Q2 2019 Earnings Call
Yes, <unk> second quarter 2019, <unk> earnings conference call will begin momentarily again, please stand by your conference will be good and one nineth. Thank you.
Ladies and gentlemen, welcome to the Rignet second quarter 2019 earnings Conference call. My name is <unk> and I will 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 if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.
I will now turn over the presentation to the old Chum Rignets Senior Vice President and Chief Financial Officer Mr. <unk>. Please proceed.
Thank you drew and good morning, and welcome to Radnets second quarter 2019 earnings call a copy of our earnings press release, what's supporting schedules, including scheduled with reconciled the non-GAAP metrics, we will discuss today to GAAP metrics.
He was posted to our website www dot rig dot net under our Investor Relations page for those of you who would like to bring lease in a 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 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 and other third party interactions our strategy and other factors detailed in the risk factors section of Rignets. 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 turn the call over to Steve Pickett, Rignets, Chief Executive Officer, and President Steve.
Thank you Lisa good morning, everyone and thank you for joining today's call. We're glad to be back in front of you to talk about our latest performance and our results.
After my opening comments Lee will review financial highlights following that as always we'll open it up for questions.
Yesterday, Rignet reported a net loss for the second quarter of $6.2 million or 32 cents per share based on revenues of $60.3 million adjusted EBITDA, a non-GAAP measure we defined in our press release and one of our key performance metrics was $9.8 million for the second quarter, both revenue and adjusted EBITDA were up compared to first quarter 2019, and compared to the prior year quarter Lee will provide some color on that in his remarks.
During the quarter, we resolved did you cheat ex dispute with Inmarsat.
In case, you missed the news at the end of June we agreed to settle the matter associated with this early 2014 contract between the companies by agreeing to pay $50.75 million, where the approximate value of the interim Arbitration Award.
We paid $45 million at the end of June .
5 million at the beginning of July and the final 750000 is due mid next year.
We spoke about our rationale in agreeing to settle but briefly as preparations for the phase two hearing progressed and we look to Inmarsat Inmarsat counter claims to our own counter claims it was a potential scenario, where the arbitration panel, which has delivered a very surprising and disappointing ruling in phase one could have given us an equally bad ruling in phase two.
Driving up the cost of an award to include interest attorneys fees and other amounts claimed by Inmarsat.
Hi, settling for the interim award amount, we felt we were able to get value for our counter claims by eliminating interest in attorney's fees and capping any further downside.
It was not the outcome, we'd hoped for but it is an outcome that let's us move on.
With that behind Us I'd like to take some time to remind you how much progress we've made in transforming the company.
Three years ago, Rignet was really just a remote managed communication services company operating in a deteriorating offshore drilling environment, where its major customers were stacking rigs at an unprecedented rate.
In this difficult industry environment, and with an abundance of new satellite capacity continuing to come online we face significant price pressure from our customers that sometimes out brand the cost benefits, we were able to recognize as satellite bandwidth prices decreased.
We also had a small system integration business as you may recall, we took more than a $15 million write down in that business in late 2015 due to poor project management on one large project.
So we had a number of priorities when I arrived a little more than three years ago.
They were one to fix the core business.
To to scale the core.
In three to expand our offerings and our addressable market through the development of over the top solutions.
I think we've made great progress across all three of those areas and want to remind you of some of the highlights.
In terms of fixing the core we focused on improving our fundamentals our relationships with customers and our service offerings, including our issue response through our global network Operation Center.
We have streamlined the business internally deploying best practices across the company.
Three years ago, the company was pretty silos in terms of its operations and internal communications.
Today, we work as one team with a common set of overarching goals along with specific department goals.
All of which are focused on delivering value to our shareholders.
We've invested in operational support systems that integrate our global support teams to the use of a single common global software platform.
We've been able to take advantage of structural declines in satellite bandwidth pricing to maintain and in some cases expand our margins.
And weve dramatically improved our proactive customer care issue resolution protocols over the last several years to differentiate rignet from competitors in terms of our service offerings.
