Q3 2019 Earnings Call

Ladies and gentlemen, nice standby today's conference will begin momentarily.

Ladies and gentlemen lease standby today's conference well begin momentarily.

Ladies and gentlemen, welcome to read Nets third quarter 2019 earnings Conference call My name misleading and I will be your coordinator for today.

At this time all participants are in listen only mode. We will be facilitating a question answer session. After their prepared remarks by management I will now turned over the participation to me Ahlstrom weakness senior Vice President and Chief Financial Officer Mr. also please proceed.

Thank you very good morning, and welcome to Rignets third quarter 2019 earnings call a copy of our earnings press release with supporting schedules, including schedules with reconciled the non-GAAP metrics will discuss today to GAAP metrics is posted to our website www dot rig dot net under our Investor Relations page.

For those of you would like to releasing PDF format, we posted that as well.

Before we get started I'd like to make you aware that we will be making forward looking statements today any statements that are not historical facts, including statements related but not limited to market expectations and future plans as well as aspirations are forward looking statements that involve certain risks uncertainties and assumptions.

These include but are not limited to risks associated with the general nature of the oil and gas industry customer. Another third party interactions our strategy and other factors detailed in the risk factor section of <unk>. Most recent annual report on Form 10-K and in our other filings with the Securities and Exchange Commission should.

One or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect actual results may vary materially from those indicated.

Rignet disclaims any duty to update the information presented on this call and now I'd like to turn the call over to Steve Pickett Rignets Chief Executive Officer in print, Steve. Thank you Lee and a good morning to everyone and thank you for joining us on todays call.

We continue to have a lot of exciting things happening here, Rick that and I look forward to providing this update as usual after my comments legal review financial highlights and then we'll take questions.

Yesterday after the market's closed Rignet reported a net loss for the second quarter of 449, I'm, sorry, $494000 or two cents per share based on revenues of $61 million.

Revenues increased by 1.1% versus the prior quarter.

Adjusted EBITDA, a non-GAAP measure we defined in our press release and one of our key performance metrics was $11 million with a third quarter.

Compared to last quarter, adjusted EBITDA was up 12.6% and compared to the year ago period, adjusted EBITDA was up 26.1%.

Before I discuss progress we made during the quarter. Let me address one thing that I know is on your mine as well as on the management teams and the board's minds.

The current price it equity.

We've seen a market decreased during the quarter and the last month.

Well, we attribute some of it to general concerns about the state of the energy industry. There continues to be what we think is a fundamental disconnect between our equity value and the business.

We think wanted those reasons is concerned over the balance sheet.

No. They take a few I could take a few minutes to comment on that topic in particular.

As you know we took additional debt on our revolver during the second and third quarters to pay $50 million up to $50.75 million settlement related to our gx arbitration with inmarsat associated with the contracts signed in 2014.

The final installment of $750000 is due in the summer 2020 .

So we put that behind us.

Of course, the impact on the balance sheet is longer lasting.

At the close at the quarter, our leverage covenant as defined in our bank facility has consolidated funded indebtedness divided by consolidated EBITDA as adjusted was 2.99.

Under that facility. The maximum is 3.25, so we have headroom there.

Our fixed charge ratio was 1.88 versus a minimum of 1.25.

Well the leverage ratio was higher than we would like it we believe it's manageable.

Remains one of the best in the industry among our competitors.

We anticipate that we will remain in compliance and that we should expect to see leverage declined in 2020 as we increase adjusted EBITDA as a result of both revenue expansion and cost control.

We also expect to begin working with our bank group to renew our facility in the coming months and we anticipate finalizing that late first quarter or early second quarter of 2020 .

No we're exploring some other options to help us de lever, including the potential sale of some assets.

But relatively early in the process and I'm not going to go into any more detail other than to say that we are committed to unlocking value for shareholders as a top priority.

Finally, you know the acquisition activity has helped enable our transformation over the last few years.

Well continue to stay active in the market to understand the opportunities that are out there, but given the state of the balance sheet and the current equity price in the short term we're not currently in the market to make acquisitions.

