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Edited Transcript of RNET earnings conference call or presentation 5-Mar-20 4:00pm GMT

Q4 2019 RigNet Inc Earnings Call

HOUSTON Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of RigNet Inc earnings conference call or presentation Thursday, March 5, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Errol James Olivier

RigNet, Inc. - Senior VP & COO

* Lee M. Ahlstrom

RigNet, Inc. - Senior VP & CFO

* Steven E. Pickett

RigNet, Inc. - CEO, President & Director

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Conference Call Participants

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* Allen Robert Klee

National Securities Corporation, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to RigNet's Fourth Quarter 2019 Earnings Conference Call. My name is Victor, and I will be your coordinator for today. (Operator Instructions)

I will now turn over the presentation to Lee Ahlstrom, RigNet's Senior Vice President and Chief Financial Officer. Mr. Ahlstrom, please proceed.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [2]

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Thank you, Victor, and good morning and welcome to RigNet's Fourth Quarter and Full Year 2019 Earnings Call. A copy of our earnings press release with supporting schedules, including schedules which reconcile the non-GAAP metrics we'll discuss today to the appropriate GAAP metrics is posted to our website, www.rig.net, under our Investor Relations page. For those of you who would like the release in PDF format, we've 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, future plans and 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 and other third-party interactions, our strategy and other factors detailed in the Risk Factors section of RigNet's 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, RigNet's Chief Executive Officer and President. Steve?

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [3]

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Thank you, Lee. Good morning, everyone, and thank you for joining us on today's call. We're quite pleased to be reporting our fourth quarter and full year 2019 results. With me today, of course, is Lee, our CFO; and a new addition to our team, Errol Olivier. I've known Errol for a number of years, and I was excited to bring him on to the team as our Chief Operating Officer.

He started with us at the beginning of the year. Errol brings a wealth of experience from his career in remote communications as well as some tremendous customer and industry relationships. He's responsible for sales, marketing, our global network operation centers, service delivery management and our bids and proposals teams. This role, which combines our customer-facing functions under one umbrella, will not only improve our consistency in delivering the highest quality of -- quality and reliability of service to our customers, but also allows other members of the senior management team to refocus their efforts on their areas of expertise.

Errol, welcome. It's great to have you on the team.

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Errol James Olivier, RigNet, Inc. - Senior VP & COO [4]

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Thanks, Steve. I really appreciate your warm welcome and flattering introduction. It's great to be here. For the past few years, I've engaged in a number of strategic advisory assignments, which gave me the opportunity to better understand what's going on in the industry from an outside view. RigNet was the only company that seemed to have a sustainable vision and a strategy to truly bring value to their customers.

Building on the stack and offering customer solutions to increase safety and improve operational performance is a real differentiator in this industry and this time and one that builds brand loyalty. This is the right time and place to be bringing such valuable solutions to the market, and I'm excited to be here to execute on this strategy.

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [5]

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Thank you, Errol. Errol's appointment coincides with the departure of Jay Hilbert, our Senior Vice President of Sales, and I want to take this opportunity to thank Jay, again, for his many contributions to RigNet's success and to wish him well in his next endeavor.

Yesterday, after the markets closed, RigNet reported a net loss for the fourth quarter of $523,000 or $0.03 per share based on revenues of $64.1 million. Revenue increased by 5.1% versus prior quarter. Adjusted EBITDA, a non-GAAP measure we define in our press release and one of our key performance metrics, was $11.9 million for the fourth quarter. Compared to last quarter, adjusted EBITDA was up 8.3%. And compared to the year ago period, adjusted EBITDA was up 13.1%.

Adjusted EBITDA grew each quarter in 2019 from $8.4 million in Q1 to $9.8 million in Q2 to $11 million in Q3 and now to $11.9 million in Q4, demonstrating very strong and improving financial performance.

