commodity price environment. Today's macro environment presents RigNet with some near-term challenges, but also unique opportunities to strengthen our capabilities, expand our market presence, and emerge ultimately as a stronger and better company. Moreover, with our strong financial position consisting of strong free cash flow, minimal net debt and approximately $90 million of cash available under our credit revolver should we need it, we are well positioned with a financial flexibility to execute against our growth plans both organically and inorganically under the current market conditions. Revenue in the first quarter was $77.7 million, an increase of 3.5% over the same quarter last year, but down 10.4% over the prior quarter. The sequential revenue decline can be attributed primarily to the cyclical downturn in the oil and gas industry that contributed to a reduction in our revenues from offshore drilling rigs and U.S. land drilling rigs. In addition, we also saw lower activity in the quarter in our Telecommunications Systems Integration business which can be lumpy period-over-period as it is project based. For those of you less familiar with upstream energy markets, it is important to point out that offshore rig count which is the addressable market for RigNet's core service offerings is significantly less volatile than the more publicly visible figure for U.S. land rigs. In addition, please keep in mind that demand for RigNet services is primarily linked to the total number of offshore rigs in operations, not supply demand fluctuations or volatile drilling day rates. With this in mind, at 854 offshore rigs at the end of the first quarter, the number of active and addressable offshore drilling rigs in the market worldwide was up 19 rigs or 2.2% over the prior-year quarter and in the current environment it was down only two rigs or 0.2% over the prior quarter. RigNet itself raised to 281, the number of offshore rigs served in the first quarter, which was an increase of 15 offshore rigs or 5.6% over the prior year quarter and an increase of three offshore rigs or 1.1% over the prior quarter. Starting from the first quarter of 2014, RigNet has added offshore rigs into service at 2.5 times the market growth rate. And as a result, at 32.9% in the first quarter, RigNet's market share of offshore rigs served increased over both the prior year quarter and prior quarter. Installation activity was also rather brisk in the quarter as we added 14 offshore rigs into service, but in the current market environment we also saw 11 rigs leave service mostly as a result of cold stacking or early retirement. It is interesting to compare the offshore rigs we added and dropped in the quarter, as our thesis has been that this accelerated market transitioned to newer rig fleets is more favorable over the long-term for RigNet due to the increasing technological sophistication of these rigs and how that increased technological sophistication manifests itself into higher demand for our remote communications solutions. Of the 14 rigs we added in the first quarter, they had a mean age of 7.5 years versus 33 years for those leaving service. Of the 11 rigs that left service in the quarter, nine were jackups and two were floaters. Of the 14 rigs added into service in the quarter, 12 were floaters and two were jackups. Pivoted another way, of the 14 rigs added five were newbuilds and nine were existing rigs taken from competition. Most importantly, the average day rate we charge to drillers for the rigs we added into service was 61% higher than for those rigs that left service. To conclude with that positive news in the quarter on the number of offshore rigs in the market staying relatively flat despite challenging market conditions and are adding a gross 14 rigs of higher day rate quality into mix, we saw revenue from offshore rigs increase 8.5% over the prior year, but declined 5.9% over the prior quarter. The sequential decline was due principally to a lower number of billing days in the quarter, a greater number of rigs and hot or warm stack mode, where we have only the driller as the customer and new rigs being added to billing over part of the quarter and in many cases before operator revenue could be added. All considered we were pleased with the performance of our offshore rig communications business in the quarter. I now want to speak to our U.S. land rig communications business, a much smaller part of our total business that was only about 8% of our revenues last year and is expected to be only about 5% of our revenues this year. From a peak of 1,930 land rigs working in the Continental U.S. in the third quarter of last year, the rig count fell precipitously to 1,046 rigs in the first quarter, a drop of 46%. As of last Friday, according to Baker Hughes, the count had dropped further to 894 rigs though many market observers expect a rate to decline to a slow with a tough somewhere between 700 to 800 U.S. land rigs working later this year. RigNet itself saw a sequential decline in the number of U.S. land rigs served to 150 in the quarter, though market share remained just under 15% and average revenue earned per rig increased significantly as the mix shifted towards more premium operations. Despite the volatility of this small part of our business, we remain committed to U.S. land drilling communications as shale drilling may ultimately become a worldwide phenomenon. However, we know that it responds quickly up and down to oil and gas price movements. Our team is experienced at managing this type of business, having managed through comparable market movements in 2009. We have taken steps to reduce our costs in this part of our business in the near-term, while we position for an improvement in business activity at a future point. As I have already mentioned, RigNet is facing some market headwinds that may last throughout the 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 our customers' rigs are working, then we are working. Further, we believe that our customers have leveraged, and particularly during this down period, we'll continue to leverage our remote communications and value added solutions to help reduce their operating and overall costs. In particular, our remote communications solutions support diverse mission critical needs such as remote management, real-time monitoring, remote access control, remote safety supervision and preventative maintenance, all of which represent key enablers for substantial cost savings opportunities in upstream oil and gas. Thus, in view of lower energy prices, overall reduced drilling budgets and a supply-demand imbalance in offshore rigs, we expect our customers to continue their focus on improving productivity and reducing overall costs which we believe will continue to increase our customers' utilization of our mission critical and value added service offerings as we help operators, drillers and service companies operate in a more productive, efficient, and safe manner. In closing, I was pleased with our solid start in the first quarter, particularly when considered against the challenging market environment. 