RigNet, Inc. (NASDAQ:RNET)
Q2 2016 Earnings Conference Call
August 9, 2016 11:00 AM ET
Chip Schneider – Senior Vice President and Chief Financial Officer
Steven Pickett – President and Chief Executive Officer
Brandon Dobell – William Blair
Walt Chancellor – Macquarie
Alan Klee – Sidoti
Ladies and gentlemen, welcome to the RigNet's Second Quarter 2016 Earnings Conference Call. My name is Victoria, 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. [Operator Instructions]
I would now like to turn the presentation over to Chip Schneider, RigNet's Senior Vice President and Chief Financial Officer. Mr. Schneider, please proceed.
Thank you, Victoria. Good morning and welcome to today's call to discuss RigNet's second quarter 2016 results. With me today are Steven Pickett, CEO and President, as well as other members of our executive team.
Yesterday, after the markets closed, we issued a press release regarding our second quarter 2016 earnings. The release is available on our Web site at www.rig.net. Steve will begin today's call -- today with a review of our second quarter business performance, and then I will follow-up with some financial details. Steve 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 Steve.
Thank you, Chip, and thank you to all of our listeners for joining the second quarter 2016 earnings call. I am happy to be with you today, and I am thrilled to be leading the RigNet team. RigNet is a great company with a history of delivering high margins, long-term customer contracts, and has a talented team of professionals executing our work across the globe.
We are challenged today by an oil industry, the primary market we serve, which is suffering due to low commodity prices. This situation is adversely affecting our financial results. However, our core competencies in the market leadership position we enjoy can be leveraged to loop up [ph] market with higher margin services in the offshore oil rig market and can be leveraged to drive growth in other verticals that also demand high availability communication services and responsive customer services, both of which we deliver today. We are determined to capitalize on these opportunities with urgency
Today in our call, I will provide a high-level summary of our second quarter financial results, and we will share some of my initial observations about RigNet, the market we currently serve and I will outline our going-forward strategy to improve performance, and therefore create greater value for our shareholders.
In terms of financial results, as outlined in our press release, revenues decreased in the second quarter to $54.9 million, and adjusted EBITDA was $8.6 million. Both represent declines relative to the year-ago period, and sequentially. This trend is one that is not dissimilar to the trend most companies are experiencing, who serve the oil industry.
In terms of my initial views of the business, RigNet, in spite of operating in what is currently a challenging energy market, is a business that is geographically diversified, and generates recurring revenues from a diverse set of customers with low revenue concentration. These are important pillars in our business that currently create and should continue to create value to our shareholders.
With regard to the primary market we serve, our managed services business provides remote communication to sites around the world, including offshore and onshore drilling rigs, production facilities, and other remote sites. And 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 second quarter, RigNet was billing on a total of 211 rigs, or a 25% market share, down from a market share of 31.3% in the prior quarter, and 35.4% in the prior year quarter.
In the second quarter, we had a sequential net decline of 21 rigs due primarily to stacking of rigs in a difficult environment. Average revenue per offshore rig declined 4.1% due to reduced multitenant revenue and pricing pressure in the market. In spite of this performance, I'm encouraged by the opportunities for our business that lie ahead.
Looking ahead to opportunities which will define our go-forward strategy, we intend to execute on three growth initiatives. Our new organizational design, announced as part of last month's restructuring, is expected to help us execute with even more urgency in each of these growth areas. The goals of these initiatives are, one, to improve sales results, and driven increases in market share through a single world-wide sales organization serving global and regional customers more effectively by sharing best practices and common solutions to create value for our customers. Two, to build new revenue streams through delivery of over-the-top application to our core market in a way that we believe will make RigNet even more relevant to our existing customers.
And three, to grow in new verticals outside of the offshore rig market, we are currently evaluating a number of options as it relates to verticals outside of offshore rigs. And I will comment further on this topic as there is more to report. In terms of building new revenue streams in our core market, I see opportunities to strengthen the value we deliver to our current customers by providing even more relevant service through commercialization of highly secure, over-the-top applications that we expect will help our customers further optimize their business performance, and reduce overall operating costs. These include critical business application to gather information from devices deployed on rigs in order to provide remote visibility and operational performance data to our customers' management teams and support staffs who are onshore.
Other applications can include crew Wi-Fi, which improves crew satisfaction while they are deployed in remote locations far from their families, and from the broadband services they rely on while onshore. And applications that create a safer environment for all remote workers. These safety applications can range from providing local weather information to helicopter pilots, helping them more safely navigate around the rig, to enhance communications capabilities that increase signal coverage across the platform where crews work. The Internet of Things, IoT is creating opportunities in the energy sector that is driving rapid growth in deployment of sensors and other devices. And we expect operators in this sector to increasingly rely on partners like RigNet to help them extract maximum value from the information that comes from these devices.