I want to touch on a few of our accomplishments during the fourth quarter. We continued to advance the business. And despite what's happening in the energy and equity markets in 2020 as a result of the coronavirus and to our own stock price, we've been pleased with our momentum. In managed communication services, after winning a public bid, RigNet signed a multiyear agreement with Petrobras to provide fully managed communication services with O3b VSAT technology on 6 of their FPSO installations, which is in addition to the 4 FPSOs Petrobras awarded to RigNet in 2018.

FPSOs are becoming an increasingly important part of our business strategy because they're long-lived with steady and often increasing bandwidth requirements. We report FPSOs as offshore production in our site count and that category grew 11% in 2019 from 347 at the end of 2018 to 385 at the end of 2019. We expect the remaining Petrobras awarded FPSOs to come online over the course of the next year. Please remember that we win these vessels before they're actually finished, commissioned and producing, so there's a lag between award and actual revenue generation.

Furthermore, we announced on February 10 that we've signed a long-term agreement with Northern Offshore to provide a variety of services to their fleet, including VSAT, CrewFlix video-on-demand, CrewHotspot Internet and enhanced cybersecurity services that we refer to as ECS.

Competition within MCS for new opportunities as well as renewals remain strong. While we're not seeing irrational behavior from our competitors, there is, of course, ongoing price pressure in the market. Nonetheless, we continue to win deals on spot -- on the spot market and have not lost any significant renewal opportunities. Our belief is that pricing is only one component of what the customer is seeking and that the kind of service quality and reliability that RigNet provides along with superior execution and support, coupled with a robust bundle of over-the-top solutions, are the keys to delivering the highest value -- the highest possible value proposition for our customers.

In Apps & IoT, where we achieved a $10 million revenue quarter for the first time, one of our biggest news items, the signing of a multiyear agreement with BP to provide Intelie Live machine learning based analytics at BP's remote collaboration centers located in both Houston and in Sunbury in the U.K. Our work related to this award, which includes a small team that's actually co-located in the RCCs is focused on helping BP improve the operational efficiency and productivity of not only their offshore drilling operations, but onshore drilling operations as well. We've launched Phase 1 with BP and expect to launch Phase 2 shortly.

We also commenced POVs, proof of values, with a number of national oil companies in both hemispheres, and we signed another small fracking company during the quarter. Beyond Intelie, AVI, our Adaptive Video Intelligence solution that helps customers analyze digital video to improve safety and operations, added 6 new customers on over 70 sites and our Enhanced Cybersecurity Services added 3 new customers.

Finally, as we announced last week, Cyphre has achieved FIPS 140-2 certification through the National Institute of Standards and Technology. This certification involves rigorous testing and one -- is one of the most difficult to achieve. It's something that is almost a requirement for anyone serving in U.S. government who is buying security solutions and it's also recognized worldwide for a variety of regulated industries.

Speaking of government, we were also accepted into the U.S. General Services Administration or GSA schedule. The GSA is responsible for procurement for the U.S. government and receiving approval to be listed qualifies us to bid for federal contracts. This is a key step as we seek to expand our business into verticals beyond oil and gas.

Since our last call, we've also increased our disclosure of our ESG program. I'm happy to report that as a result of a fresh look at our ESG profile, ISS has upgraded our scores in this area. Our environmental score improved from 8 to 4, where smaller numbers are better. Our social score improved from 9 to 5, again, a lower score is better. And our governance score remained a strong 3.

ESG is an important topic to investors, our global team and to our customers. A number of the services we deliver can create meaningful impact on ESG goals for our customers from real-time machine learning that can drive environmental and safety improvement across multiple industries, to our cybersecurity solutions that can help guard against attacks from even state-level actors that can impact safety and our global environment, to our highly reliable communication services to keep our customers operating and living in sometimes hazardous locations.

Before I turn it over to Lee, let me comment on what we're seeing as the impact -- as it relates to the impact of coronavirus. So far, we've not seen a slowdown in activity in any of our segments. That said, some customer decisions are taking a bit longer and many of our customers as well as RigNet itself have banned nonessential travel.