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 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 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 first quarter 2015 financial results. During the first quarter of 2015, we reported revenue of $77.7 million, representing an increase of $2.6 million or 3.5% compared to the same quarter last year. The increase in revenue compared to the prior year quarter was primarily attributable to increases in ARPU and sites served from offshore rigs and an additional month of revenue from the Inmarsat Enterprise Energy business unit acquisition, offset by decreased Telecom Systems Integration, TSI, revenue of $5.1 million. Revenue from offshore rigs compared to the first quarter of 2014 increased by 8.5% with 2.9% coming from increased revenue per rig and 5.6% earned from an increased number of rigs served. Looking at our quarter-on-quarter revenue performance, total revenue in the first quarter decreased by $9 million or 10.4% compared to the fourth quarter of 2014. The decrease is primarily due to declines of $2.7 million from our TSI business segment, $2.1 million related to lower activity in our U.S. land communications business, and $2 million from offshore rigs. Despite a sequential net increase of three offshore rigs served in the first quarter, revenue from offshore rigs decreased 5.9% quarter-on-quarter due to a reduction of 11 rigs primarily related to cold stacking and retirement, increased hot and warm stacking of existing rigs served, the addition of 14 rigs that entered billing during the quarter with many newbuilds not yet having operators, and finally, fewer operating days in the quarter. Adjusted EBITDA was $17.1 million or 22.0% of revenue, an increase of $900,000 or 5.6% over the same quarter last year but a decrease of $1.4 million or 7.7% quarter-on-quarter. The increase compared to the prior year quarter resulted primarily from increased revenue from our core offshore rig operations and an additional month of Inmarsat Enterprise Energy business unit acquisition. The decline in adjusted EBITDA in the first quarter compared to the prior quarter is primarily attributable to lower activity in our U.S. land rig operations. We reported total SG&A expenses of $23.2 million in the first quarter compared to $16.4 million in the prior year quarter and $22.0 million in the prior quarter. Excluding $4.2 million of restructuring charges related to a resource reallocation plan announced on February 19, 2015, SG&A expenses would have been $19.0 million in the current quarter. Adjusted SG&A increased from the prior year quarter, primarily due to the acquisition of Inmarsat's Enterprise Energy business unit on January 31, 2014. Adjusted for the restructuring charges, SG&A decreased from the prior quarter due to lower professional fees, savings from the resource reallocation plan, and benefits from a separate cost savings initiative. Cash earnings improved to $14.3 million or $0.82 per diluted share in the first quarter compared to $12.5 million or $0.70 per diluted share in the prior year quarter and $14.0 million or $0.78 per diluted share in the fourth quarter of 2014. Unlevered free cash flow defined as adjusted EBITDA less capital expenditures was $9.0 million in the first quarter compared to $6.6 million in the prior year quarter and $9.3 million in the prior quarter. Capital expenditures were $8.1 million in the first quarter compared to $9.7 million in the prior year quarter and $9.2 million in the prior quarter, leading to even higher cash conversion from lower capital expenditures in times of cyclically lower volume growth. In the first quarter, we reported a consolidated net loss attributable to common stockholders of $1.0 million or $0.06 per diluted share. Excluding restructuring charges associated with the resource reallocation plan announced in February, net income attributable to common stockholders would have been $5.2 million or $0.30 per diluted share. Adjusted for the impairment of goodwill charge of $2.7 million taken in the fourth quarter of 2014, net income attributable to common stockholders would have been $4.6 million or $0.26 per diluted share in the prior quarter. Our effective tax rate for the three months ended March 31, 2015 was not meaningful due to the $6.2 million of the total restructuring charges recorded primarily in our domestic operations, which significantly decreased our consolidated pre-tax book income and thus increased the valuation allowance recognized in the period ending March 31, 2015. Excluding, the restructuring charge, our effective income tax rate would have been approximately 31% for the three months ended March 31, 2015. The company continues to focus on strategic tax alternatives available to us that will optimize both our cash and book tax expense in the future. Against the challenging macro environment, an upstream oil and gas, and to address a number of analyst questions on the impact of the recent oil price decline on RigNet's performance, let me mention again RigNet's first quarter performance highlights. First, revenue grew 3.5% over the prior year quarter, primarily driven by our core offshore rig communications business, which itself grew by 8.5% from both rig adds and revenue per rig. Secondly, we grew our offshore rig market share over the prior year and prior quarters to 32.9%. Thirdly, both EBITDA up 5.6% and cash earnings up 14.2% are up materially compared to the first quarter of 2014. And finally, and perhaps most importantly, RigNet's unlevered free cash flow grew 37.9% versus the prior year quarter as cash conversion improved significantly from strong financial performance and lower success-based installation CapEx. Now turning to the balance sheet. As of March 31, 2015, our cash including restricted cash was $62.0 million, net working capital was $107.7 million, and our debt was $84.0 million. Our gross debt to EBITDA leverage stood at 1.16 times as of March 31, 2015 while our net debt leverage was 0.3 times. As of March 31, 2015 $90 million was available under our $125 million revolving facility. Now, for an update on our ERP project; we will commence go-live procedures during the second quarter 2015, which will carry over into the early third quarter. Based upon this timing, we are now projecting total capital expenditures will be approximately $7 million, representing a substantial investment in our systems to standardize and strengthen the background of our growing global operations. Total expenditures related to our ERP implementation were $1.2 million in the first quarter and have been $5.7 million since inception. In addition to our previously announced resource reallocation plan, we continue to focus on a separate global cost savings initiative focused on all third-party spend including both expenses and capital expenditures. We remain confident that our future results and margins will benefit from our company-wide focus. Wrapping up, we are pleased with our first quarter financial performance and operational execution, especially when considered in a more challenging market environment. Our business performed generally in line with our expectations despite further deterioration over the quarter in the upstream oil and gas macro environment. I am confident that this experienced management team, which is managed through previous cycles, will be ever prudent in sizing our company to the current business environment while continuing 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 your questions. Candice, please open the line for questions.

