RigNet Inc. (NASDAQ:RNET) Q2 2017 Earnings Conference Call August 8, 2017 11:00 AM ET
Steven Pickett – President & Chief Executive Officer
Chip Schneider – Senior Vice President & Chief Financial Officer
Andrew Carmichael – Simmons
Christine Curt – Sidoti
Ladies and gentlemen, welcome to RigNet's Second Quarter 2017 Earnings Conference Call. My name is Latoya, and I will be you conference call operator 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]. As a reminder, this conference call is being recorded.
I will 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, Latoya. Good morning, and welcome to today's call to discuss RigNet's second quarter results. With me today is 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 earnings. The release is available on our website at www.rig.net. Steve will begin today's call 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 the 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 2017 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 could 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 risks and other factors in our SEC filings.
I will now turn the call over to Steve.
Thank you, Chip, and thank you to all of our listeners for joining this second quarter earnings call. Today on our call, I will provide a high-level summary of our second quarter performance, will talk about our recent M&A activity to expand our addressable market and diversify our business, and finally will highlight our organic efforts to expand our over-the-top solutions for our customers.
As outlined in our press release, second quarter revenues were $49.2 million, which were in-line with our expectations and market estimates. Net loss attributable to common shareholders was below expectations and estimates due to an increase in certain acquisition, legal and over time expenses during the period.
Of these, acquisition expenses of $1.9 million were added back to calculate adjusted EBITDA. $500,000 in legal expenses over time and other cost related to resolution of a third-party service outage were not added back to calculate adjusted EBITDA. Revenue performance for the quarter is aligning with other market indicators that suggest stabilization in the upstream oil and gas sector that we serve.
We have completed restructuring plans announced in 2017 resulting in meaningful reductions in G&A expense. Additionally, our supply chain theme has made important progress in reducing cost associated with key supplier contracts, which we believe will favorably impact our financial results as the year progresses.
As we proceed with globalizing our business and support functions, we continue to find ways to optimize our spend and drive operational efficiencies that are supported by the new structure and management team. During the quarter, we increased our site count from 995 to 1,051 for a net increase of 56 or just over 5%.
Included in this increase are a net six offshore production sites related to our efforts to diversify to the delivery of services and production-related assets. Also included in the increase are 10 maritime vessels and eight international land sites, another 32 sites were predominantly U.S. land base sites. Although these U.S. land sites generally have lower day rates, we think this is an encouraging leading indicator of E&P activity as a whole.
It is encouraging that our site count of offshore rigs show no net change quarter-over-quarter, the first time without a decline in nine quarters.
On the M&A front, we completed three acquisitions in the last three months, one in the second quarter and two in just the last three weeks. In May, we completed the acquisition of Cyphre Security Solutions, a U.S. based cybersecurity company that provides advanced enterprise data protection. This business has secured two contracts with important channel partners. The first is a large U.S. telecommunications carrier who is integrating Cyphre's BlackTIE solution into their cybersecurity portfolio on the white label basis and is introducing these capabilities across multiple verticals through their existing sales force.
The second which we announced two weeks ago is Fornetix, who is bringing together our best-in-class Cyphre BlackTIE encryption solution with their best-in-class Key Orchestration solution. Both RigNet and Fornetix will make our bundled solution available to our respective customers
Separately, the first, post-acquisition order for Cyphre services was closed just as the second quarter was coming to an end. In July, we successfully completed the purchase of substantially all of the assets of Data Technology Solutions or DTS, a U.S. based provider of VSAT services to the energy and maritime space. DTS assets include patented rapid deployment solutions that can be used to support time sensitive remote communications needs in the oil and gas market, the maritime market and the emergency response market.
In addition to these exciting new solutions that we will market worldwide, we have also acquired a broadband wireless point-to-point set of asset in key geographies in the United states that are ideally situated to support land drillers and oil and gas service companies.
Also in July, we've successfully completed the purchase of substantially, all of the assets of Energy Satellite Services or ESS, a supplier of wireless communication services to the midstream sector of the energy industry. This acquisition more than doubles our SCADA market position, which is a key part of our IoT business. This asset acquisition also includes a state of the art, SkyEdge II network technology that will form the foundation for the combined businesses going forward.
From here, we will aggressively market OTT applications and support new IoT devices to support our customers who use these mission-critical services in the midstream energy sector. We continue to look for other inorganic opportunities to advance our scale and capabilities by continuously assessing M&A prospects as they become available.
In terms of organic efforts to increase our over-the-top portfolio, which further supports our customers' broad ranging business requirements, we made solid progress in the quarter. Our global sales force has received extensive training on our Cyphre BlackTIE service offering and we are engaging with many of our customers on this top of mind capability.
As a result of these sales efforts and other over-the-top sales efforts, we started trials with an additional nine customers since our last earnings call who are now testing or had tested at least one of our OTT solutions, and we've advanced a commercial deployment with two additional customers.
As a reminder, these over-the-top or OTT solutions will provide a relevant set of services to both energy and non-energy customers, further differentiating our core managed communication service and guiding increases in ARPU. Together these are expected to improve margins and enhance the shareholder value.