Fortunately, as a remote communications technology company, we're well positioned to continue pursuing our business. There's clearly going to be some impact to global oil demand, and it's too early to really tell how that will affect us. But for now, we believe that the impact to energy is more likely to be onshore than international or offshore. And as oil prices have dropped, it's provided even more opportunities for us to help our customers recognize the benefits of our Apps & IoT solutions to drive their own operational and economic performance.

With that, let me hand it back to Lee.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [6]

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Thanks, Steve. Let's begin by reviewing some of the numbers and giving a bit of color. Consolidated quarterly revenue for the fourth quarter was $64.1 million, up 5.1% compared to $61 million in the prior quarter. The increase compared to the prior quarter was primarily due to SI coupled with Apps & IoT and partially offset by MCS.

Revenue increased by $6.4 million from $60.2 million -- sorry, by 6.4% from $60.2 million in the fourth quarter of 2018. The increase compared to the fourth quarter of 2018 was primarily due to Apps & IoT with increased contributions from Intelie coupled with SI and again, partially offset by a decrease in MCS.

Revenue for full year 2019 increased $4.1 million or 1.7% to $242.9 million compared to full year 2018 revenue of $238.9 million. Net loss attributable to common stockholders in the fourth quarter of 2019 was approximately $0.5 million or $0.03 per fully diluted share, including the gain on certain noncore assets or a loss of $4.8 million or $0.24 per share, excluding this gain. This compares to a net loss of $0.5 million or $0.02 per share in the third quarter of 2019 and a net loss of $49.7 million or $2.62 per share in the fourth quarter of '18, including the GX charge or a quarterly net income of $0.9 million or $0.05 per share, excluding that GX charge.

For the year ended December 31, 2019, our net loss was $19.2 million or $0.97 per share, including the gain of certain -- on the sale of certain noncore assets or $23.4 million or $1.18 per share, excluding the gain. Compared to 2018, net loss attributable to common stockholders was $62.5 million or $3.34 per share, including the GX charge or a net loss of $11.8 million or $0.63 per share, excluding the GX charge.

Adjusted EBITDA grew nicely quarter-on-quarter to $11.9 million. This was an 8.3% increase compared to the $11 million in the third quarter and a 13.1% increase compared to $10.5 million in the fourth quarter of 2018.

Let's talk a little bit about the segments. Managed Communication Services revenues were $39.3 million for the quarter compared to $42.1 million in the prior quarter and $42.9 million in the prior year quarter. Segment gross margin in the fourth quarter of '19 was 38.3% versus 42.6% in the third quarter of '19 and 39.1% in the fourth quarter of '18. Revenue compared to the prior quarter was impacted by lower VSAT and equipment sale revenue. Gross margin was lower in the fourth quarter based on lower VSAT revenue combined with the ability to -- or the inability to reduce corresponding bandwidth costs. I'm pleased to say, however, that in January, both VSAT and equipment sale revenue has bounced back.

Our MCS site count at year-end was 1,340, up by 17 compared to the fourth quarter of 2018 and compared to 1,386 in the prior quarter. When compared to 12/31/18, we gained 1 net offshore drilling rig and 38 offshore production sites as we continue to focus on the FPSO market. This was partially offset by a net decline of 10 maritime sites, mostly in the Gulf of Mexico, and a net 12 other sites, which are primarily in North America land.

In Q4, we sequentially gained a net 1 offshore drilling rig and a net 1 offshore production site, but this was partially offset by a decline of 13 maritime sites, which are primarily support vessels in the Gulf and 35 other sites, which, again, are mostly North America land drilling sites as activity fell off in the month of December during the holiday season. As a reminder, U.S. land and maritime support vessels tend to be higher beta and lower revenue per site compared to our offshore drilling rig and production sites. And once again, I'm pleased to say that the site count bounced back up in January.