[Operator:]

And our first question comes from Veny Aleksandrov of FIG Partners. Your line is now open. Please check your mute button. And our next question comes from Brandon Dobell of William Blair. Your line is now open.

[Brandon B. Dobell:]

Thanks, guys. Good morning.

[Mark B. Slaughter:]

Good morning.

[Brandon B. Dobell:]

Couple of big picture questions. First, maybe some comments on your discussions around pricing – price pressures, especially around contracts on rigs that are up for renewal. Just want to get a sense of how those conversations are going, both with the operators but also with potential second and third tenants on those sites?

[Mark B. Slaughter:]

Yeah. The way I would look at – this is Mark by the way. Thanks Brandon for the question around pricing. When we looked a couple of years ago with an outside study, we found that the top five key buying factors did not include price when you pick a company like RigNet. In today's environment price is higher up that chain, but it's still, I would argue, still not the reason we're chosen. I mean we're a very small portion of the overall cost of constructing a well today and it's more important that we're reliable, that we restore service quickly if there is an issue, and that we provide a robust set of services across the globe. So I think those factors are still there. With that in mind, pricing has certainly moved up. And as we become more aggressive out there in the marketplace today and try to expand our market presence, price is a bit more of a consideration among the drillers, operators, and service companies. Where we do try to focus our discussions though is not so much the price we charge, but where we can apply our technology in the overall well construction process to help our customers lower their costs. And that's really where our technology can be some advantage, as I talked about before, or we can help with remote monitoring and remote activities that help them operate more productively and more efficiently.

[Brandon B. Dobell:]

Has this downturn or market turmoil changed how you guys are approaching the service companies, maybe other providers on that rig besides the operator from either I guess go-to-market or sales strategy?

