RigNet Inc
Q4 2015 Earnings Call Transcript

Published: 1 Mar 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to RigNet's Fourth Quarter and Full Year 2015 Earnings Conference Call. My name is Tanya and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session after the prepared remarks by management. I will now turn the presentation over to Chip Schneider, RigNet's Chief Financial Officer. Mr. Schneider, please proceed.

[Chip Schneider:]

Thank you, Tanya. Good afternoon and welcome to today’s call to discuss RigNet’s fourth quarter 2015 results. With me today is Marty Jimmerson, CEO and President as well as other members of our executive team. Yesterday, after the markets closed, we issued a press release regarding our fourth quarter and full year 2015 earnings. The release is available on our Web site at www.rig.net. Marty will begin today's call with a review of our fourth quarter business performance, and then I will follow up with some financial details. Marty 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 2016 and beyond, as well as activities, events, or developments that we expect, estimate, believe, or anticipate, may, or will occur in the future, are 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 Marty.

[Marty Jimmerson:]

Thanks Chip, and good morning to all our listeners and thank you for joining our fourth quarter 2015 earnings call. Most of our listeners know RigNet well. But with our recent leadership changes, I would like to start with an overview of RigNet and our new leadership. RigNet is a leading global provider of digital technology solutions focusing on serving energy facilities, maritime vessels and other global remote locations around the world. We provide mission critical services to our customers that allow them to operate more efficiently and slightly. Our services are increasingly relevant as operations have become more complex, sophisticated and dangerous. Now turning to the leadership changes. Many of you may know that I’ve previously served as a Chief Financial Officer over the past nine years. And from that time, I know our business, customers and employees extremely well. I look forward to leveraging my experience and knowledge in this role, and I am honoured that our board of directors asked me to serve as the interim CEO and President, which has always been a career goal. I am confident and believe in the long-term prospects for our Company. I am also pleased that Chip Schneider joined RigNet as CFO in early December 2015. Prior to that Chip was most recently Vice President and Chief Financial Officer for the Engineering and Construction Americas Divisions at KBR. Chip has an impressive background and knowledge of the energy industry and is already having a positive impact on our Company. Our leadership team is working well together and is highly focused on executing our 2016 strategy and plan. Now turning to the business. Like most companies serving the oil and gas industry RigNet experienced increasing market headwinds over the course of 2015 as a result of a volatile and lower commodity price environment. This recent quarter reflects these headwinds as well as the effects of a telecom systems integration or TSI contract issue. Our TSI business has an ongoing contract related to a project in Australia. In the fourth quarter of 2015, as a result of a dispute related to this contract, we recognize what we anticipate to be a onetime revenue and expense adjustments totaling a negative $15.6 million. Chip will provide more details shortly. But I would like to highlight that we remain committed to completing this project, which we currently believe to be in the final stages with estimated completion in the second quarter of 2016. Our dispute is with a customer that we have served extremely well in the past. And in fact are commencing work with on a similar project, making the current situation even more disappointing. We have committed significant time and resources on this contract dispute, and we’ll remain committed to pursuing all avenues available to us to reach a satisfactory conclusion on this matter with no further negative impact to RigNet. As outlined in our press release, excluding the TSI adjustments, revenue declined in the fourth quarter to $61.8 million, a decrease of $4.5 million compared to the prior quarter. Managed services revenue was $57.1 million in the fourth quarter, a decline of $3.7 million or 6.2% compared to the prior period, primarily as a result of previously announced rig stacking and scrapping and to a lesser extent lower operator revenues as rig utilization declined globally. Adjusted EBITDA, excluding the TSI adjustments, was $12.4 million in the fourth quarter compared to $14.5 million in the prior