Apps & IoT revenue was $10.1 million for the quarter, up 8.8% compared to $9.3 million sequentially and up 59.1% compared to $6.3 million in the prior year quarter. We are delighted that we have achieved our revenue milestone of $10 million in Apps & IoT for the first time in a quarter. The increase was largely the result of Intelie ramping up with BP in the quarter. And compared to our prior quarter, in addition to BP, we also ramped up Transocean and our large West Texas fracking customer who we signed early last year.

So our transformation to delivering more revenue via apps is well underway. And again, to give some color in 4Q '18 in our split between IoT and apps revenue within the segment was about 80-20. In the third quarter '19, the split was about 55-45 and the split is -- in Q4 was about 50-50. And we project that the segment will be increasingly levered toward apps due to our continued high growth rate there. In fact, revenue from Intelie, one of our strongest performing solutions, grew 245% in 2019 to about $7.7 million, and we expect a very strong growth rate in 2020.

Systems Integration revenue for the quarter was $14.7 million, up 52.5% from $9.7 million in the prior quarter and up 33.6% from $11 million in the prior year quarter. This quarter had some strong progress on certain of our large projects. Backlog in the business declined to $26.2 million as of December 31, 2019, from $35.9 million in the prior quarter, meaning that we added about $3.5 million of new projects in backlog during the quarter, but recognized more revenue and some project descoping than we added.

Gross margin for SI decreased to 14.4% from 23.3% in the prior quarter and 42.3% in the prior year quarter. The GM in the fourth quarter of 2019 was adversely impacted by some change orders on one of our large projects where a customer made some decisions to reduce work scope based on their larger overall project budgets. Conversely, GM in the third quarter 2019 and fourth quarter 2018 benefited largely from savings being recognized on several projects nearing completion, where we were able to reduce costs versus our projections.

We continue to view the outlook for the SI business as positive, and the number of RFPs we're responding to is fairly steady with over 20 in Q4 and already more than that in January and February. Some of these are pretty significant in size, and I would observe for you that the decision-making process with respect to customers is stretching. In other words, we remain confident in the business, but it's taking a little bit longer to replenish the backlog.

SG&A expenses totaled about $13 million in 4Q '19 compared to 15.2% in 3Q '19 and 15.1% in 4Q '18. The decrease compared to prior quarters is primarily due to reduced bad debt expense, and we're also very proud of our AR team's diligent collection efforts in a tough environment. In addition to lower bad debt expense, G&A had lower labor and travel expenses in the fourth quarter of '19. Also, SG&A for 3Q '19 included credits of about $400,000 of GX dispute Phase 2 legal costs.

Now I don't normally talk a great deal about taxes during these calls as our tax rates are highly variable due to recognizing valuation allowances in many jurisdictions, but the adverse effective tax rate was pretty significant during the quarter and does merit a comment. We regularly evaluate our tax positions in jurisdictions where we operate. In doing that review during the quarter, we identified and recorded a new significant uncertain tax position, or UTP, of about $1.3 million. We also took down an asset that was shielding an existing UTP of about $1 million due to the uncertainty that, that asset had value or was collectible. Both of these had a negative book tax impact, though, again, not a current cash tax impact.

Capital expenditures for the 3 months and year ending December 31, '19, totaled $8 million and $25.5 million, respectively, compared to $10.8 million and $30.5 million for the 3 months and year ending December 31, 2018. Capital expenditures were $5.9 million for the quarter in -- for the third quarter in 2019.

As of December 31, 2019, we had accrued capital expenditures of $2.5 million compared to $2.1 million as of December 31, 2018, or a difference of $400,000. Additionally, in the 3 months ended December 31, 2019, the company vendor-financed $2.8 million of equipment in the Managed Communications Services segment, which is included in the short- and long-term liabilities of the balance sheet at 12/31, but will be reclassified as debt on our 3/31 balance sheet. After accounting for the accrued capital expenditures and vendor-financed equipment, capital expenditures on a cash basis were $5.6 million and $22.4 million, respectively, for the quarter and year ended December 31, 2019.