[Mark B. Slaughter:]

Yes. But I think we've always been aggressively pursuing the multi-tenancy on the remote sites adding the additional customers that are available there. I think it maybe if more than anything else we're using this period of downturn to sharpen that focus, as we mentioned back in February, we had a resource reallocation plan that pulled down some people expense inside the U.S. land business and in some of our corporate back-office functions. So we're redeploying that to the frontend of the business, to in effect, get more aggressive and use this opportunity to emerge with even greater market penetration and market presence. So in these sorts of the downturns, you can get defensive or you can get offensive, and we're certainly being prudent around our cost structure but we're also leaning in in this business and looking to come out of this downturn ultimately stronger than we entered in.

[Brandon B. Dobell:]

Okay. Then maybe thinking about the bandwidth obligations that you guys disclosed in the filings, how much you could purchase on a go forward basis. In the context of Global Xpress, maybe some color on how Global Xpress is progressing, but also how you think about, the – I guess the obligations that'll come along with that partnership or just broader bandwidth obligations given all the stuff going on out there?

[Mark B. Slaughter:]

Yeah. Let us answer that in two parts. This is Mark. I'll cover the Global Xpress, and then ask Marty to comment more generally on broader bandwidth purchasing.

[Brandon B. Dobell:]

Okay.

[Mark B. Slaughter:]

With respect to Global Xpress, we're very excited about that high throughput satellite offering. There ultimately will be three satellites launched and in place, one is up today and is operating well. The second one is launched and is going through its operational testing, that's F2. And then, I believe F3 is to be launched in May with the kind of schedule on our end that in the fall, the Global Network will be fully operational.

[Brandon B. Dobell:]

Okay.

[Mark B. Slaughter:]

We're going through – there's alpha and beta testing going on today. We're excited about that offering and what that can mean. There's obviously an obligation that goes with that, but we view that as not a constraint but an opportunity to provide that high throughput offering to our customer base.

[Brandon B. Dobell:]

Okay.

[Mark B. Slaughter:]

And the financial obligation, I would just offer this, doesn't really kick in until the full Global Network is in place, which we expect to start late this year.

[Brandon B. Dobell:]

Okay.

[Mark B. Slaughter:]

And then, let me ask Marty to maybe comment more broadly around bandwidth in this environment.

[Martin L. Jimmerson:]

Brandon, good morning.

[Brandon B. Dobell:]

Good morning.

[Martin L. Jimmerson:]

So I think it starts first with respect to the C-band and Ku-bands that we currently provide our customers. We do not have excess bandwidth. There's maybe a little bit of overhang, but nothing of any significance. We continue to be encouraged by customer inquiries with respect to trying out GX, and so the way the agreement's written, it is a commitment over five years. There're some carryovers that are available to us. So we remain confident today that we'll be able to utilize this bandwidth as scheduled.

[Brandon B. Dobell:]

Okay. Great. Thanks, guys. I'll turn it over.

[Mark B. Slaughter:]

Thanks, Brandon.

[Operator:]

Thank you. And our next question comes from Veny Aleksandrov of FIG Partners. Your line is now open.

[Veny Aleksandrov:]

Good morning, and I'm so sorry that I lost you before.

[Martin L. Jimmerson:]

Welcome back, Veny.

[Mark B. Slaughter:]

Yeah. Yeah.

[Veny Aleksandrov:]

So, my first question is on the ARPU side. You added bigger fleets that are paying higher day rate but, at the same time, there is some utilization issues with some clients. So how should we think about the ARPU going forward?

[Mark B. Slaughter:]

Good question. I tried to cover that though. There's a lot of data I put across. A couple of things. We did see overall ARPU across our offshore rig count drop slightly in the quarter. What we're seeing in the existing base of rigs we serve is a much higher proportion of rigs that are in warm or hot stack status, meaning that they're not actively drilling but they're being marketed to the next operator. So in those situations, we lose the potential to sell to the secondary customers, principally operators and service companies. So that's something that's different and you'll compare to more robust periods in the industry cycle where more of the rigs are actively drilling, so that's point one. And then, with respect to the new rigs, we were quite pleased with the brisk activity in installation of rigs as they came online in the quarter. Many of those rigs some were newbuilds, as I pointed out, and others we deployed and others we deployed and then they go to station to begin working and lot of that would happen in the future. So there's some embedded upside there with the rigs we've added in but, today, we don't have the same multi-tenancy with those rigs that were added.