quarter, representing a decline of $2.1 million or 14.5%. Total revenue for 2015, excluding the TSI adjustments, was $280.9 million compared to $330.2 million in 2014, and adjusted EBITDA for 2015, also excluding the TSI adjustments declined to $62.5 million compared to $73.7 million in 2014. I am proud of and would like to thank our entire team around the globe for their commitment to continuing to provide best in class service and willingness to size our business accordingly to reflect the conditions that we were confronted with in 2015. Looking forward, although our visibility is limited and we expect the current oil and gas downturn to persist through at least 2016, we do see a few signs indicating that our rate of top line decline in our managed services business should abate as we move closer to the bottom of this cycle. We expect our remote communication solutions will continue to play an important role in driving productivity and efficiencies that help rig owners achieve higher rig utilization and reduce breakeven well cost for operators and service companies. We believe our major drilling rig customers are well positioned with quality fleets and financial capacity to weather this down cycle and are focused on operational efficiencies and safety, which we believe our services play an integral role in helping achieve these objectives. We continue to see our customers demanding more of our services rather than less despite some continued pricing and contract pressures on both the existing and incremental services. Although, virtually everyone in energy industry is focused on cost reductions, including RigNet, we continue to believe that aligning ourselves with customers operating high quality assets and providing best-in-class customer service will be rewarded over time. We continue to focus on developing new business in this environment, and there’re still customer opportunities that we are pursuing and win. Example is during the fourth quarter included wins for an FPSO, international land rigs, and maritime vessels. I am also pleased to report that we are successfully renewing business and continue to see demand for more bandwidth. While we do not know how long the current market conditions will persist, we remain committed to extending RigNet services to both existing and new customers, as well as new sites with existing customers and continuing to provide best in class high quality services that the energy industry demands. We will also use this energy down cycle as an opportunity to move swiftly and utilize our core competencies to pursue other remote communication sites, that align with our capital discipline, and leverages our global presence, network infrastructure, employee skills and financial flexibility. Our managed services business serves remote communication sites around the world including offshore and onshore drilling rigs, production facilities, support vessels and other remote site. Our revenue and profitability are more closely tied to offshore drilling, given the mission critical nature of our services and the data intensity associated with offshore drilling operations. At the end of the fourth quarter, RigNet was billing on a total 238 rigs that included 232 active and addressable offshore rigs, which represents a 32.3% market share slightly down from the market share of 33.3% in the third quarter. Maintaining our approximate one-third market share in this environment speaks to the quality of the drilling customers that we currently serve and the quality of service that we deliver. In the fourth quarter, we added 10 new rigs offset by 27 rigs that were cold stacked or scrapped. Included in our rig additions were three newbuilds and four competitive wins on higher end drilling rigs. Average revenue per offshore rig declined 1.7% over the quarter. Since October 1, 2014, we have been notified directly by customers or through public announcements that 63 offshore drilling rigs we serve will be cold stacked or scrapped. By the end of the fourth quarter of 2015, we had stopped service on a total of 57 of these 63 rigs. This leaves another six offshore rigs that we expect will be leading service during 2016. We expect that there will be additional rigs removed from service through 2017 however the pace of announced rig stacking and scrapping directly impacting us has slowed throughout 2015. Taking a longer term view of offshore drilling industry, the primary market that we serve today, our thesis continues that the market is transitioning to newer offshore rig fleets and will be 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. We expect the global fleet of drilling rigs to decline through 2017, which will not only help to rebalance supply and demand dynamics but