Fourth quarter 2019 CapEx was substantially composed of success-based commitments. And full year 2019 CapEx included $2.4 million for our new Lafayette, Louisiana location that consolidated what was 3 former facilities into 1 as well as another $2.8 million for our T-Mobile LTE build-out. So both of those are nonrecurring. We are already seeing the benefits from bringing the teams in our 3 separate facilities together into 1 and that's enabling collaboration across a wide range of opportunities for us.

During the quarter, we generated about $1.3 million of free cash flow after making our principal and interest payments. This is up from about $0.5 million in the third quarter. We calculate this by starting with adjusted EBITDA and subtracting cash CapEx, so that would exclude the $2.8 million of vendor-financed equipment, and then taking out cash taxes, interest and principal payments. And in 2019, we made $9.5 million of principal payments on our term loans.

With respect to the balance sheet, at December 31, our cash was $12.9 million. Our outstanding debt was $107.7 million, both long term and current. And at year-end, our consolidated leverage ratio, as defined in the credit facility, was 2.72x versus our cap of 3.25x. And as a reminder, that's on a gross debt basis.

Speaking of the credit facility, we recently amended and extended our credit agreement with our existing bank group. We outlined some of the specifics in the press release announcing the amendment and extension and provided a summary in the earnings release yesterday, but it's worth going over these again at a high level.

So we increased the size of our revolver and extended the maturity out to August 31, 2022. We also established a new $16 million term facility, which replaced the existing term notes with -- and this new facility has a maturity of March 31, 2022. We'll amortize that loan at $2 million per quarter beginning in the second quarter this year, and that has a few important implications for us.

First, it will be paid off by the time it matures. Second, we've got a payment holiday here in the first quarter, which saves us $2.75 million, which was our scheduled payment. Third, the principal payment of $2 million per quarter starting in Q2 is $750,000 less per quarter over the life versus our previous principal payments. And that means that in 2020 alone, we're going to conserve about $5 million in cash, which we're very pleased with.

The bank has also extended the leverage ratio cap of 3.25x out to the end of the third quarter of 2019, after which it drops to 3x for 3 quarters, and then finally, 2.75x. Our pricing grid currently at L plus 3 is unchanged, and we also have established a $30 million accordion feature. So kudos to our treasury and finance teams in getting that done in a very difficult environment.

Lastly, you're aware that we don't provide forward-looking guidance. We're not going to start today, particularly given the uncertainties in the energy markets related to the coronavirus, but we do have some goals for the year, which include increasing both revenue and adjusted EBITDA over 2019 levels, being cash flow positive after principal payments for the year and continuing to grow Apps & IoT. Now we expect the shape of the revenue and adjusted EBITDA growth to generally mirror what we saw in 2019, which means lower in the first half of the year and growing in the second half. Of course, the timing of SI project revenue recognition over the course of the year can add some variability to that. And as a reminder, as has been the case for the last couple of years, first quarter adjusted EBITDA is generally lower than the previous quarter because first quarter G&A expense ends up being higher as a result of paying our bonuses. So lots of numbers there, lots of percentages. But with that, I will turn it back to Steve.

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [7]

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Great. Thank you, Lee. Before we open up to -- before we open it up for questions, I want to thank the RigNet team for their hard work and specifically congratulate our operations team for their great safety record. I know each of them is focused on driving the business to improve our results and increase value for our shareholders.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [8]

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All right, Victor, why don't we go ahead and open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Allen Klee from National Securities.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [2]

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So if I could sort of go through segments, starting with MCS. I'm trying to think about where we stand now? Is it best to think about that this segment, this is kind of the new run rate -- level of run rate? Or maybe how much exposure there's still to land in terms of -- should we potentially think that the segment could -- is likely to decline given some of the macro in 2020?

And then maybe on the margin front, gross margins were around 39% for the segment in '19. Can you discuss the factors that could move that in your mind, up or down, for 2020?

