RigNet Inc
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to RigNet's second quarter 2015 earnings conference call. [Operator Instructions] I would now like to turn the call over to Mr. Marty Jimmerson, Chief Financial Officer. The floor is yours.

[Martin Jimmerson:]

Thank you, Nicholas. Good morning and welcome to all of our listeners. With me today is Mark Slaughter, CEO and President. Yesterday, after the market closed, we issued a press release regarding our second 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 second quarter 2015 performance, and then I will follow-up with some financial details. Mark and I will then open up the call 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 Slaughter:]

Thanks, Marty. Again, to all our participants from around the world, I want to thank you for joining our second quarter 2015 earnings call. Before I go into my prepared remarks, I want to publicly thank Marty Jimmerson, our CFO, across the table here, for his over eight years of dedicated service for RigNet. Having announced his departure by the end of this year, he is committed to working with us through the transition. On a personal note, it has been an absolute delight working with Marty. And I wish him the very best, as he pursues his next career opportunity.

[Martin Jimmerson:]

Thank you, Mark. I appreciate the invaluable experiences gained at RigNet, and I am proud of our accomplishments. I have enjoyed my tenure at RigNet, particularly as a public CFO, interacting with the investment community as well as working with Mark, our management team and our talented employees around the world. Though, I will clearly miss RigNet and my colleagues here, I am looking forward to the next chapter of my career.

[Mark Slaughter:]