For fullness of communications, let me come back to the topic of our restructuring. While restructuring our business for the long-term, we took the opportunity to rightsize the organization in the short-term due to continued declines we see in the addressable market we serve. The rightsizing is expected to reduce headcount worldwide by approximately 12%, and costs by more than $3.5 million annually. We expect to see the full quarterly effects of that rightsizing in our fourth quarter 2016 results.
To further comment on the performance of our core managed services business, these services are increasingly relevant as remote operations to provide energy to our world economy has inherent risks, and have become increasingly complex. We continue to believe that aligning ourselves with customers, operating high quality assets, and providing them with best-in-class customer service globally will be rewarded over time. Some of those rewards have come to us in the form of market wins that we have closed since the start of second quarter that merit comment.
Each of these have a total contract value that is expected to exceed $1 million. They include a three-year managed services contract with a key oil and gas services company in Mexico, a new four-and-a-half year contract with a global provider of well intervention services, a contract in a midstream project in the Middle East that is scheduled to be executed over the next 12 months, and a three-year managed services contract renewal with a global provider for their entire marketable offshore drilling fleet.
Since we started reporting stack rigging, in late-2014, we've been notified directly by customer or through public announcements that a total of 95 offshore drilling rigs we serve will be or have been cold stacked or scrapped, an increase of 18 compared to the prior quarter. By the end of the second quarter, we had stopped service on a total of 80 of those 95 rigs. This leaves another 15 offshore rigs that we expect will be leaving service during the remained of 2016. We expect there will be additional rigs removed from service through 2016 and 2017.
As it relates to our TECNOR acquisition, I'm pleased with our transition thus far, and I'm encouraged by the collaboration I see with our customers and among our employees. TECNOR continues to provide best-in-class service to a diverse set of customers across Mexico. In our TSI business segment, we ended the quarter with $22.6 million of contracted TSI backlog, compared to $24.7 million in December of 2015, including a $15.5 million project related to an LNG facility in Texas, which is in the early stages, and is currently scheduled for completion in 2018.
As we look forward, we plan to execute a strategy of pursuing projects that result in full-through opportunities that can generate recurring revenues, and on projects that enhance our position with key customers and strengthen our brand.
We also plan to focus on opportunities that provide better margins, balanced working capital utilization, and most importantly satisfactory risk mitigation. In terms of global express, or what we call GX, RigNet is currently piloting this high throughput satellite, also known as HTS, with an offshore user. We expect this GX operating to help us address our customers' demands for more bandwidth in remote locations around the world at competitive prices. We're excited about the prospects of transitioning this capability to a full commercial rollout.
Finally, again addressing the state of our core managed services business, market conditions have resulted in operator reducing CapEx, while utilization of drilling rigs continues to decline. We expect conditions to remain challenging, as we do not expect a meaningful recovery in rig activity in the near-term. We however remain confident in the longer term fundamentals of oil and gas activity. During future earnings calls, among other things, I am looking forward to sharing information about our efforts to commercialize over-the-top applications and our efforts to expand our managed services footprint in other vertical markets.
In closing, we have right sized the business based on current market conditions. We've restructured the business to help drive growth in market share in over-the-top application and in new verticals. I'd like to thank our RigNet team members for their hard work and and personal commitment to both our business and to our customers around the world.
With that, I will now turn the call back over to Chip for a more detailed financial review. Chip?
Thank you, Steve. As Steve mentioned earlier, quarterly revenue was 54.9 million during the second quarter of 2016, representing a decrease of 7.4 million compared to the prior quarter. The decrease in revenue was primarily due to a $4.2 million decrease in managed services revenue coupled with a $3.2 million decrease in TSI revenue.
TSI revenue in the prior quarter included a $2.3 million benefit related settlement of the TSI project dispute. With regard to managed services decrease 2 million was attributable to reduced offshore drilling sites served due primarily to stacking, 1 million was due to reduced offshore ARPU resulting from reduced operator utilization, 1.2 million was related to others sites and by 0.9 million was due to declining activity in our North America land business which has been significantly impacted by the reduction in US onshore drilling activity.
The above declines were partially offset by a contribution of 0.9 million an increase in revenue from TECNOR our recent acquisition of Mexico due to the impact of one additional month of TECNOR result in the second quarter compared to the first. Compared to the prior year quarter total revenue decreased 20.2 million of this managed services revenue declined 14.5 million and TSI revenue declined 5.7 million. With regard to the managed services revenue 6.3 million of the decline was due to decreased offshore drilling by sites served primarily due to stacking.