Now I'd like to update you on the progress, we're making across our various business segments, beginning with managed communication services.

On our last call, we announced that we had renewed our long term relationship with florists to provide them with managed communication services in a multiyear agreement.

We provide some other services from our absent Aiotv segment as well.

We also recently announced an exclusive multiyear agreement to provide manage communication services to board drilling.

Which has been putting its fleet of advanced Jackups to work in West Africa in Mexico.

In Brazil, we won five drillships with a local drilling contractor, which would be turned on over the next several months and we successfully initiated service on the first of our Petro Bras S.P.S. shows where we have one to manage communication services business.

In fact.

Earlier this week, we officially announced wins on six more espressos with Petrobras, bringing total global wins for F. Dsos to 17 over the last 36 months.

[noise] polluting Gatwick production company in the Philippines, we're providing not only manage communicate manish communication services, but real time machine learning and safer based encryption to Gallic, making them our first triple play customer.

Revenue in the absent I O T segment grew 15.7% quarter on quarter.

24.1% versus a year ago quarter, and now comprises 15% of told revenue.

The Io T. revenues grew in the quarter in represented 55% of the absent Aiotv segment total for the quarter down from about 64% in the first quarter as Intelli in our other apps, including Avi I include hotspot continue to increase their contributions at.

The higher pace.

We're extremely pleased about how the aiotv portion of our base business continues to get to develop in fact, both September and October were a record months for the M to M or machine to machine portion of the Io tea business in terms of bandwidth utilized and revenue generator.

We told you on the call on the last call that Intelli was continuing to win business. It increase its contribution to revenues in that you'd begin to see more of an impact in the third quarter as transaction turned up along with some of our other customers.

Earlier this week, we announced that we had reached an agreement with BP to provide intelli lives for BP state of the art remote collaboration centre in Sunbury, England.

Our ability to implement the solution quickly and map tens of thousands of unique data points, where some of the key criteria in the selection process, where we were actually displacing the incumbent.

We're also implementing Intelli live for BP. The same service, we inaugurated would transition to help manage their data from the edge to the core.

In the fracking in convention unconventional markets. We're now working with three additional fracking companies in the Permian as well as two super majors, delivering real time monitoring of their unconventional drilling operations.

We continue to expand the use cases for intelli as our workforce cracking initiative attracts further interest and we develop new apps for real time pipeline leak detection and stuck pipe onshore.

As it resulted in new contract with an existing Super major we're also further growing our R&D work in Brazil.

As a result of the use of the Brazilian Levy in energy. This work is essentially customer funded it allows us to develop new applications, where rignet owns the IP without incremental R&D spend.

Lastly, we're looking at forming partnerships, which could advance intelli, both within the energy vertical as well as in other verticals in the interest level is high.

Many of you asked what our goal is for the absent Aiotv segment.

Aspirationally and this is not guidance and we'd like to see the segment get to 50% of revenues in the in the next five years.

Our system integration business continues to perform well we ended the quarter with backlog of $35.9 million.

One of our ESI wins during the quarter was with a customer who essentially is essentially replicating in existing project in rather than go to bid awarded us the work directly.

Finally, we're making progress on the government front during the quarter, we were largely focused on an effort to be included on the general services administration or G.S.A. list.

Which is what qualifies companies to bid directly for government contracts.

We successfully filed all of the required people work and are now going through the final confirmation steps.

This was an important accomplishment accomplishment in the quarter.

Overall, we're pleased with the business performance.

But as I, often say pleased does it mean satisfied.

The team continues to demonstrate its ability to execute against the strategic initiatives, both management and the board have defined.

With that let me turn it overtly [laughter] thanks, Steve.

I'll apologize in advance because I've got a little bit of a cold here. So if I start coughing uncontrollably, that's that's why.

No. We are actually very pleased with our results this quarter and I'd like to begin by recapping just a few of the numbers as Steve said, the consolidated quarterly revenue was $61 million up 1.1% compared to 60.3 million in the prior quarter.

The increase compared to the prior quarter was due primarily to absent aiotv, coupled with Mcs, the partially offset by ESI.