Thanks, Marty. The RigNet team demonstrated strong operational execution in the quarter against market headwinds resulting from significantly reduced oil prices and curtailed customer spending. By adjusting our cost structure and capital investments to the available market, we were able to lift EBITDA, EBITDA margins and cash conversion in the quarter, even as revenues declined, while maintaining needed has long-term investments critical for our future success. Regardless of the point in the energy cycle, RigNet helps enable the increasing digitization of the oilfield by providing digital technology solutions across the life of the field from drilling through production. The mission-critical role of our remote communication solutions is at the heart of RigNet's importance to the oil and gas industry, whether it's in periods of high growth or in today's lower commodity price environment. Today's macro environment, clearly presents RigNet with some near-term challenges, but also unique opportunities to strengthen our capabilities, expand our market presence and emerge as a stronger and better company. Looking briefly to our financials, revenue declined in the second quarter to $75.1 million, principally as a result of reduced customer spending and a depressed commodity price environment. However, through targeted cost containment actions to match our business to the available market, EBITDA which was at $18.5 million increased in absolute terms over the first quarter and EBITDA margin at 24.6%, represented margin expansion over both the prior-year quarter and the first quarter. Our cash conversion was also strong in the quarter. We report two cash conversion metrics for our investors, one is cash earnings and the other is unlevered free cash flow. Cash earnings were at $15.4 million for the second quarter, which was an increase over the prior year and prior quarters. Unlevered free cash flow at $10.4 million was also an increase over the prior year and prior quarters. With profitability holding and capital expenditures down compared to prior-year quarter due primary to reduction in newbuild RigNet network deployments, RigNet was able to demonstrate in the second quarter how its business model can deliver improved cash conversion efficiency in down cycles. I think it is important to highlight that the offshore rig count, which is the primary addressable market for RigNet's core service offerings is significantly less volatile than the more publicly visible figure for U.S. land rigs, which itself has dropped over 55% since its peak in the third quarter of last year. In addition, please keep in mind, that demand for RigNet's services is primarily linked to the total number of offshore rigs and operations, not supply demand fluctuations or volatile drilling day rates. With this in mind, RigNet management closely monitors the number of active and addressable offshore drilling rigs around the world. Using publicly available databases, we focus on three primary offshore rig classes, drillships, semi-submersibles and jackups, and further adjust out any rigs that have been retired or cold stacked are being constructed in the shipyard and are working in sanctioned countries. The resulting active and addressable offshore rig count is therefore a measure of the rigs in the market that a company like RigNet could serve. Under this updated methodology, the active and addressable offshore rig count worldwide was 743 at the end of the second quarter, which was down eight rigs or 1.1% from the first quarter and down 20 rigs or 2.6% from the prior-year quarter. In short, the active and addressable offshore rig count has held up much better than that for U.S. land drilling. Applying the same market sizing methodology, RigNet itself was serving 263 active and addressable offshore rigs in the second quarter, which was a unit market share of 35.4% of such rigs. This offshore rig market share for RigNet remained essentially constant over the prior-year quarter and the first quarter, so with our objective being to grow such market share, regardless of market conditions and particularly during this down cycle. Our billing count of offshore drilling rigs, which includes cold stacked rigs, and which we are still contractually billing as well as newbuild rigs on which we are billing small amounts for shipyard or transit communications, dropped by net 11 rigs in the second quarter, with 6 rigs added to service and 17 rigs that left service, primarily due to cold stacking or scraping. What's interesting to note is that the average age of the rigs that entered service was six years versus 31 years for the rigs that left service. In addition, the average revenue per rig received from drillers on the rigs added into service was 71% higher and that for the rigs that left service. This supports our long-term view that a newer and more technologically sophisticated offshore rig fleet will ultimately translate into higher bandwidth needs and associated value-added solutions, which should be positive for average revenue per rig over the long-term. Since October 1, 2014, we have been notified directly by customers or through public announcements that 47 offshore drilling rigs we serve will be cold stacked or scrapped. By the end of the second quarter, we had stopped service on a total of 23 of these 47 rigs. There were six of those that left service in the fourth quarter of 2014, six in the first quarter of this year and 11 in the second quarter of this year. This leaves another 24 offshore rigs that we expect will be leaving service in the second half of this year to be offset by any new remote site additions over the same period. While average revenue per offshore rig declined slightly in the second quarter over the first quarter and result principally in reduced operator utilization, as more rigs moved into hot or warm stack mode, our thesis continues that this accelerated market transition to newer offshore rig fleet is more favorable over the long-term for RigNet, due to the increasing technological sophistication of these rigs and how that increased technology manifest itself into higher demand for our remote communication solutions. Thus, despite the headwinds in upstream oil and gas, we were pleased with the performance of our core offshore rig communications business in the quarter and remain positive about the long-term attractiveness of this key market segment for RigNet. As I have previously noted, RigNet is facing some market headwinds in upstream oil and gas that we believe will 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. Further, we believe that our customers have leveraged, and particularly during this down period, we'll continue to leverage our remote communication solutions to help reduce their overall operating costs. In particular, our remote communication 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. So in view of lower energy prices, overall reduced drilling budgets and the 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 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 strong operational execution in the second quarter, increasing our profitability over the first quarter, expanding our margins and improving cash conversion efficiency, particularly when this is all considered against the backdrop of a challenging market environment and its impact on our revenues. We continue to be bullish on our long-term outlook, and believe that we are positioned well for the near-term headwinds. We continue to win new business and provide a mission-critical remote communications platform for our customers, both in good times and in bad. We believe our story is stronger than just current commodity prices, and we hope that our continued performance will ultimately garner appropriate recognition in the capital markets. 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, open new market runways and position us to continue to serve our customers with distinction. With that said, I'll now turn the call back over to Marty for a more detailed financial review.

[Martin Jimmerson:]