In closing, our recent acquisition of Cyphre and the acquisition of DTS and ESS assets are further evidence of our commitment to implement our new strategy known as RigNet 2.0.
In addition to increasing revenue this quarter, our team generated $1.1 million of unlevered free cash flow and further improved our balance sheet. Despite the low level of new activity in the offshore drilling market, we are encouraged by signs of recovery in the upstream sector as a whole, where during the second quarter we recorded an increase of over 5% in the number of sites we are serving.
I'd like to thank our RigNet team members for their hard work and their personal commitment to our business. And I thank all of you on the call for your interest in RigNet.
With that, I'll now turn the call back over to Chip for more detailed financial review. Chip?
Thank you, Steve. As Steve mentioned earlier, consolidated quarterly revenue was $49.2 million during the second quarter of 2017, representing an increase of $1.1 million compared to the prior quarter and a decrease of $5.7 million compared to the prior year quarter.
On a segment basis, Managed Services revenue was $43.1 million for the second quarter compared to $44.1 million in the prior quarter, and $50.2 million in the prior year quarter. Adjusted EBITDA and Managed Services decreased to $10.3 million in the current quarter, partially due to cost associated with a third-party satellite outage. This result compares to $12.4 million in the prior quarter and $14.6 million in the prior year quarter.
SI&A revenue for the quarter was $6.1 million compared to $4 million in the prior quarter and $4.7 million in the prior year quarter. Since our last call, we have added change orders totaling $2.9 million which along with expected work-off during the quarter brings our total SI&A backlog to approximately $35 million.
On a consolidated basis, SG&A expenses were $12 million in the second quarter compared to $11.9 million in the prior quarter and $15.5 million in the prior year quarter. Acquisition and legal costs in the second quarter added pressure to G&A expenses as a whole.
GAAP net loss attributable to common stockholders was $4.2 million or $0.24 per share in the current quarter compared to a net loss attributable to common stockholders of $2 million or $0.11 per share in the prior quarter, and net loss attributable to common stockholders of $4.8 million or $0.27 per share in the prior year quarter.
The decrease compared to the prior quarter was due primarily to elevated acquisition and legal costs, transition costs relates to a third-party satellite outage during the quarter, and a $550,000 net adjustment in gross margin related to our SI&A Mexico operations.
Adjusted EBITDA in the second quarter was $6.1 million compared to $7.2 million in the prior quarter and $8.6 million in the prior year quarter. The decreases were primarily due to decreased revenue, partially offset by a reduction in ongoing operating expenses.
Acquisition related costs of $1.9 million have been added back in the calculation of adjusted EBITDA. Legal costs of approximately 500,000 as well as over time and other costs related to revolution of a third-party service outage were not added back in the calculation of adjusted EBITDA.
Capital expenditures were $4.9 million in the second quarter compared to $3.2 million in the prior quarter and $4.7 million in the prior year quarter. As a result, unlevered free cash flow as defined as adjusted EBITDA less capital expenditures was $1.1 million compared to $4.1 million in the prior quarter and $4 million in the prior year quarter. CapEx spend for the quarter continued to be disciplined and was substantially comprised of success based commitments to seven large customers, including two large investments, one in equipment upgrade and one in spares, as well as smaller amount related to the move of our – move to our new Houston headquarters locations.
Turning to the balance sheet, as of June 30, 2017, cash was $42.7 million, net working capital excluding cash was $18.8 million and our outstanding debt declined to $47.1 million. The decline in our cash balance reflects the $4.9 million in cash paid in the completion of the Cyphre Security Solution acquisition in May and a $5 million voluntary prepayment on our revolving credit facility in Q2 which follows a $5 billion voluntary prepayment in Q1 as well.
Wrapping up, an increase of over 5% in our site count, key offshore production and maritime wins, improvement in our revenue and SI&A backlog of approximately $35 million give us confidence around the stabilizing level of oil and gas industry activity and in the growth potential for our business.
We believe M&A activity completed over the past several months expand our addressable market provide, additional scale, enhance our service offering and provide new avenues for revenue growth in the Managed Services and OTT markets.
As always, we continue to focus on reducing core business expenses and improving cash generation with and expectation to see further progress in the second half of the year.
With that Steve and I would be pleased to address any questions that you have. Operator, please open the lines.
Thank you. [Operator Instructions]. And we do have a question from Andrew Carmichael of Simmons. Your line is now open.
I was wondering if you could talk a little bit about the evolution of margins, not asking for formal guidance, but I was wondering how you expect margins to progress over the back half of this year, relative to the square?
Margins, you know as the business begins to expand further, you know we're hoping to see some expansion in margins. We have seen some contraction over time and that's largely driven by the decline in the market, the competitiveness in the market. So, I would – we're going to do everything we can to improve margins. The whole strategy behind our OTT business is to add additional services to our mix which any services we believe are higher margin services relative to our remote communications business, and we believe that we have an opportunity to expand margins over time. But there is no doubt that coming out of a down draft in the industry as we have over the past few years that things remain competitive and we will do all that we can to expand margins, but the reality is, is that we are working to dig out of this industry malaise as everyone else is.