Constant in proactive customer care is one of our key differentiators.
Finally, we fix the ESI or system integration business by bringing in new leadership professional sales and project management, if we're able to turn that business into one which is routinely meeting and exceeding both our and our customers' expectations.
In the last three years in that business revenue was doubled.
Gross margins have doubled.
Backlog has doubled.
All while taking less contract risk than in the past.
In terms of our second goal, we've expanded our core business.
Over the past two years, we've done acquisitions, which have helped us build scale in the base business because as I've said, many times networks benefit from scale.
It's a key element in realizing cost savings.
Rick net AD network scale in the Mcs or manage communication services business through the acquisitions of Dts dotcom.
And.
We've grown sites organically.
Offshore on land.
In maritime and in production.
Last quarter I mentioned that we had one for ESP msos with Petrobras in Brazil, and that these will be getting turned on later this year.
I'm excited to tell you that we've won yet another six Fps those in Brazil since our last call.
These are large complicated vessels the significant bandwidth requirements and they represent a new area of expansion for us in the energy value chain.
I am even more pleased to announce that Weve concluded in exclusive long term multi year agreement to provide managed communication for volaris.
Formally ensco Roland.
Rignet was a provider to both ensco and Rowan prior to their combination.
But this immense our future relationship in a deal which both sides were very pleased with.
We'll be providing more bandwidth to the combined fleet, while protecting margins and opening the doors for additional opportunities in machine learning and cyber security.
We've also expanded our business in the middle East is significant and growing area of activity for oil and gas customers.
And built a first fourg LTE and Fiveg enabled network in the Gulf of Mexico, Thats back by a major us telecom partner T mobile.
Going back to our ESI business, we've improved and grown that business, both organically and through the acquisitions of safe Con and Autocam.
Starting in the first quarter of this year, we launched our government services initiative, where we're seeing a lot of interest, particularly in our cyber security related products and services.
In terms of our third goal, we recognize several years ago that to thrive and to manage communication services business, we needed to differentiate ourselves by moving up the stack.
So we created a new segment apps and Aiotv.
And while our own internal development of applications, including Avi.
Complete connect and our crew welfare suite have been successful.
We made a number of acquisitions that have really launched us in exciting new directions.
FSS edited strong Aiotv business.
We currently provide service to over 10000, Io T. skaters sites.
Largely associated with oil and gas midstream.
We continue to work on growing that business.
In May Echostar in rig net announced that our companies are partnering to rollout equipment and services in Europe using span spectrum to increase options for customers fix and mobile data solutions.
We think this is a really exciting opportunity.
Our two key acquisitions in the apps and Io tea segment had been site safer our hardware based cyber security product that's proven to be a platform for the development of a broad cyber security portfolio.
And Intelli, our real time machine learning and AI solution cuts rapidly gaining ground as the go to solution for live data acquisition and analysis.
We just announced a multi year agreement with transition to provide intelli for real time mission critical data analysis on their offshore fleet.
Intelli is the fastest to implement in most efficient solution available, enabling our customers to rapidly realized the benefits of their digital transformation efforts.
Were other solutions can take years to implement and can fail to deliver results in the case of transaction and other customers.
We've been able to introduce Intelli successfully complete the proof of value trial.
And execute the development work required to roll out the solution meeting customers expectations and deployment milestones.
As we've said in the past Intelli is gaining traction with offshore drilling contractors global Super majors in offshore fracking excuse the onshore fracking companies demonstrating velocity versatility and value.
Cypress, but a little slower on the uptake, but it forms a key element of our cyber security solution set which is gaining traction because of the increasing number and sophistication of cyber attacks on our customers' networks.
It has significant growth potential.
Finally, we've been able to create what we called a flywheel effect where business in one segment is created follow on opportunities in other business segments.
A great example is with a large system integration customer, where we've introduced intelli in combination with certified safety to create a real time workforce tracking system that is getting very positive reviews.
As the projects schools up the recurring revenue for this solution will be reported in apps and Aiotv.
Another example is our newly introduced live Ity solution.