Thank you, Mark. Now, let me share some more detail about our second quarter 2015 financial results. During the second quarter of 2015, we reported revenue of $75.1 million, representing a decrease of $5.6 million or 6.9% compared to the same quarter last year. The decrease in revenues compared to the prior year quarter was primarily attributable to fewer sites served led by land rigs in North America and to a lesser extent offshore rigs and strategic initiatives. Revenue from offshore rigs compared to the second quarter of 2014 decreased by 4.7% with approximately half the decrease coming from lower revenue per rig, driven by lower operator utilization, and the remaining half of the offshore rig decrease been derived from a net seven fewer rigs served primarily as a result of cold stacking. Looking at our quarter-on-quarter revenue performance, total revenue in the first quarter decreased $2.5 million or 3.3% compared to the first quarter of 2015. The decrease is primarily due to declines of $1.3 million from our U.S. land business in the Western Hemisphere segment and to lesser extent offshore rigs. Revenue from offshore rigs decreased 5.9% quarter-on-quarter, with approximately half of the decrease coming from lower revenue per rig, driven by lower operator utilization and remaining half from decreased rig served. We experienced a net reduction of 11 rigs during the second quarter, primarily related to cold stacking and retirements. Adjusted EBITDA was $18.5 million or 24.6% of revenue, a slight decrease of $300,000 or 1.6% over the same quarter last year, but an increase of $1.4 million or 8.1% quarter-on-quarter. The decrease compared to the prior-year quarter resulted primarily from decreased revenue, as discussed earlier, partially offset by savings from our first quarter 2015 announced resource reallocation plan and our separate global cost savings initiatives focused on third-party spend. The increase in adjusted EBITDA in the second quarter compared to the prior quarter is primarily attributable to savings from our resource reallocation plan and global cost savings initiatives. We reported total SG&A expenses of $18.1 million in the second quarter compared to $17.9 million in the prior-year quarter and $23.2 million in the prior quarter. As a reminder, the prior quarter included $4.2 million of restructuring charges related to a resource reallocation of plan announced on February 19, 2015. Excluding this charge, SG&A expenses would have been $19.0 million in the prior-year quarter. Adjusted for these restructuring charges, SG&A decreased from the prior quarter due to lower professional fees, savings from the resource reallocation plan and benefits from our separate cost savings initiatives. Cash earnings increased to $15.4 million or $0.86 per diluted share in the second quarter compared to $14.8 million or $0.82 per share in the prior-year quarter, and $14.3 million or $0.82 per share in the first quarter of 2015. Unlevered free cash flow, defined as adjusted EBITDA less capital expenditures, improved to $10.4 million in the second quarter compared to $7.2 million in the prior-year quarter and $9 million in the prior quarter. Capital expenditures were $8.1 million in the second quarter compared to $11.6 million in the prior-year quarter and $8.1 million in the prior quarter, leading to even higher cash conversion from lower capital expenditures at times of lower volume growth and fewer site served. In the second quarter we reported consolidated net income attributable to common stockholders of $6.0 million or $0.34 per diluted share compared to $5.7 million or $0.31 per diluted share in prior-year quarter. 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 in the prior quarter. Our effective tax rate for the three months ended June 30, 2015, was 30.1% compared to 37.4% in the prior-year quarter. For the three months ended March 31, 2015, our effective tax rate was not meaningful due to the $6.2 million of 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. Against a challenging macro environment and the upstream oil and gas business, and the impact of the recent oil price decline on RigNet's performance, let me mention again, RigNet's second quarter performance highlights. First, we increased our adjusted EBITDA margin to 24.6%, representing an increase of 130 basis points and 260 basis points over the prior year and prior quarters, respectively. Secondly, cash earning were up 3.8% and 7.5% over the prior year and prior year quarters, respectively. And finally, RigNet's unlevered free cash flow grew 44.1% versus the prior year's quarter, as cash conversion improved significantly from strong financial performance and lower success-based installation CapEx. Now, turning to the balance sheet. As of June 30, 2015, our cash including restricted cash was $62.3 million, net working capital was $114.8 million and our debt was $81.9. Our gross debt to EBITDA leverage decreased to 1.1x as of June 30, 2015, while our net debt leverage declined to 0.3x. As of June 30, 2015, $90 million were available under our $125 million revolving facility. Now, for an update on our ERP project. As expected, we commenced go-live procedures during the second quarter of 2015, which will carry over into the fourth quarter, and we expect completion of our launch before yearend. Total expenditures related to our ERP implementation have been $6.3 million since inception. We are pleased with our initial results and continue to believe that this substantial investment in our systems to standardize and strengthen the backbone of our growing global operations will benefit us in the years to come. In connection with the additional cost reduction plan we announced on July 13, 2015, RigNet will take a one-time pre-tax charge of approximately $1 million in third quarter of 2015 for employee severance expenses and related matters. These costs are related to the layoff of an additional 47 employees. On an annualized basis, we expect to achieve annualized net savings of approximately $4.0 million. Wrapping up, we were pleased with our second quarter financial performance and operational execution, especially when considered against a continued 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 this experienced management team, which has managed through previous cycles, will continue to 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. Nicholas, please open the lines for questions.