One thing I can say is that on the cost of services side, we have worked very hard to reduce the cost of some items in our supply chain, but we do believe that in the second half of the year, we'll see some benefit from the activities that we have undertaken to reduce some of our contracts on the supply chain side. So, again, doing everything we can to maintain and keep margins as robust as possible, but we hope to see some expansion as the industry begins to expand.
Understood. Thank you. And for my follow-up, I was wondering if you could speak to how you plan to market the Cyphre technology kind of in layman terms describe how you see that strategic partnership kind of facilitating that effort?
Sure. So a couple of ways. On our direct sales force, we'll indeed market the Cyphre capabilities to our existing customers, but in terms of leveraging this capability across other verticals, we look to use channel partners. You know I mentioned two of those channel partners in my comments, so one indeed a large U.S. carrier and other being Fornetix, a strong brand in the cybersecurity space, so it will be a combination on both direct and channel partners depending on the vertical that we're pursuing.
Thank you. And the next question is from Allen Klee of Sidoti. Your line is open.
Actually, this is Christine Curt on supporting Allen today. I have a question, given that you've spent a combined $27.4 million on the three acquisitions of Cyphre, DTS and ESS. Can you provide us some expected financial contributions related to these acquisitions and how they fit in with existing services and vision of the Company's direction?
Let me speak to vision and company direction, then I'll let Chip comment on the financial aspects. So, in terms of vision, Cyphre is our first acquisition since I've come onboard. It's really about enhancing our over the top portfolio number one, and number two it also allows us to provide an important point of differentiation related to the core managed communication services that we deliver as our customers increasingly are concerned about what's happening related to cyber threats and cyberattacks that are affecting enterprises across the world, not just energy, at least enterprises.
Then number three, Cyphre was intended to change our addressable market in a very positive way. The addressable market for cybersecurity solutions is substantial and our opportunity to market that through partners to many more verticals beyond the energy vertical is indeed helps us expand overall addressable market that's available for RigNet.
As it relates to the DTS acquisition, it helps us build more a competitive advantage particularly on the – in the land market, where of course we're seeing important growth and in the maritime market as well. And finally, as it relates to ESS, ESS is an acquisition that helps scale our IoT business, number one. Number two, it adds a new technology that allows us to support many more IoT devices beyond just SCADA and allows us to apply our over-the-top applications or SaaS applications to that market in a broader way. And finally, ESS helps diversify our revenue stream further within the energy sector by being focused primarily on the midstream sector.
I think from a financial perspective, DTS and ESS will begin making contributions very soon in terms of revenue and EBITDA. Those businesses we purchased, they had similar profiles to ours in many ways and we are buying them and integrating them with our operations. So, we are not taking on a lot of G&A associated with those businesses. There is some cost or services that goes with it, but at the same time, we're hoping to integrate both businesses into our company such that we start using our larger bandwidth portfolio and with scale on the buying side of bandwidth, we can further reduce cost. So, we do expect both ESS and DTS to start making contributions fairly soon and you will start to see that in upcoming quarter.
On Cyphre, it's a little longer term play for us. We think it's a very exciting technology. We think it has a lot of application in our – not only our media customer base, but also in other enterprise verticals and we see lot of potential in that business, but I would say the contributions to our consolidated results will be a little bit further out. So, very happy with the technology, very happy with the potential there and very happy with the progress we've already made since acquiring the company, but I think the – any real financial benefit from that acquisition will be toward the end of next year.
Okay, great. Thank you.
Thank you. [Operator Instruction] We have another question from Alan Klee of Sidoti. Your line is now open.
Hi, guys. So, another question is, how do you expect cost cutting actions to impact operating costs in the second half of the year?
In two ways, one, we continue to find opportunities to drive efficiency associated with the global restructuring that we have done, and number two is that as Chip talked about, we've worked really hard in the area of more effectively managing our supply chain costs. So, we expect to see those efforts begin to be reflected in our financial performance as we move through the balance of the year, and that's predominant related to network costs.
Okay. And just following up on that what are your thoughts on trends for CapEx run rate for the second half as well?
Well, CapEx popped up in the second quarter due to two – primarily two items, one was an upgrade for a customer which we have been working on for some time and this was a large equipment order as part of that. And then a spare that we have agreed to put in place for one of our other larger clients. And so, those two items were fairly sizeable for this quarter's CapEx.
Run rate, we are still anticipating to be close to what we did last year. I think in success based opportunities come along and those are the good kind of CapEx you like to have to write a check for. So, right now we are not seeing large CapEx requirements coming in toward the end of the year, but we will continue to spend judiciously throughout the remainder of the year. And so, I am not expecting anything that's too at or sync with what we've seen in the first and second quarter on average.
Okay, great. Thanks.
Thank you. [Operator Instruction] And I am not showing any further questions at this time. I'll turn the call back over for closing remarks.
Okay. We want to thank everyone for joining us this morning for the second quarter call. Steve and I are always available for follow-up in the coming days if there are other questions from our stakeholders. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.