With the introduction of Intelli actually created an opportunity for us to help our customers manage the data systems that feed Intel lease real time machine learning based they die.
Life is a new IP as a service that will ensure customers rapidly realized.
Optimal value from their digital transformation investments.
In the last three years Rignet has come a long way.
We used to be considered oilfield services company predominantly focused on delivering communications on offshore drilling rigs.
Today, we're a global technology company with some of the most advanced real time, AI and cyber security products on the planet.
Combined with an efficient.
Ultra superior network that in combination enables digit digitalization across the energy value chain.
Including upstream midstream and downstream.
We'll go next behind US we're excited to return our focus to this ongoing successful transformation.
With a strong market position and manage communication services.
A large owned network infrastructure in the Gulf of Mexico.
The systems integration capability, that's performing well.
A rapidly growing real time machine learning business with a long list of Premier brands in energy and in other sectors.
And a best in class cyber security portfolio, we feel the sum of the parts valuation deserves a much closer look.
These businesses feed one another that is truly differentiated we're looking across the technology sector.
With that let me turn it over to Lee.
Thanks, Steve.
Recapping, what Steve said earlier consolidated quarterly revenue was $60.3 million up 4.9% compared to $57.5 million in the prior quarter.
Revenue was up by half a percent from $60 million in the second quarter of 2018.
The increase compared to the second quarter 2018 was primarily due to apps and aiotv.
The increase compared to the prior quarter was due primarily to ESI and I'll touch on the segments in a moment.
GAAP net loss attributable to common stockholders in the second quarter 2019 was 6.2 million or 32 cents per share compared to a net loss of $12 million or 63 cents per share in the prior quarter and a net loss of $4.3 million or 23 cents per share in the second quarter 2018.
Adjusted EBITDA was $9.8 million in the second quarter of 2019, a 16.6% increase compared to $8.4 million in the prior quarter.
They are they 20.7% increase compared to $8.1 million in the second quarter of 2018.
Now, let's touch on the segments.
Manage communication services revenue was $41.2 million for the quarter compared to $42.3 million in the prior quarter and $41.7 million in the prior year quarter.
Gross margin in the second quarter of 19 was 39.3% versus 36.3% in the first quarter of 19 and 39.3% in the second quarter of 18.
The decrease in managed communication services revenue and increase in gross margin compared to the prior quarter was due to the prior quarter, having higher equipment resale revenue.
Also the T mobile LTE Buildout was substantially completed in second quarter. So there was a decrease in revenue associated with that project.
Our Mcs site count for the second quarter was 1384 up by 87 year over year and up by 24 sites sequentially compared to the first quarter.
As we discussed on our last call we've seen some recovery in site count since year end driven by the production maritime and other site count categories.
This quarter, we gained six offshore rigs while several of the fleets, we serve had some cold stacking and scrapping.
As a result, we were down a net of three offshore drilling rigs in the site count.
However, though the overall number of offshore rigs sites was down slightly the monthly recurring revenue of the six sites, we added more than offset the sites, where we service ended.
Absent Aiotv revenue was $8 million for the quarter up 21.7% compared to $6.6 million in the prior year quarter and flat at $8 million sequentially.
The increase from the prior year quarter was largely the result of Intelli ramping up.
Sequentially revenue in the segment was as I said flat that's largely because we were doing some significant development work for our customers during the second quarter with a focus on hitting milestones, which allows us to increase billings in threeq and beyond.
For example, trans Ocean turned up new services. After the end of the quarter and our first fracking customer turned on new services and turned up additional sites late in the second quarter, meaning the revenue contributions from these successes will not be seen until the third quarter.
So in summary, we expect to continue to see until his contribution increased throughout the remainder of the year as current customer revenue ramps and new customers are brought online.
Systems integration revenue for the quarter was $11.1 billion up 55.3% from $7.2 million in the prior quarter, but down from $11.7 million in the prior year quarter.
Gross margin for ESI increased to 36% from 30.6% in the prior quarter.
And from 33.7% in the prior year quarter.