[Operator:]

[Operator Instruction] And our first question comes from the line of Michael McCormack with Jefferies.

[Michael McCormack:]

Just sort of thinking through your opportunity here, and obviously from a commodity standpoint things looks pretty challenging out there. What areas do you think you have for additional cost flexibility, as we progress over the next few quarters? And then maybe just a point of clarification, Marty identified that I think half of the lower revenue was just the sort of demand per rig. And just trying to get a sense whether or not if you have contractual variability in those rates or was this more of a sort of retention effort on your part to be more flexible on those rates?

[Mark Slaughter:]

You're asking about the cost side of the equitation. Our two biggest cost buckets in the company are people and network. And even before the downturn, we had commenced a third-party spend review and that continues through today and into tomorrow. We continue to work with our key suppliers around that end of things. We have also this year in two separate exercises reduced staff, that's due to match our people side of the organization to the available market. And we believe if the market does downtick from here and we're certainly seeing commodity prices that were range-bound around $60, they appear to be range-bound at $50 or $45 to $50, that could cause a reset in activity, we don't know. But we're positioning the business for the current environment, but poised for either an uptick or downtick at the appropriate time. So I think that's the way to think about the cost structure. What we've been able to show I think in the second quarter results is that we can turn those dials in terms of CapEx and OpEx investment, and we will continue to monitor that very closely. But we're also not just cutting for the near-term, we're also maintaining investments for the long-term. And I think that's an important distinction here. And we could drive the margins up a lot higher, if we weren't preparing for the future, and we continue to do that as well. On the revenue side, I think you were talking about some of the revenue drop, and Marty may want to opine on this as well. That was really driven for the managed services side, less so from the TSI segment that we report. And while some of that was U.S. land market decline, a lot of that is the cold stacking of rigs and less service. And secondly from existing rigs, we're seeing lower operator utilization across the rigs that we serve. And so we're missing that additional revenue stream on those sides.

[Michael McCormack:]

Just, Mark, maybe as a follow-up on the cost side. Outside of headcount, what are the other sort of key buckets you look at with respect to being able to save cost?

[Mark Slaughter:]

The biggest cost really facing this company is network. And so network starts with satellite bandwidth or space segment, as its call in the industry. And so you are providing in then connectivity between rigs, remote sites and offices, and so that ends up being the biggest component. In addition to that, there can be teleport charges, leased lines, et cetera, to assemble that end-to-end connection. But the biggest chunk is space segment that we lease from satellite operators. So we've been working though really across the third-party spend initiative. We first began working with an affiliate of KKR called Capstone. That's a consulting arm of KKR's that works exclusively across the KKR family of companies. And we've worked with them on two separate occasions across our third-party spend effort. But at this point, we feel we've institutionalized that capability. We've actually created a supply chain group that reports to our CFO here, Marty. And we're continuing those efforts to drive supply chain reductions.

[Operator:]

Our next question comes from the line of Tim Horan with Oppenheimer.

[Tim Horan:]

The cost of revenue was down quite a bit sequentially, was that more because of usage or pricing that you're getting on the satellite front?

[Martin Jimmerson:]

Yes. More than anything, it's really two things, Tim. First, you're starting to see the benefits of the resource reallocation plan in the first quarter. But you're also starting to see, what Mark just alluded to, the savings from our entire third-party spend with a majority of it coming from bandwidth. But just to add a little more commentary, we're looking at all of our third-party spend not just our bandwidth. And so now it's the time to be able to consolidate down to fewer vendors or one vender and take advantage of pricing.