also improve the overall quality and reliability of offshore drilling. In summary, the intensity of the current downturn, while challenging in the near-term, will also be the catalyst to drive out excess supply through scrapping of older rigs and cancellation of certain speculative newbuilds, which in the mid to long-term will be positive. Thus, despite the market headwinds and upstream oil and gas today, we remain positive about the long-term attractiveness of this key market segment. Now turning to our TSI business segment. We ended 2015 with $24.7 million of contracted TSI backlog compared to $17 million a year ago, including a recently announced $15.5 million project related to an LNG facility, which is just now kicking-off and currently scheduled for completion in 2018. As we look forward, we will execute on our strategy of pursuing projects that result in pull through opportunities that generate recurring managed service revenues after completion of the project cancellation. We have been successful with these projects in the past and still believe opportunities exist. We will also focus on opportunities that provide for better margins, balanced working capital utilization, and most importantly, satisfactory risk mitigation. Subsequent to year-end, RigNet completed its acquisition of TECNOR on February 4th, a leading remote communications provider in Mexico. RigNet has long served offshore drilling industry in Mexico but recent energy reforms opening the doors to foreign investments are a positive step for drilling and production activity, both onshore and offshore, that led us to pursue this acquisition. While it is a small company relative to Rig Net with pro forma revenue in 2015 of approximately $14 million, TECNOR brings in important local presence and knowhow through a quality management team, advanced solution capabilities, market positioning in the oil and gas and other verticals, and will serve overtime as a springboard deeper into Latin America. I am pleased with our integration planning and tremendous collaboration between the respective management teams that is allowing us to hit the ground running. I am pleased to report that we are already achieving anticipated efficiencies and synergies and look forward to monitoring the progress of the integration and the realization of our strategy. Now I’d like to provide you with an update on global express or what we call GX. RigNet will offer the latest high throughput capacity provided by Inmarsat once it becomes fully operational. Inmarsat announced in early January of this year that its global commercial service introduction was achieved for its new GX constellation, which is formed from three KA-band high speed mobile broadband communications satellite. We are expecting that this new advanced network will be available to us in 2016 and will provide seamless high throughput global coverage open additional network path to remote sites with critical communication requirements and enable content rich applications. Initially, we expect GX to help us better serve our customers’ needs and also provide more opportunities to remote locations around the world. Our field trough testing results indicate promising potential and our customers are looking forward to commencing pilot testing once operational. We are looking forward to offering this new exciting solution to our customers in the near future. In closing, regardless of where we find ourselves in the business cycle, RigNet is helping to enable 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 in periods of high growth or in today’s lower commodity price environment. Today’s macro environment clearly presents us with near-term challenges, but also unique opportunities to strengthen our capability, expand our market presence and emerge as a stronger and better Company. Despite the recent changes in corporate leadership and the market headwinds, we have not lost our drive, and in fact, have gained momentum as a result of the continued dedication, commitment and team work of our valued employees. I want to personally thank our employees who helped us push toward the industry headwinds and are responding remarkably. To our employees around the globe, I am very appreciative and thankful for your incredible support during the last 60 days, and could not be more pleased with the positive direction in which we are heading. We believe our story is stronger than just the current commodity prices and want to emphasize that we have the liquidity and financial flexibility to manage through the current business environment and take advantage of other remote communication opportunities as they arise. With that, I will now turn the call back over to Chip for a more detailed financial review.