[Veny Aleksandrov:]

Thank you. And also on the number of rigs that got retired from your clients, last quarter when you were on the call with us, you said that there were 24 of clients rigs that have been or are about to be cold stacked. How many of those have already left?

[Martin L. Jimmerson:]

Veny, in Mark's commentary, I believe he said that there were 11 rigs that were reduced from our count. The majority of those were cold stack. So, I think the actual number was 10. So I think you can conclude 10 of the 24-plus at the additional announcements that are in our 10-Q. I think the total number is up to 29 maybe since October of 2014.

[Veny Aleksandrov:]

Thank you. And the last one and I'll circle back. Did you mention the backlog for TSI? I did not note it down.

[Martin L. Jimmerson:]

No, we did not mention it. It's roughly kind of in the same range that it was the end of the fourth quarter.

[Veny Aleksandrov:]

Thank you so much.

[Mark B. Slaughter:]

Yeah thanks, Veny.

[Operator:]

Thank you. And our next question comes from Tim Horan of Oppenheimer. Your line is now open.

[Tim K. Horan:]

Hi. Thanks guys. The rig count is fairly impressive on an offshore basis. What percentage of them are being hot stacked now, and maybe where do you expect that to go? And when they're hot stacked, can you give us a sense of what the ARPU decline is?

[Martin L. Jimmerson:]

Okay. Well, I don't think we've really revealed the proportion, but that's general data out there that can be found from databases. With that said, it can be substantial. As we've told investors for some time, an active operator on a rig can many times pay as much as twice the day rates that the driller is providing. So with that, you kind of do the math there, it suggests that if a rig was actively drilling and we were capturing both the driller and operator revenue, kind of setting aside oilfield service revenue that's also potentially there. You could see the revenue drop on that one site by as much as two-thirds. So it can be substantial. And hot or warm stack status is not a stable status. Either the rig is going to go back to work, or it will ultimately be cold stacked or retired. With that said, with the rigs fighting to gain the available business out there today, more and more of them are moving into that status today. And we like being present. We like to continue to serve the driller in those situations, but it does impact the ARPU available from that rig site.

[Tim K. Horan:]

And should we expect a material pickup in rigs that are being hot stacked over the next six months, do you think? Not just for you, but the overall industry?

[Mark B. Slaughter:]

Very hard to call. I mean, I'm not sure we're the best ones to ask in that sense. As I mentioned before, if you use the U.S. land rig count, maybe it's a little bit of a proxy. Some of the market observers were saying that they're expecting a slowdown and decline in the number of land rigs. In other words, they still expect a lower trough than we sit today, but the rate of decline is slowing. I think in the quarter – I think, it's fair to say and that's factual, we had a fairly rapid decline or stacking of rigs that occurred through the first quarter. I think what we would not be able to comment on that's really up to our customers is what might happen in the second quarter going forward.

[Tim K. Horan:]

So maybe, Marty, can you give us a sense of what you exited the quarter at in terms of revenue? I mean the 10% decline would suggest that you exited at a number below that. And just conceptually, I know you're reinvesting for growth. Do you have any kind of target on EBITDA with your expenses? Obviously, you have a lot of control over expenses, but do you think you can keep the margins in this 22%, 23% range you've been at for a while, with all the moving parts? Thanks.

[Martin L. Jimmerson:]

So with respect to revenue, we didn't see any real material changes by month other than a number of days. So kind of I think you can think about that, as you look forward. With respect to EBITDA, we don't give guidance on EBITDA, but your management team and the company remains very focused on its cost structure and we're striving to continue to maintain, if not possibly increase margins. The real question is what does the market do here? And then, I'm sorry the final question on CapEx?

[Tim K. Horan:]

No. Sorry, Marty. I wasn't asking about that, but just – you obviously have a lot of flexibility to spend and a lot of moving parts and cutting expenses. So I guess, is it your druthers to try to keep margins here? Or would you be willing to invest to see them decline a little bit for a while?

[Martin L. Jimmerson:]

No. That's a great question, Tim. We look at it on both sides. We continue to look to the long-term best interest of the company. We're beefing up the front end of the engine, adding sales and business development people for the right strategic opportunities by no means are we retrenching and cutting back. But having said that, as all companies are in the current macro environment, everyone's looking at all of their cost from top to bottom and RigNet's no exception, and so we'll identify areas to be more prudent in expenditures, while continuing to invest in front end.