Revenue decreased 5.8% from $64.8 million in the third quarter of 2018.

The decrease compared to the third quarter of 2018 was primarily due to a decline in Mcs largely as a result of lower equipment sales and some reduced to be set and microwave revenue and lower project billings and aside during threeq United team.

This was all partially offset by a 1.8 million dollar growth in apps in I O T almost entirely in the applications part of that segment.

GAAP net loss attributable to common stockholders in the third quarter 29 team was just under half a million dollars or two cents per share compared to a net loss of $6.2 million or 32 cents per share in the prior quarter and a net loss of 2.8 million or 15 cents per share in the third quarter of 28 team.

Adjusted EBITDA grew nicely quarter on quarter to $11 million. This was a 12% 12.6% increase compared to 9.8 million in the second quarter, and a 26.1% increase compared to 8.7 million in the third quarter 2018.

Now, let's talk a bit about the segments.

And it's communication services revenues were $42.1 million for the quarter compared to $41.2 million in the prior quarter and 44.9 billion in the prior year quarter gross margin in the third quarter of 19 was 42.6% versus 39.3% in the second quarter of 19.

Okay, and 37.9% in the third quarter of 18.

Our Mcs site count for the third quarter was 13 86.

36 year over year and up by two sites sequentially compared to the second quarter of my team.

This quarter, we gain net of two offshore rigs dropping one semi submersible, while gaining one jackup and two drillships.

Our fleet mix is about 71% jackups at about 29% floaters and when you consider the approximately 495 rigs currently under contract. According to our data sources, we have about 38% of the worldwide Jackups in about 36% of global floaters.

Furthermore, in the production category, we were up nine sites to a total of 384 as we continue to focus on may have FPSO market.

Alright announcement of the 10 PFP Assos one in offshore Brazil in the last year takes a total number of Fps those we serve or will serve to about 31, giving us what we estimate to be about 16% of the worldwide market share of around 190 operational left dsos.

Total site count was negatively impacted by a reduction of 10 in the other category all related to land rigs.

And I are Ti revenue was $9.3 million for the quarter up 15.7% compared to $8 million 8 million sequentially and up 24.1% compared to $7.5 million in the prior quarter prior year quarter.

The increase was largely the result of Intelli ramping up in a number of customers, including transition our large west, Texas fracking customer and progress associated with our safety related digital workforce tracking solution. We're implementing for one of our Super major customers at a large LNG construction site.

One of our largest wins announced earlier this week is with BP, we will be installing Italian their UK based remote collaboration center, where our goal will be to help BP extract value by improving their operational efficiency at well sites around the world both onshore and offshore we're especially pleased by this win because we displaced and then.

Combined provider I think this highlights our ability not only to demonstrate value to the customer quickly, but also to rapidly and efficiently deploy the solution. We expect to begin seeing revenue contributions from the BP deal in the first quarter of 2020.

Additionally, we signed a multiyear agreement to provide intelli alive, the company's real time machine learning based analytics program to ocean, whatever Brazil's largest offshore drilling contractors and will be deployed in their dips, they're real time decision support center monitoring maintenance beer PV power management and the dynamic positioning system.

Among other things.

Our other applications are also contributing to growth along with Intelli live we signed a multiyear agreement would transition to provide our enhanced remote adaptive video intelligence solution.

To help improve operational integrity inefficiency.

And we're continuing to successfully rollout our crew morale of offerings as bandwidth demands continue to increase for off duty workers on both rigs and platforms.

So our transformation to delivering more revenue via apps is well underway and to give some color in Threeq. You 18 are split between Aiotv and apps revenue within that segment was about 80, 20, so about 80% aiotv and 20% apps.

In Threeq you 19, the split is about 55% Aiotv and 45% apps and we expect that to flip in the coming quarters. So that the apps will be driving more revenue than aiotv.

The Aiotv portion of continues to perform well, particularly in the area of machine to machine traffic. We track a number of key metrics and you might find some of the growth numbers interesting.

In terms of volume we've seen an increase in traffic through October of about 45% year to date.