[Chip Schneider:]

Thank you, Marty. Before I share with you our results for the fourth quarter, I would like to review financial details related to the TSI adjustments discussed earlier by Marty and his comments. As we disclosed to you on our third quarter 2015 10-Q filings, our TSI business had a dispute related to a multiyear project that commenced in 2013. The project was conveyed to RigNet as part of the Inmarsat Enterprise energy business acquisition. The company has recorded adjustments in the fourth quarter, including negative revenue of $9.6 million and project cost and accruals of $6 million. Moving on to our financial results for the quarter, during the fourth quarter of 2015, quarterly revenue was $61.8 million, excluding the negative $9.6 million revenue impact related to the TSI adjustments. This represents a decrease of $24.9 million or 28.7% compared to the prior year quarter. Managed services revenue decreased $16.4 million or 22.3% compared to the prior year quarter. Of this, $7.6 million of the decrease was primarily attributable to cold stacking and to a lesser extent reduced operator utilization, $4.5 million was due to a decline in other sites served and lower ARPU as our customers focused heavily on their own cost reductions, and $4.3 million was due to declining volume in our North American land business, resulting from significant reduction in U.S. onshore drilling activity. TSI revenue declined $8.5 million compared to the prior year quarter, excluding the TSI adjustment, due to fewer new awards and reduced activity on work under contract. Compared to the prior quarter, total revenue in the fourth quarter decreased $4.5 million or 6.8%, including the TSI adjustment. Managed services revenue decline $3.7 million of this $2.3 million was primarily due to cold stacking and to a lesser extent reduced operator utilization, $700,000 resulted from few other sites served and lower ARPU and $700,000 resulted from lower activity in our North American planned rig operations. TSI revenue declined $800,000, excluding the adjustments, which represented approximately 18% of our consolidated decline from the prior quarter. During the fourth quarter of 2015, adjusted EBITDA was 12.4%, excluding the TSI adjustment, the decrease compared to the adjusted EBITDA for the prior year quarter of $18.5 million and prior quarter $14.5 million. These decreases resulted primarily from lower managed services revenue partially offset by benefits from cost reductions. Including the TSI adjustments, adjusted EBITDA was negative $3.2 million for the quarter. SG&A expenses were $15.7 million in the fourth quarter compared to $15.7 million in the prior quarter and $22 million in the prior year quarter. Fourth quarter SG&A reflect savings from the resource reallocation and restructuring actions, including plans to vacate facilities and elimination of other business expenses, and a global cost savings initiative focused on all third party expense categories. This is offset by executive departure cost of $1 million that were added back for adjusted EBITDA. Quarterly cash earnings, excluding the TSI adjustments of $15.6 million, were $16.2 million or $0.92 per diluted share, representing increases of $2.2 million and $4 million respectively over the prior year and prior quarter. Quarterly cash rents, including the TSI adjustments, were 600,000 or $0.03 per diluted share, representing decreases of $13.4 million and $11.6 million respectively over the prior year and prior quarters. Unlevered free cash flow, defined as adjusted EBITDA less capital expenditures and excluding the TSI adjustments, was $1.9 million, representing decreases of $7.4 million and $6.5 million respectively over the prior year and prior quarters. Unlevered free cash flow was negative $13.7 million including the TSI adjustments representing decreases of $23 million and $22.1 million respectively over the prior year quarter. In the fourth quarter, we reported a consolidated net loss attributable to common shareholders of $11 million or $0.63 per diluted share. Excluding the $15.6 million TSI adjustment, a $1.7 million impairment of fixed assets in the North American land business and $1 million of executive departure costs, consolidated net income attributable to common shareholders would have been $7.3 million or $0.41 per diluted share compared to $1.9 million or $0.11 per diluted share in the prior year quarter. Net loss attributable to common shareholders was $10.9 million or $0.62 per diluted share in the prior quarter, primarily due to a $12.6 million write down of goodwill and intangible assets in the third quarter of 2015. Our effective tax rate for the fourth quarter was 28.3% and was not meaningful for the prior quarter due to a result of goodwill and intangible impairment charge. The rate for both quarters was adversely impacted due to recognition of valuation allowances related to increased book losses in certain jurisdictions. However, the rate in fourth quarter was also benefited by the reduction of tax reserves. Turning to the balance sheet. As of December 31, 2015, cash was approximately $60 million, net working capital excluding cash was $33 million, and our outstanding long-term debt of $78 million. Our gross debt to EBITDA was 1.24 times and we had $90 million of unused capacity under our $125 million revolving credit facility. To update you on our ERP project, we are pleased to report that we completed our Western Hemisphere go live during the second quarter of 2015. We intend to launch our Eastern Hemisphere deployment in mid-2016. Total expenditures related to our ERP implementation since inception are approximately $7.4 million. Wrapping up, the fourth quarter has been challenging for RigNet. Our fourth quarter results were impacted by adjustments related to TSI and asset impairment on land business, restructuring and executive departure costs, and continued deterioration in oil and gas activity. With regard to the macro environment, we believe that a rebound will occur and we remain focused on optimizing our Company to the level of activity. We plan to maintain financial flexibility to meet the challenges of current business conditions while continuing to position RigNet for both organic and inorganic opportunities better and the best interest for our customers, shareholders and employees. With that, Marty and I are happy to address your questions. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] And our first question is coming from Tim Horan of Oppenheimer. Your line is open sir.