The revenue increase compared to the prior quarter was due to the variable nature of the business with several new projects ramping up and savings being recognized on several projects nearing completion, which also benefited gross margin.
Project backlog remains strong at $37.1 million as of 630 by team.
Up 17, and a half million dollars or 89.1% from second quarter 2000, eighteens total of $19.6 million.
But down $5.9 million as of 331 bank team due to work off.
Now lets you could become concerned that we've seen a decrease in the backlog remember that just like recognizing revenue on individual projects can be uneven the pace of bidding for these opportunities also ebbs and flows as well as see business Theres, often a gap, which is sometimes considerable as clarifications and changes to bids are submitted between the initial bid and the final project Award.
All of that to say that we are responding a to a significant number of opportunities in fact to put some numbers around it we received 34 opportunities to bid in the second quarter of 18.
That's up from 22 Q1 19, and 20 in Twoq you 18.
Now we don't respond to every opportunity some just aren't the right fit for what we do and we do have limited resources, but these figures should give you an idea that the ESI business is healthy.
As DNA expenses totaled $17.4 million in to Q1 9, compared to $20.3 million at one to 19 and $17 million in Two Q1 8.
The decrease compared to prior quarter is primarily due to the prior quarter, having elevated stock based compensation under our 2018 short term incentive plan.
SDMA for Twoq, you 19 included $2.2 million of Gx dispute phase two legal costs compared to $2.2 million Q1 19, and zero point $8 million of gx costs into Q1 8.
We also recorded a $1.3 million increase in the fair value of the Intelli earn out and contingent consideration.
This is actually a positive indication of how well intelli continues to perform.
Capital expenditures were $4.6 million compared to $7.1 million in the first quarter and compared to $6.6 million in the prior year quarter.
Capex spend for the quarter included a total of $1 billion for the build out of the new Lafayette, Louisiana facility that will enable us to consolidate three separate legacy facilities and half a million dollars for the build out of the LTE network with our partner T mobile.
We expect to complete the final few sites associated with the Gulf of Mexico, LT network, which has already carrying live traffic in the coming months.
The remaining $3.1 million of Capex was substantially composed of success based commitments.
Finally, let's turn to the balance sheet as of June Thirtyth, 2019, and cash was $10.9 million, our outstanding debt was 111.1 million, including both current and long term.
And with that I will turn it back over to Steve.
Thanks, Lee before we open it up for questions I want to thank the team at rig net premiums dedication and for their determination to drive results for our customers and investors.
Our more than 600 employees executing for our customers in over 50 countries are critical to our success and I recognize and appreciate their professionalism and their tireless efforts.
Lee with that let's open the line for questions.
Alright, Jerome, let's let's open the queue. Please.
Ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your Touchtone telephone. If your question has been answered or Chris Terry move yourself from the queue. Please press the pound key again, if you would like to have a question. Please press Star then the number one on your cat stoned telethon, we'll pause for just a moment to copilot cleaning roster.
All right. Your first question comes from the line of Allen Klee with Maxim Group humor now lives.
Yes, good morning.
In your managed communication services segment.
Can.
You talked about a couple of wins.
And it seems like you are adding in areas outside of 'em off shore could can we get a sense of adding this all together of.
Maybe starting off with.
The status of the of noble in terms of how many rigs rolled off and how many are left and then of the couple of of wins that you mentioned in the segment.
If we added that all together does this imply that the that we could think about this segment is growing sequentially in possibly in Threeq and Fourq you. Thank you.
Yeah. Good question. Good morning. This is Lee let me just answer your question with respect to noble. We just had I believe one of the noble rigs roll off during the quarter.
We still have three rigs on contract and it looks like those are expected to stay on contract with us through the end of the year.
So that's a that's a positive for us.
I think if you if you look at the rig sector.
It continues to struggle I think there is still some optimism from the offshore drilling contractors as you look at.
What what we think will happen in 2020.
So I would like to tell you that I think that we can see the overall market continue to grow there. It's more rigs go back to work, but as you obviously know given the situation with China, The trade War, Iran.