3.7 million was due to decreased ARPU associated with our offshore drilling sites primarily from reduced multi-tenant revenues; 2.3 million resulted from declining activity in our North American land rig operations due to a significant reduction in US onshore drilling activity over the past 12 months. And 5.2 million resulted from other sites of which fewer other sites are served. Declines in managed services were partially offset by $3 million -- by $3 million in revenue contributed by TECNOR in the second quarter of 2015. SGA&A expenses were 15.5 million in the current quarter compared to 17.2 million in the prior quarter and 18.1 million in the prior year quarter.
In the second quarter we reported restructuring charges of 1.1 million, impairment charges of 0.4 million related to intangible assets, CEO search cost of 0.2 million and ERP implementation cost of 0.6 million. In the first quarter we recorded executive departure cost of 1.9 million. Acquisition related cost of 0.2 million, CEO search cost of 0.3 million, ERP implementation cost of 0.4 million and restructuring charges of negative 0.6 million. Restructuring charges, impairment charges, executive departure cost and acquisition related costs are added back to net loss to calculate our non-GAAP measures.
GAAP net loss attributable to common shareholders was 4.8 million or $0.27 per share in the current quarter compared to a net loss of 1.3 million or $0.08 per share in the prior quarter and net income attributable to common shareholders of 6 million and $0.34 per share in the prior year quarter. During the second quarter of 2016 adjusted EBITDA was 8.6 million compared to 10.7 million in the prior quarter and 18.5 million in the prior year quarter. The prior quarter included a $2.1 million benefit from settlement of the TSI project dispute.
The decrease from the prior year quarter results primarily from lower revenue partially offset by savings generated from cost containment actions. Capital expenditures were 4.7 million in the second quarter compared to 4.9 million in the prior quarter and 8.1 million in the prior year quarter. Un-levered free cash flow is defined as adjusted EBITDA less capital expenditures was 4 million compared to 5.8 million in the prior quarter and 10.4 million in the prior year quarter.
Turning to the balance sheet as of July 30, 2016 cash was 59.5 million, net working capital excluding cash was 27.6 million, and our outstanding long-term debt excluding current maturities of 8.4 million was down to 65 million. Our revolving credit facility had approximately 90 million of unused capacity. With regard to our ERP project we're pleased to report that on August 1 we initiated the final regional launch of our ERP system which includes the UK, Norway and all TSI operations. With this deployment our ERP platform is operational on the global basis.
Expenditures related to our ERP implementation since inception totaled approximately 8 million of which approximately 0.4 million were incurred in the second quarter of 2016. Wrapping up the second quarter was impacted by continued deterioration in offshore oil and gas activity, restructuring costs, impairment charges, ERP implementation cost and CEO search cost. Over the recent quarters however RigNet has substantially improved its cost structure, systems and processes to better address challenges in its core market with the aim of improving operating leverage and scalability particularly for when market conditions do improve.
With regard to the oil and gas industry if history is any indication a rebound is likely to occur until then we believe that by focusing on key relationships in our core business we have opportunities to drive new revenues with existing customers through the commercialization of over-the-top services to pursue opportunities in new verticals and continue optimization of our business operation. Importantly we continue to maintain adequate cash liquidity and unused credit capacity enabling us to meet the requirements of current market conditions and further positioning RigNet for both organic and inorganic opportunities.
With that, Steve and I are happy to address your questions. Operator, please open the line.
[Operator Instructions] The first question comes from Brandon Dobell of William Blair. Your line is open.
Thanks, good morning guys.
Hi, Brandon. Good morning.
Hi. First on the cost cut commentary, I guess there's a couple of different questions here; first, did you cut, I guess to the point where when you have an opportunity to more broadly rollout GX or when you see opportunities in non-oil and gas verticals that you will have to add people to keep up with those opportunities or can you take advantage of those things without having to add people or infrastructure for a while?
Yes, I think we will be able to respond to early opportunities with the resources that we currently have. As those opportunities grow, we will look to respond to those opportunities using a variable cost model as often as we can, and their resort finally to adding that fixed cost on to support those opportunities.
Okay. And I know in the past you've talked a little bit about some of the bandwidth commitments bodes well with the GX, but more broadly, how do you guys view the situation there for the balance of the year into '17, kind of let's call it "Pace of Business" relative to how much bandwidth you guys are on the hook for any discussions with the providers around those dynamics?
Well, we continuously have conversations with some providers around those dynamics, but at this point, we're comparable with the level of commitment we have, and we are constantly working internally on to accept the level of efficiency we drive utilization of satellite bandwidth. So we're keeping very close taps on that.
Got it. And then turning to GX for a second, you mentioned piloting it with an offshore provider, and how do we think about the cadence of this rollout, right, it probably could be a couple of months, could be a couple of years I guess in an extended fashion, but how do you feel that we should see it rollout, or are there certain milestones that you need to hit with in Marcel or with particular customer that gives you enough confidence that it's ready for a more broad rollout?