[Tim Horan:]

So you were able to get your satellite pricing down, it sounds like quite a bit. And it sounds like that's the secular and that that can maybe even continue to drop further from here?

[Mark Slaughter:]

Let's just say with our new supply chain effort, we expect to visit our bandwidth pricing on at least on a semi-annual basis and take advantage of where the demand is for our total bandwidth purchases, our geographical purchases. We also have some GX coming up that we think will assist us as well. Well, I can't commit to the amount of bandwidth savings. We think there is an opportunity to continue to drive our cost per megahertz down.

[Tim Horan:]

And do you have your own internal estimate? I know you had given the 47 stacks that you've basically been informed about or to be cold stacked. Do you have your own internal estimate that how many more rigs can be kind of cold stacked other than what's already been announced?

[Mark Slaughter:]

Tim, it's a great question. What we monitor very closely here are the rigs that move from active status to warmer hot stack status. That means, they are still being operated by the driller, but they are not actively drilling and they are being marketed for their next job. That is as we like to say an unstable state for rig. It's either going to go back to work or after a certain period of time, it's going to be moved into cold stack status. And so that's the risk group, if you will, and there are publicly available databases to match that up. We watch that very, very closely here in terms of the databases, plus we obviously stay in very close contact with our key customers.

[Tim Horan:]

So I know you're not giving guidance, but is it fair to say that revenue, given that the number of rigs that are going to get shut down here or cold stack in the next six months that revenue should kind of tend to trend down of this quarterly run rate of at least in next six months or so?

[Mark Slaughter:]

Well, first of all, we don't give guidance. But there are two moving things. We're still active in the shipyards, deploying on equipment, we're bidding on brownfield opportunities for existing rigs. So we're continuing to add sites. It's more of a question of what leaves, and generally what has been leaving, I wouldn't call them lower quality rigs, but these are older rigs with lower day rates. And we're in a transition to what's going to be ultimately in one to three years a high-quality technologically sophisticated rig fleet that's going to have high demand for the types of services we offer. And so we're just in that transition. And the pace of that is really hard to call right now. But you get past this transition, it's a very, very attractive market for what RigNet does.

[Operator:]

Our next question comes from the line of Veny Aleksandrov with FIG Partners.

[Veny Aleksandrov:]

My first question is again on the rigs leaving. So 24 are going to leave between now and the end of the year and 17 left this quarter and you added six. And I know you don't give guidance, and I know you don't have all this information. But can we estimate that you're going to have the same rate of replacement one-third of what's leaving coming to new rigs?

[Mark Slaughter:]

Well, I'm not sure we can say that. What we don't provide is our backlog of opportunities, except by press release, but as to when they come in by quarter. What I said in the commentary was we expect those 24 to leave our billing over the course of the year, to be offset or partially offset by any side additions. The additional color around that is that the count leaving is not at the same rate as the count arriving. And in the case of the second quarter, and we also saw that in the first quarter, there is quite a substantial difference in day rate. In the second quarter analysis on a per rig basis, the rigs added had a 71% higher day rate for the driller alone. And that's clearly a result of higher bandwidth needs, a more robust portfolio solutions we're providing, and just the higher data intensity that continues to play into this fleet as these rigs go evermore harsh, evermore remote in their search for oil and gas.

[Veny Aleksandrov:]

And my next question is on the TSI side, you just announced a new LNG contract, which is more Canadian. I would guess that it did not start in Q2. Is it start in Q3 and how many quarters is it going to go?