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [3]

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All right. We'll let Steve start, and then I'll provide the color commentary, Allen.

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [4]

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Great. Thanks for joining. Let me first address the question about the onshore. Indeed, we are seeing reduced activities onshore, particularly in the U.S. But frankly, that doesn't represent a very significant part of our overall revenue stream within MCS. The majority of our revenue stream -- the large majority of our revenue stream still comes from offshore. And those offshore agreements are typically longer-term agreements. And at this point, we're not seeing a reduction in activity offshore. So hopefully, that gives you a little color around where those revenues come from.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [5]

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Yes. And we do have a number of opportunities and some large opportunities this year to win rig fleets going forward here in the MCS segment. And again, as Steve said, we are not seeing those activity levels around RFPs or projected timing really slow down or change. So you asked about margin and guidance around that. Our MCS revenue -- or sorry, gross margin has generally been in a 36% to 40-ish percent range over the last 8 to 12 quarters. So it's been fairly steady within that range. Now what can impact that up or down? Obviously, we do, do equipment sales within that segment. And so those equipment sales, which are generally a resale of equipment that we buy for a customer and then markup comes at a much lower revenue margin. So typically, that's a 15% to 20% kind of activity for us.

So when you have more of that in the quarter, that tends to drive down the overall segment margin. And that's actually kind of hard for us to predict. We never know exactly when a customer will say, "Well, I want you to go out and buy a bunch of Cisco boxes for us because you've got a better relationship on the purchasing side than we do." But I don't see the revenue -- or sorry, the gross margin getting outside of that range going forward.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [6]

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Okay. And then you spoke about that, during the quarter, you saw lower VSAT and equipment revenue and an inability to lower bandwidth cost. But then in January, it picked back up. What would you attribute to kind of why it was lower in 4Q and then why it improved in January?

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [7]

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So sometimes, when you have a number of sites that just roll off as they did in December, they go back to work in January, and that picks back up. And again, remember, when I say that we weren't able to lower bandwidth costs as is often the case in what we do, we buy bandwidth in advance, right? So the way the industry works is, we will buy bandwidth upfront, and then we have that allocated out to particular customers with an expectation of how much they're going to use over what period of time.

So if a site goes off unexpectedly, that may leave us with a little bit of an overhang there. Now in general, our overhang with respect to unused bandwidth is very, very low, a couple percent, I would say at most, based on the last data that I saw from engineering. So we do a really good job of matching that. But sometimes, it gets off a little bit.

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [8]

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Yes. And if I could add some color to that. In most of our agreements to acquire bandwidth, we have the ability to turn off bandwidth if our customers were to stack a rig as an example. But if they just stop operations for a couple weeks, then that isn't technically a stacking. So we don't necessarily have the ability to turn it off. But if it was something more prolonged, we would have much more flexibility around turning off that cost.

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Errol James Olivier, RigNet, Inc. - Senior VP & COO [9]

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Yes. I'd add in, also. This is Errol. When you run bandwidth really lean in an operations, it allows you to buy bandwidth on the spot market as you need it at a reduced rate. Whereas if you buy an abundance of capacity and prices are dropping over time and you have that in the inventory and you look at it as sunk cost, it's still a cost at the original purchase value. So because we run so lean and that we run lean purposely, it allows us to go buy bandwidth for new opportunities as we need them and that will continue to help drop our overall cost and increase our margins.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [10]

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That's very helpful. If I move on to Apps & IoT, the segment outperformed my expectation. Can you talk a little about how you think about the pipeline of new opportunities there? And what gives you confidence in your goal to continue to grow the segment in 2020?

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [11]

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Yes, I'll start. The pipeline is robust. We're very pleased with the performance of that business, and we're getting very positive feedback from customers who are finding that we're able to turn on machine learning to generate value for them much faster than any one of our competitors. So we're very pleased with the pipeline.