[Tim K. Horan:]

Thank you.

[Operator:]

Thank you.

[Martin L. Jimmerson:]

Thank you, Tim.

[Operator:]

And our next question comes from Walt Chancellor of Macquarie. Your line is now open. Walt A. Chancellor - Macquarie Capital (USA), Inc. Good morning. Yes I just wanted to hone in on the outlook for the rig count offshore here in maybe Q2 or Q3, or just some color for the balance of the year. Going through the Q, as was mentioned, I think it's 29 that you received notice will be cold stacked. Only 14 had been terminated as of March, leaving something like 15. Do you guys have a line of sight based on your newbuild deployments as well as maybe some share gains, to hold that flat? Or how are you thinking about that, just as we think about those two balancing together here in the near-term?

[Mark B. Slaughter:]

Well, this is Mark and thanks Walt for the question. We do think about it a lot, but I think what I can really just comment to is what happened in the first quarter. We watch very closely the newbuild market. We watch the stacking of rigs that occur across the industry. We stay in close consultation with our customers. This is obviously very important to us. But there, still in front of us, is some cone of uncertainty around your market and market direction. So I think we're cautious but we think we executed well in the first quarter, actually grew the rig count number that we serve and we were quite pleased with that execution. Walt A. Chancellor - Macquarie Capital (USA), Inc. Yeah. No, that certainly is clear. And I understand there's still a lot of uncertainty out there. I wanted to hone in on two geographic areas of uncertainty; one, a little bit more negative; one, more positive. You all, I believe, have a pretty decent footprint in the North Sea. And we've yet to see big declines in activity there, but I think the outlook for that market is pretty challenged. What are you seeing in that market? What'd you see in Q1, and how are you thinking about that market in the near-term here?

[Mark B. Slaughter:]

Yeah, interesting for North Sea. We really haven't commented specifically as to various regions' for offshore. I will mention organizationally we've tried to increase our focus across the North Sea. We're redrawing some of our region boundaries for the moment, and in fact, coordinating across our Norway and UK offices under our common management team to increase our focus there. I think business is generally, I would say, the same is in other markets. We generally with our 32% or so share outside of Latin America, that share is generally consistent in most of the major regions that we operate in around the world. So specifics to North Sea, I don't know that we would see any particular negatives other than we're trying to coordinate our management activity and our sales activities across the entire North Sea environment. Walt A. Chancellor - Macquarie Capital (USA), Inc. Okay, that's helpful color. And then, I guess the one real positive we have seen in the oil patch has been real resilience out of the Middle East. I'd like to hear any thoughts you guys have about that market as you think about strategically longer-term, with all this uncertainty in the upstream, at least for now, this seems like one area that should be stronger. I know you've got some strategic growth initiatives there. I'd like to hear a little bit more color on the go-forward plan there.

[Mark B. Slaughter:]

Yeah. Go ahead. Yeah, thanks, Walt. Yeah, the Middle East traditionally has been a very strong region for RigNet. The finding cost, if you will, per barrel are quite low compared to the rest the world. So that in and of itself would suggest that activity can remain relatively robust, let's say, compared to some other regions. We have expanded quite significantly from a heavy Qatar presence to a much more balanced revenue stream across many countries in this both offshore drilling as well as onshore drilling in the GCC countries and in some cases beyond that. So it's an important market. We've also begun to branch from there into Central Asia. You saw a release some time ago where we've entered Kazakhstan, which again is beachhead to position us more in Central Asia and that's also managed from our Middle East operations. So an important market for us, and yes with – we suggested that the finding costs are lower compared to other markets would suggest that there's an opportunity from the drilling activity there to remain a bit stronger relative to other regions. Walt A. Chancellor - Macquarie Capital (USA), Inc. All right. I'll turn it back. Thanks for the color.

[Mark B. Slaughter:]

Yeah. Thanks a lot. Thanks.

[Martin L. Jimmerson:]

Thanks, Walt.

[Operator:]

Thank you. And our next question from Brandon Dobell of William Blair. Your line is now open.

[Brandon B. Dobell:]

Thanks, guys. A couple quick follow-ups. The offshore rigs you added in the quarter, any sense of, I guess, rigs from existing customers that were either taking delivery of newbuilds or had purchased a rig from a different provider versus new customers? Just trying to get a split of, let's call it, same-store growth versus totally new customers?