[Mark Slaughter:]

Great question. Thank you for bringing up a question about our TSI business. Pretty excited about it. We call our East and West Hemisphere, the segments that we report publicly are managed services business, the recurring revenue business, and we call our Telecom Systems Integration business, a project-based business. The interesting thing about the TSI business is that during this slower period upstream, it can pivot to pursue projects midstream and downstream. And those parts of the energy value chain activity is quite robust. And in this particular contract win, which is a very significant win for us for a major EPC firm that's working for an oil and gas company, we have won a TSI subcontract for that EPC for a greenfield U.S. Gulf Coast LNG export terminal. So this is a project that's going to run for several years. I think we have quoted the total contract value publicly. Oh, no, we haven't. Okay. I was about to give you that number. But some of that is what we call frontlog, which is backlog that will be booked in the current year. It's going to be a fairly small percentage of that, because it's really ramping up on the project. The bulk of this revenue will be in '16 and in '17. And of course, the total contract value that we saw for that contract is also subject to change orders, et cetera, that can further up the size of that contract. So we're delighted for the group. It's a key win. Its midstream, which is having a lot more activities these days than upstream is, in terms of capital projects. And just I think shows some of the versatility we can show within energy to deliver revenues for our investors.

[Veny Aleksandrov:]

And just a short follow-up. Can you give us the backlog for TSI currently?

[Martin Jimmerson:]

We do not disclose that Veny. It's roughly flat during the second quarter compared to the first quarter. And that's before the addition of the new project.

[Operator:]

And our next question will come from the line of Tom Dillon with William Blair.

[Tom Dillon:]

Hi guys.

[Mark Slaughter:]

Hey Tom, how are you? Thanks for the flash report that you put on yesterday.

[Tom Dillon:]

No problem. Can you help us better understand the dynamics in the ARPU growth? Obviously, the high-grade in the more advance premium operating rigs is playing into that growth, given we're seeing a lot of the older gen rigs being stacked that weren't using too much technology. And then as you pointed out, the increase of the 70%-plus day rate need would offset probably by some utilization on secondary customers. So as parse through some of those more detailed put and takes you provided there, what's the apples to apples bandwidth growth on existing sites? I just don't want to overstate any ARPU growth moving forward.

[Mark Slaughter:]

Well, that theme interestingly still continues. The increased data intensity and bandwidth growth for rig, I think that it's certainly being looked at with greater scrutiny by our clients today. But the cold heart fact is more and more bandwidth is needed at the edge, and we're responding on that basis. And so that's going to be positive for ARPU. You are right when you get to a per rig revenue measure that the fact that the composition of our fleet is changing. There certain rigs are stacking, right, and they tend to be the older, lower day rates contracts for us that in of itself is going to boost things. But we also are seeing growing bandwidth and growing solutions they use that bandwidth being provided to our customers. And then, of course, the overall fleet mix between fixed and floater and greater specification rigs versus lower is very favorable for our ARPU.

[Tom Dillon:]

And then maybe can you talk about how things are progressing with F3 in the Global Xpress network? Are you still on schedule to be fully operational this fall or has any current environment altered plans?

[Mark Slaughter:]

So you're talking about Global Xpress with Inmarsat. Let me provide an update F1, which is over the Indian Ocean region is one that we've been working very, very closely with Inmarsat to test it, both the satellite performance as well Inmarsat's equipment partners. And we've been in alpha testing for some time. We've actually been beta testing with customers. And we just completed a recent test in Thailand, under very rainy conditions. And we're quite pleased to see that we were able to maintain the link though extremely stormy weather. And that's been some concerned for potential customers was whether Ka service, which is slightly more range susceptible than Ku service, could it maintain. And we were pleased to have thunderstorms and stormy weather that we were able to test that with a client and the client was quite pleased. And we continue to expand that beta testing with the client, and other sorts of environments in Southeast Asia. Though our obligation to Inmarsat kicks in at the point that F1 through F3 are all operational, we have the ability to roll in those solutions today. F1, I would say, it really is operational though we're going through our testing. F2 is moving into operational phase, it's still going through its testing. And then F3 has been delayed, as result of a failure of the launch vehicle for another satellite operator. I am looking around, I don't believe they have set a date, but our best estimate is that maybe up and operational by the end of the year, but maybe more likely in the first quarter. However, I think you would really need to speak to Inmarsat directly to understand their latest plans with respect to F3. But certainly they are confident with it. We're excited about it. We're one of the strong value-added resellers working with Inmarsat to demonstrate it with customers, in an oil and gas business that sometimes doesn't like new things. And so we're being very careful with that and introducing it to our customers and showing it's capabilities.