[Tim Horan:]

Marty, can you give us a sense of your planning and spending prognosis. What your outlook is as the oil prices -- what are you guiding in your assumption? And maybe when do you think offshore rigs might roughly bottom out to not to you guys but for the whole industry? Thanks.

[Marty Jimmerson:]

We’re not in a position to share how we look at the price of oil. I think if you look at what the industry is saying, prices are going to continue to be volatile in the near-term. And with respect to rig count, while we stated in the transcript that we are seeing a slowing of the announced scrapping that we’re seeing, we do expect the overall market count to decline as we move forward as some of these older rigs are retired from service maybe displaced by newbuilds. But we do expect the global fleet to decline. But I did want to highlight that the fleet that remains is going to be a more complex sophisticated rig that we believe will demand more of our service, if not less.

[Tim Horan:]

And maybe then can you just maybe give us a sense of what percentage of your revenue or not tied to new -- join new spikes or new capital expenditures. What percentage maybe is more recurring on existing platforms? And maybe just thinking on expenses, how variable are your expenses at this point for the same reasons? Thanks.

[Marty Jimmerson:]

So, let me just say, the majority of our revenue as we said in the transcript is tied to drilling rigs and FPSOs production units, and the majority of that is recurring. They do range in contracts from one to five years. So, we feel like with the exception of any possibilities of early terminations or unannounced cold stackings that for the most part that revenue does act sticky. With respect to our cost, as we stated in the past, we typically contract duration match our bandwidth, which is the largest component of the cost of goods sold. We do have -- we deployed personnel around the world that you can flex with rig activity to a certain extent. But those are the key items that would go with rig activity.

[Tim Horan:]

So just lastly, so if you enter into a five year contract, is that for a fixed amount of bandwidth that they have to take in that five year contract? Or can it be tend to vary quite a bit I guess, or if they’re using 1 megabit or 10 megabits, and what’s the contracts for usually?

[Marty Jimmerson:]

So, each contract is different Tim. It does vary, but we typically try and get a contract duration matching for these individual contracts. But in certain areas of the world where we’re comfortable with the rig activity level, we will start to pull bandwidth knowing that we can shift between customers demanding more bandwidth or we could even port it to another geographic region around the globe.

[Operator:]

And our next question comes from Alan Klee with Sidoti. Your line is open Alan.

[Alan Klee:]

For the TSI contract, I guess, my first question is what would be the cash impact if you said all that the amount that you deliver your revenue and your expenses?

[Chip Schneider:]

Well, looking forward, we don’t expect a lot of cash impact. Most of the cash related to the job has already flowed through our book balance. So, looking forward, we’re not expecting -- there will be some additional cash impact related to finish the job. But beyond that, it has already passed-through the financials that you are reading.

[Marty Jimmerson:]

And Alan let me just add that this matters and dispute, and we consider the pending legal matter, and we’re not going to provide any further information at this time until we get through this process.

[Alan Klee:]

Last quarter I think you mentioned that the revenue -- that this was around 10-sh million dollar contract. So, does that imply that you’re assuming that almost all of it is going to be lost?

[Chip Schneider:]

Alan, that was what was on the balance sheet at the time related to the job, the contract was a larger contract.

[Alan Klee:]

Then in terms of the TSI segment overall and with the backlog going up, is there a way to think about how that backlog will get recognized over time? And does TSI need to have a certain level of revenue to be profitable in your view?