[Mark B. Slaughter:]

Yeah. I didn't provide that data of which were brand new customers. But as I mentioned, of the 14 we added into service, five were newbuilds and nine were existing offshore rigs taken from other providers. The customer moved to us.

[Brandon B. Dobell:]

Okay.

[Mark B. Slaughter:]

In general, our focus though I mean – to mention, our focus is to grow the number of customers we do serve and using this downturn as a way to get focused more aggressively. It's always a challenge with sales organizations to capture additional customers. Many cases that's sometimes a tougher job than it is to capture additional business from existing customers. But we certainly are looking for opportunities as we segment our customer base to add to our customer set and with existing customers to capture any additional sites that we don't have...

[Brandon B. Dobell:]

Okay.

[Mark B. Slaughter:]

...with the idea that we're looking to grow our market presence. And we measure that a lot internally and we just don't share that publicly.

[Brandon B. Dobell:]

Okay. And then almost the same kind of question in the U.S. land business. I know there's a concerted effort to get away from some of the lower-margin or lower-tech rigs out there. Should we expect that rig count number to track, I don't know, the horizontal oil rigs that are out there now going forward, or should we see further declines in the near-term, as you guys really hone in on the customers that you want to serve versus the marginal customers? Guess, I'm just trying to get at how to think about that U.S. land rig count relative to the overall market count.

[Mark B. Slaughter:]

Yeah. I think our goal is to try to maintain a market share in this downturn. We're not sure how low it will go ultimately...

[Brandon B. Dobell:]

Right.

[Mark B. Slaughter:]

... (41

[Brandon B. Dobell:]

Yeah.

[Mark B. Slaughter:]

So we want to stay positioned against these shale plays and operate today through 13 service centers strategically placed across the United States. We would love to keep each of those open depending on market conditions, because ultimately we know this is going to swing back. That's what happened to us in 2009. And in that environment we actually added service centers as we came out of the downturn because we watch very closely by basin where the rig counts begin to improve. And you have both gas directed shale plays as well as oil directed. And so we saw places like the Bakken come back and we quickly opened up service centers and got positioned for that business. And we're doing the same kind of real-time monitoring of business activity here.

[Brandon B. Dobell:]

Got it. And then one more question regarding U.S. land. As we think about the expense structure, I know you guys have made some changes across the broader cost structure but in particular around U.S. land, how much further opportunity, further impact should we see expenses in the Western Hemisphere relative to the opportunities to drive expenses out of the U.S. land business?

[Mark B. Slaughter:]

Yeah. The way I think about the U.S. land business is we've just proportioned the cost structure down to the available market in what we see going forward. So we haven't cut deeper than we need to, but we've cut as much as we need to to position with the sales and field techs and engineering and operations support that we need in that business. And that's really afforded us the opportunity to ramp down those costs and then take those costs and reinvest a good portion of that towards the front end and growth areas of our business, which is everything from offshore drilling to energy maritime, offshore production, which is going to be much less impacted in this environment. And then international land drilling, which is much more – it has been much more stable, particularly in places like the Middle East than it is in the United States.

[Brandon B. Dobell:]

Got it. Okay. Thanks, guys.

[Operator:]

Thank you. And our next question comes from William Alpaugh of Simmons & Company. Your line is now open.

[William R. Alpaugh:]

Hey, guys. Most of my questions have been taken. But just a quick question on SG&A. Should the $19 million be a good run rate going forward, or do you all have any more cost reductions possible?

[Martin L. Jimmerson:]

William, thanks for the question. We're not going to give any specifics in terms of the outlook, but we'll continue to keep you posted with future results.

[William R. Alpaugh:]

Okay. Just another quick modeling one. What percentage of the East and West revenue was offshore?

[Mark B. Slaughter:]

And you're probably saying offshore drilling...

[William R. Alpaugh:]

Right.

[Mark B. Slaughter:]

...as well, right? Because in the U.S. which would be the Western Hemisphere, we have added in a microwave network that is a production oriented network today. So I think we'd have to...

[Martin L. Jimmerson:]

Yeah. I think the answer is, we're not giving specifics but the majority of it is offshore in both.

[William R. Alpaugh:]

Okay, okay. Well, that was it from me.

[Martin L. Jimmerson:]

Thank you, William.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Marty Jimmerson for closing remarks.

[Martin L. Jimmerson:]

Thanks again to all our listeners for participating on our first quarter call. And we look forward to speaking with you after our second quarter results are announced in July or early August. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.