All of these things create a lot of uncertainty and I don't think we're seeing offshore operators make big bold moves in putting large sets of drilling rigs back to work. So what we're focused on is really continuing to provide excellent service to our existing customers.
Assist them as they pursue their own new opportunities in various basins around the world.
And then look for opportunities to leverage Intelli.
And in our other offerings in a way which might allow us to.
Increase our market share of the SEC, Steve anything to add to that.
Clearly our.
Complete set of capabilities today.
Give us an opportunity to capture a larger wallet share in them. So that's what we'll continue to focus on rate.
Yes offshore any more color in terms of our manage coms business as you know we also.
Rolling.
Production related business into in midstream.
And we're looking to provide solutions that park guest solutions that deliver toms to remote areas, but instead enterprise wide.
That provide things like the best in class Cyber security protection, and real time machine learning wherever our customers might be.
Yes, so I think the the announcement of the Polaris contract renewal. This morning here on the call is obviously a significant win for us, especially given some of the chatter that was out there in the market that greetings fear and uncertainty around that.
I think that we have an opportunity to continue to.
Build on the foundation of that relationship and also expanded with the other opportunities that we have but I believe that one of the reasons that they chose to renew with US was as Steve mentioned, the proactive customer care that we do and the relationship that we build through our network operating center.
Back in ensuring that that we are.
Responsive to their needs and issues and keep them up and running.
With the best service, they could possibly get it's not just about price.
Thank you and then the.
Also of network Gulf of Mexico Network.
That's you are clear.
Hello.
45 to you that you from close to being finished building out.
Is there a way to think about the potential revenue contribution in 2020.
But this could could generate.
That's a great question.
Alan and and frankly, one that we actually are working ourselves internally to try and understand.
Yeah remember the dynamic the dynamic was we spent the capital upfront.
T mobile pays us for every site that we turned back on.
Then once the network is carrying traffic at generating roaming revenue on the network T. mobile takes that revenue to recover its payments to us. So basically 100% of that initial roaming revenue goes back to T. Mobile. So that we are kept hold in the capital expenditure Department. They are then made whole and then we start on a 50 50 revenue sharing agreement and we believe that we will start sometime in 2020.
But.
I think it's very early on in terms of determining how much traffic and how much revenue that's going to generate and of course, it's a very unique network paid seats in network that covers an area about the size of the state of Georgia over water in the Gulf of Mexico in there aren't that many.
Comparisons to use to determine what to expect in terms of.
He said the roaming traffic.
Offshore.
And by the way, we're really excited about having his project is essentially complete by a couple of more platforms yet to go but essentially complete its carrying traffic in what we're really excited about is.
Something thats very special about this network and that is the frequencies in which it operates both 600 700 megahertz that debt penetrate these big.
Metal off shore.
Assets much more effectively than higher frequency solutions. So anyway really pleased that we we have the bulk of this build behind us and that is certainly makes it the most contemporary network out there.
We're continuing to have conversations with them about opportunities to expand expand.
Thank you and then moving on to apps and I were to you spoke about that you have a couple of them.
Projects that are going to start to contribute in.
Next quarters or is there a way for us to think about.
What what that can mean in terms of the magnitude of.
Increases in revenue.
Well you know, we don't give you guidance Alan.
But.
There's there's a significant contribution that we're expecting to come as we ramp up what we're doing for translation as well as for our Frac customers. So.
I'm afraid I can't really give you much more than that certainly in terms of numbers.
Okay and then.
Well I guess I would also say tell you that we've got a number of of.
Customers that I think are in I would call. The late stages of their proof of value were trials, where we expect to convert those two contracts as well.
Begin ramping those up.
Okay. Thank you my last question is in within.
Systems integration.
You talked about in prior calls that the seasonality we should think about is.
I think that.
Growth in Twoq, two and then three Q sequentially and then a decline in for Q.
Is that still how you're kind of thinking about.
How it plays out across the year.
Yes, I think in general Thats correct, I think we talked about in the past is being somewhat camel shaped.