Yes, we are not ready for a broad rollout yet, and of course the purpose behind doing a pilot is to validate the performance is that where it needs to be before a full commercial rollout. So, we will continue to report on that, but at this point with these we've taken the steps on to enter our pilot customer.
Okay, great. I'll turn it over. Thanks.
All right, thank you.
Thank you. The next question is from Walt Chancellor of Macquarie. Your line is open.
Hey, good morning.
Good morning, Walt.
Hey. Just a -- actually I just didn't know how Gulf of Mexico revenue has held up given what's been a pretty steady decline in deepwater activity recently offset by maybe some of your leverage to existing production platforms?
I can't give you precise numbers, but the Gulf has been on the jack-up side, particularly we've seen a lot of deteriorations in jack-up market. And that's worldwide, quite honestly, and the Gulf is not left out of that. So we are seeing declines in a number of markets. I think the deepwater in the Gulf, we are seeing on floaters from our perspective, we see stability but it's the jack-up market that's really has been impacted the most.
Okay. I appreciate that color. And I guess just sticking in the market and tying it into maybe some longer term opportunities, we have seen one large producer in the Gulf of Mexico planning to reduce headcount by, I think, up to 25%. Are you seeing moves like this drive bandwidth demand or opportunities for automation? Are you seeing this move towards the all-so [ph] Internet of Things picking up in a particular geography, resource, or customer type? Just interested in how these longer term opportunities are realizing at this sort of industry trough?
Yes, we are seeing that kind of activity. And we do believe that that is going to drive more adoption of Internet of Things kind of services. So, services that allow the operators to get better visibility as to what's going on in the rig with fewer people to manage the rigs locally, and we are hopeful that will translate into the need for more services from RigNet and more bandwidth from RigNet as well.
Are there any particular areas, or instances where that's popped up today, or is it still just sort of getting caught up in the general business mix?
I would describe that it's just beginning to grow now, and we don't see one area the world really stepping out versus another.
We see a general trend in the industry, but not geographically-specific.
All right. I appreciate it. Thank you.
[Operator Instructions] The next question is from Alan Klee of Sidoti. Your line is open.
Yes, hi, good morning.
Hi. You saw a pick-up in operating cash flow during the quarter. Seemed to be driven by working capital and also CapEx at -- this seems to be going at a lower run rate. I am just wondering how -- thinking forward, how we should maybe think about those factors playing out?
One thing we did have a large collection in April related to our settlement on the TSI project dispute. So, that's one receivable that was collected in April. However, that was an old story. We are seeing better collections. Our DSOs are improving. Of course, as sales do flatten out and drop off, you do tend to liquidate some of the receivable. So you are seeing some of that in the cash flow. But we are focused on cash. And we are focused on our operation, payables receivables, and ensuring that we have that oiled as well as we can so that we optimize our cash flow.
CapEx certainly has always been an important part of -- at least during my tenure an important part of our business operations and ensuring that we are not overspending in CapEx and we are spending what's appropriate to invest in the market that we have today. So it's all of those things that are contributing to what I think is a better cash flow picture.
Okay, thank you. And then, in the TSI segment you mentioned the large L&G project, should we anticipate that that as that -- in the near term as that starts up that that will have an impact on revenues and TSI ramping up?
Well, it's going to be -- the revenue on that project will be recognized over time as a percentage of completion project. So it's just in its early stages. This is the project that we've had under contract for some time, so it's not a new project. I would say that we are well into the early stages of that job. So, we will see revenue recognized on that job over the course of the contract which is a good two, two and a half -- two years or so from now. So it will take some time for all the revenue to be recognized.
Okay. Any additional comments on your looking at a channel strategy and adjacent verticals?
It's in area -- both are an area of focus for us, but no further comments yet. I do expect to be talking more about that in upcoming calls.
Okay. And then on the ERP implementation, are we to think that the cost associated with that completely drop off or that it kind of stays a little bit elevated going forward?
Yes, it should be coming off rather sharply over the last -- now relatively to the past year or so. All of the implementation were -- is virtually complete. And really it's now cost associated with operating system and upgrading it over time. So, yes, I think the cost associated with ERP will be much less going forward, but it will not zero. We will always have cost associated with running our ERP system and optimizing it.
Thank you. [Operator Instructions] I am not showing any further questions in queue at this time. I'll turn the call back over for closing remarks.
Okay. We want to thank everyone for joining us today for our second quarter 2016 call. We appreciate your interest in RigNet. And you can find information on our release and the company at www.rig.net. And we'll sign off for today. Thanks very much.
Thank you, everyone.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.
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