To almost 63 gigabytes per month now that may not sound like a lot of traffic, but do you consider but if you consider that most of the devices are transmitting very few bits at a time, it's actually quite a lot.

We're also seeing our average monthly usage per terminal has increased this year by about 31% across our more than 5700 terminals.

In a nutshell, our customers are deploying more and more sites in generating more and more traffic from those sites.

Systems integration revenue for the quarter was 9.7 million down 13% from 11.1 billion in the prior quarter and down 21.8% from the $12.4 million in the prior year quarter.

Last quarter, we did have some strong billings from two of our larger projects.

Backlog in the business declined to 35.9 billion from $37.1 million at June 30, meaning that net of our revenue burn we added about half million dollars into backlog during the quarter.

Including some projects that were direct awards rather than competitive bids.

Gross margin for ESI decreased to 23.3% from 36% in the prior year quarter and from 26.2% in the prior year quarter. The GM in the second quarter benefited largely from some savings recognized on several projects nearing completion, where we were able to benefit from reduced costs.

As we said in the press release, we continue to view the outlook for the ESI business is positive and the number of RFP will responding to is fairly steady.

Our SDMA expenses totaled $15.2 billion in Threeq, you 19, compared to 17.4 million in Twoq, United team and to about 17.4 million in Threeq you 18, the decrease compared to the prior periods is primarily due to the reduced gx legal costs.

DNA for Threeq uniting included credits a $400000 of Gx phase two legal costs.

Our gx costs were $2.2 million in Twoq, you 19, and $700000 in Threeq you 80.

Capital expenditures were up in Q3 $5.9 million compared to 4.6 million in the second quarter and compared to 6.5 million in the prior year quarter Capex for the quarter included about $1 million associated with our new Lafayette, Louisiana location that consolidated what was formally three facilities into one.

We actually just accretion the facility a few weeks ago, what are really pleased with how it's turned out we're already seeing the benefits from bringing the teams together that had been in three separate facilities.

To one facility and enabling collaboration across a wide range of opportunities.

Furthermore, there was one and a half million dollars of Capex associated with a large success based job for a certain surface super major in Angola.

The remaining $4.4 billion of Capex was substantially composed of other success based commitments.

We're expecting a little boost in Q4, as we're able to recognize more revenue across a number of projects.

With respect to the balance sheet as of September Thirtyth 2019, cash was 14.3 million our outstanding debt was 114.4 million, including both current and long term and remember that we made an additional 5 million dollar payment on our gx settlement using the revolver during July but offset that by a principal pay.

But at the end of September so our outstanding debt was up only about 3.3 million.

Our balance drops from about 68 million at the end of Q2 to about 62 million at the end of Q3 is we continue to focus on our collection efforts I think there's still an opportunity for us to improve their though I will say, we saw coast customers holding on to cash as we reached the ended the quarter and I am expecting to see the same behavior at the end of the year.

Finally, I'm pleased to report that we generated positive free cash flow this quarter of about half a million dollars. After capex cash taxes cash interest and principal payments cash breakeven or better continues to be the goal of the entire team as we manage the business. So the timing of Capex around success based opportunities and other factors may impact quarter.

Differently with that let me turn it back Steve.

Thank you Julie before we open it up to questions I want to think the Rignet team for their hard work and specifically congratulate our operations team for another quarter with great safety results.

Each of them is focused on driving the business to improve our results and increase value for our shareholders.

With that let's open up the deadline for questions. Please alright, Lady will take some questions now.

Thank you so much ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone.

Your question has been answered or you wish stream will result from the Q you May press the pound.

Again, if you have a question. Please press Star then the number one on your Touchtone telephone.

I am seeing no questions at this time for all from you May continue.

Okay. Thank you Lady.

Well there are no questions for us today, Steve and I will certainly be around in the office and feel free to give us a call to follow up.

We look forward to seeing you back in March when we report our fourth quarter and full year 2019 results.

And we would just like to thank you all for joining us on the call today. Thank you everyone and thank you ladies.

Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank everyone for participating.