With the hump into Q3, Q, but I think.
I think we may have less of a fall off in Fourq you just based on what we're seeing right now.
And does that hamill shape, but just that camel shape mean that threeq it was higher than two Q.
Oh, you know I'm not going to answer that question for you.
Okay, alright, thank you so much.
You're welcome Thank you Alan.
Ladies and gentlemen, once again.
If you have questions at this time. Please press the Star then the number one key on your Touchtone telephone. If your question has been answered or you Register move yourself from the queue. Please press the pound key.
Now we have follow up question from Allen Klee with Maxim Group.
Yes, hi, I wanted to but since I'm. The only one I will keep [laughter] I noticed.
You had it looks like a good reduction in your accounts receivable this quarter and I know you've had a focus on improving collections. So looks like we saw that and any comments on on NIM. The actions there and how you how you're thinking about this.
Well I hope.
My Aer team is listening right now to have heard you noticed that and mention it because they have just done yeoman's work this quarter.
In in working with our customers and it's not just they are it's been it's been a great team effort. Steve mentioned, we're working in a way that's much less I look today than we used to and so you know sales and operations and the order fulfillment team.
Everybody has come together to really put a focus on.
Bringing collections of the AR number down so very very pleased with performance. We continue to have that as a focus area and are working.
Bring more cash in the door every day. So thanks for noticing and maybe add to that we're also looking at where we can improve processes customers.
In order to make this a more consistent.
The result for was business thing for our investors.
Okay and then maybe my last question would be you talked about.
During your presentation that the value of the sum of the parts of the company I was wondering if maybe if we could get get your expansion on that in terms of maybe how.
What investors might be missing in or.
And some of the.
Segments that you have.
Yes, I think there are a number of comps that you can look at when you kind of dissect the different areas of the rig knits business.
Yes, I think is look at them, how real time machine learning and businesses are trading typically those trade as a multiple of revenue.
The same is often true for cyber security businesses that trade it oftentimes trade at a multiple of revenue.
In the offshore.
Owned infrastructure, we think has meaningful really meaningful value.
And on top of that there is still a remote.
Satellite based manage coms business.
That's up performing well.
In.
In a market that say generally.
I think the two I mean, Alan when you when you look at it we are trading today.
You know in a difficult market at about at slightly below $150 million in market.
That's below the managed columns revenue from 2016 right. So not only are we trading less than one times revenue for.
One segment, that's giving absolutely no credit to any of the rest of the business, particularly the apps and Io Tee business, which we expect is going to be the growth driver of the company really going forward and ESI business, that's just delivering a great projects in great margins.
So it's it's a little I think frustrating for the management team, it's a little frustrating for the board to see.
The equity behavior moving as it is.
Because there are so many good things.
Going on right now and I think Thats really one of the reasons why.
Steve chose to.
Sort of reset the stage and help people remember what rig that was and really what weve done with the company over the last several years and now that we've put gx behind us, we're really poised to be able to focus on that growth.
It really build on the momentum that we have because as I as I said in the press release, we're really hitting on all cylinders as it relates to the three segments of our business. So very pleased with it we're going into this call. We have a very important contract extension with our largest manage communication services.
Customer of ours.
A big win in the area of real time machine learning.
With with Transocean.
Nice growth as we talked about managed communication services out of Brazil.
And so anyway, we're really pleased with how the business is performing in that I think over time that will be good.
Okay. Thank you.
You do.
My numbers on revenue and EBITDA, so even a good quarter.
Thank you very much.
All right. Thanks, Alan Thank you Alan.
Again.
If you do have.
Question at this time. Please press the Star then the number one key on your Touchtone telephone. If your question has been answered or wish to remove yourself from the queue. Please press the pound key.
Okay.
I am showing no further questions at this time I would now like to turn the conference back to read out from.
Alright, Thanks, Jerome and thank you for joining us today on our second quarter earnings call.
We'll be available here in the office. If you have any follow up questions that weren't addressed today and we certainly invite you to join US in November when we expect to report our third quarter 2019 earnings have a good day.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.