[Tom Dillon:]

And then maybe any detail around success in adjacent markets or opportunities?

[Mark Slaughter:]

Well, our professed strategy is oil and gas related, but moving to near adjacencies beyond drilling rigs to include production and what called energy maritime. So it's really a life-of-the-field approach drilling through production. As we think about the M&A context, any targets we might pursue in that world, a lot of times these companies have an energy centric piece to them, but they may have positions in other vertical markets. And ultimately we think there's a Wave 2 or Wave 3 aspect to our strategy that may take us beyond energy. This is not to make us a multi-vertical conglomerate, but energy will always be at our core, but there are additional runways that can benefit from the scale and scope of the business that RigNet has created globally to serve other customers and other verticals. We've not done that yet, but this cycle is certainly making us think about that a little bit more. That said, we remain absolutely firmly committed to energy and we're showing at least with TSI that positioning in midstream and downstream does give us some additional flexibility, not just drilling through production, but up and down the chain, and energy can also give us some flexibility, but there maybe other adjacencies beyond energy that the company could address in the future.

[Operator:]

Our next question comes from the line Walt Chancellor with Macquarie Capital.

[Walt Chancellor:]

I was late hopping on, so apologies, if this was already covered. But the pretty resilient results out of the Western Hemisphere, given a really bad U.S. land environment and a pretty beaten up shallow water market as well. What's really driving the resilience there at the topline, and frankly, at the bottom line as well? Is it all cost savings driving some of that margin strength or were there any sort of discrete events contributing?

[Mark Slaughter:]

Well, I think the mix is a little different as a result of the Inmarsat acquisition, I point that out. We have a microwave network with a WiMAX overlay that covers the shelf. And today that is more production-oriented, right. So that's added into the mix. We also have a SCADA/M2M network in the continental U.S., they covers over 3,000 sites serving the midstream pipeline industry. So those businesses have been reasonably unimpacted by this upstream downturn. So that's maybe point one. Yes, the U.S. land drilling market, we've kind of declined with it in that business, but it's also a very small part of our revenue mix today. And in the offshore business on the drilling side, we've continued I think to hold our own, and particularly in deepwater as well. So we remain pretty excited there longer term. Though clearly there have been one driller particular that has been hurt a lot on the shelf, right. So that said, we think we've performed pretty well. Your final point, yes, cost savings are benefiting results as well globally, particularly with some of our bandwidth efforts to procure.

[Walt Chancellor:]

And then, just following up for Marty again. If you touched upon this, apologies, but how do we think about CapEx moving forward in this environment? It was down pretty meaningfully sequentially. Is something in that $6 million range reasonable with sort of what you see on rigs coming online and projects getting deployed or just philosophically, how should we think about that moving forward?

[Martin Jimmerson:]

So our comment there, Walt, is that CapEx was flat in the second quarter compared to the first quarter. Obviously, year-over-year is down. We clearly have seen success-based CapEx come down year-over-year. Right now, it's flat to slightly down. And so the real question is what happens with the new builds? What happens with our brownfield wins in terms of that? We remain committed to ERP. And so again, no projections there, but take it for what it's worth in the sense that CapEx was flat quarter-over-quarter.

[Operator:]

Ladies and gentlemen, this concludes today's Q&A session. I would like to turn the call back over to Marty Jimmerson for closing remarks. End of Q&A

[Martin Jimmerson:]

Thank you, Nicolas. And again to all our listeners and participants, we appreciate you listening in to our second quarter earning calls, and that would conclude our call. Have a great day.

[Operator:]

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