[Marty Jimmerson:]

Again with the backlog question, the timing of projects can vary. We’re not in control of that. But typically, contracts can go anywhere from six to nine months to as long as three years. And we highlighted that $15 million of the $24 million was in backlog and will be is just now starting. We do and not included in our backlog our change orders and other projects that we pick up along the way that are benefits of this business. So, I wouldn’t necessarily draw the correlation. We’re not anticipating any material changes in the business in 2016, but we are focused on executing our strategy of pursuing opportunities that result in pull-through opportunities for recurring revenue in our managed services business. And the specific examples are we’ll do an installation on, let’s just say a production unit, that we then are able to provide the transport for that unit once it goes into operation. As you look at the numbers, depending on the type of overhead that we’re going to commit to this segment, your breakeven number could be somewhere between $15 million and $25 million of revenue at the EBITDA line depending on how that SG&A structured. But we’re going to be focused on ensuring that we have positive EBITDA, but more so about pursuing the pull-through opportunities that benefit to the managed services business.

[Alan Klee:]

And finally, of the six remaining customers that you say have announced that they’re going to be leading service. What does that represent in terms of revenue from the prior year?

[Marty Jimmerson:]

Alan let me ask real quick [multiple speakers]. Alan, we’ll out confirm that before we jump off the call.

[Operator:]

And our next question is going to come from Walt Chancellor of Macquarie. Your line is open Walt.

[Walt Chancellor:]

Just wanted to start with the gross margins in the managed service business. It's down little bit over 7% year-on-year Q4 ’15 versus Q4 ‘14. I just was hoping if you could walk me through what the big drivers of that are, is it pricing, is it throughput, less multiple clients because of warm stacking, or lag from cold stacking? Just helping bridge me on that, I’d appreciate it.

[Chip Schneider:]

I think Walt it's a lot of things of course. We’re in a, obviously more competitive environment. So there is some pressure on price. But given what we offer, we think that that’s limited in terms of that pressure. There is also of course the fact that when we get on to a platform, we often have multiple customers that we’re serving. And in the cold stacking situation, we’ll find ourselves not serving as many customers. We’ll serve the driller but not the operator. And on our warm stacking situations, we’ll serve the driller but not also the operator and the service company. So, there is additional margin that comes along but with fully operational rig out on the -- out to say in the Gulf of Mexico. And so as you see rigs go off contracts but stay warm that revenue is not there. So, we’re seeing some of that I our numbers, we’re seeing again competitive pricing, we’re seeing some multi-fleet opportunities or multi-rig fleet opportunities reduce in the number of rigs that are operational among in that fleet. So there is a lot of different factors that go into the gross margin number.

[Walt Chancellor:]

As we think going forward I know you guys aren’t going to guide. What would it take for that margin to stabilize? Is it just an ending all these rigs being stacked. If we can stabilize your active rig count, will that be enough to hold these margins. How should we think about that conceptually?

[Chip Schneider:]

I think if you consider the rigs that are warm stacked, those go back out into operations then that will cause some of the margins to firm up, because obviously you’re generating more revenue from one site. So that would be a positive factor for margins. Once the stacking faces I think you will find from a quite a bit. But calling the bottom on that is very difficult?

[Walt Chancellor:]

And then just following up on the TSI contract dispute and I know you won’t speak to outcomes. I am just curious as what the dispute resolution process actually is, if you could speak to that at all maybe a roadmap?

[Marty Jimmerson:]

Walt, thanks for asking again. It's a legal matter we’ve got various avenues available to us. And so let us just lead it right there. But we remain committed to reaching a satisfactory solution.

[Walt Chancellor:]

All right, thanks.

[Marty Jimmerson:]

Thank you, Walt. And Alan just to confirm your question, sorry we didn’t have that number handy. But the revenue in 2015 associated with the six rigs that we still expect to be stacked at some point in ’16 was roughly about $2.5 million of annual revenue.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. I would now like to turn the conference over to management for closing remarks.

[Chip Schneider:]

We want to thank everyone for joining us this morning. This concludes our earnings call. And we look forward to talking to you at the end of the first quarter.

[Marty Jimmerson:]

Thank you.

[Operator:]

You may now disconnect.