And as I mentioned earlier in my comments, we actually had 5 new POVs start here since our -- since the last time we had a call. So it's not only lots of opportunities in the pipeline, but those opportunities are nicely maturing from conversations about what we can deliver -- the value we can deliver to proof of values. And in almost every case, those are proof of values that are paid for, and we're very pleased with the conversion rate from a paid POV into a multiyear deployment contract. So we're encouraged by what continues to happen in that area of the business.

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Errol James Olivier, RigNet, Inc. - Senior VP & COO [12]

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Yes. I might also add to that. Earlier, what I said was that when I was on the outside looking in, I saw all the competition in the marketplace. And everybody is selling value-added services. With value-added services to a customer that CrewWifi or TV type services certainly is a value. But when you look at RigNet and the kind of value-added products they're adding, they are actually real solutions that bring operational efficiency to our customers, reduce their costs, increase their safety. So I think our customers are starting to recognize that these aren't the same old type of applications that we've been selling and everybody else has been selling in the marketplace, that these are actually additional apps and applications that actually drive efficiencies for them. So we're seeing -- as word gets out and as we penetrate some of these accounts and our account teams are outseeing customers, we're seeing a bit -- quite a bit more interest in these other kind of services that they've never seen before.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [13]

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Yes. Allen, if you think about exactly following all what Errol said, what we're doing and not just on the revenue side, but also on the ESG side as well, think about an example like an Ocyan down in Brazil where they put out -- there's reports in the media out there where Intelie and the real-time operating center for them has helped improve their downtime by 250 basis points. So let's say you're running an offshore deepwater rig and you're getting $350,000 a day and your downtime on a 100-day well, just to make the math easy, was about 7.5 days. Now it's down to 5 days, okay? So you got 2.5 days back. When you add that up over the course of, say 3.5 wells per year and 5 vessels, and suddenly, we're adding $5 million or so directly to the bottom line of that customer through that. Next, consider that you're burning 10,000 to 15,000 gallons of fuel per day, right? So you can actually eliminate that 2.5 days of fuel burn, which not only reduces emissions, but saves the operator who is the one who pays for the fuel generally the cost of that fuel.

So the impact that we're able to deliver through Intelie and some of our other solutions is not just pretty charts and pictures and KPIs and monitoring, it's directly impacting their financial and operational performance.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [14]

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Can you provide an update on Cyphre?

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [15]

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Yes. Cyphre, we did secure FIPS 140-2 certification actually earlier this year. We think that's a real enabling certification for Cyphre. And the interest level is high, I would say, not just within our customer base, but with governments around the world as well.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [16]

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Okay. In your conversation, you talked about shifting within the segment to apps versus IoT. Does that have an impact on margins relatively?

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [17]

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So it should, right? The more -- and remember, the whole model around the apps part of the segment is a SaaS model, particularly in Intelie, where you're going to pay -- as a customer, you're going to pay for a license fee upfront, and then you're going to pay per app and per deployment site per app, right? So 40 rigs would be 40 uses of a particular app. And of course because we've developed that app for one customer and now it's applicable really across an industry, anybody who then chooses that app other than some minimal customization that has to be done, revenue is almost 100% margin. So apps should drive margins in that segment increasingly higher.

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [18]

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Yes. And as that app portfolio gets bigger and bigger, the value that we can deliver to our customers very quickly goes up as well. And it's not uncommon for a machine learning initiative to take 18 to 24 months to get implemented. And that -- and we're now implementing them in a matter of months if we don't already provide a solution and could be in the matter of weeks if we already have the apps available. So it's just very quick value creation for those end users.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [19]

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Steve, we talked about signing up and turning on that smaller pressure pumping company out in West Texas. We actually did that, Allen, over the course of a weekend because we took the app that was effectively right off-the-shelf and hooked it up to the sensors on their trucks. In fact, we probably could have done it sooner, but it took us the weekend to actually get the server out to them physically in West Texas.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [20]

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Moving on to the SI segment, if I look at your average margin in 2019, is that kind of reasonable to think about as a run rate for '20 or is there any reason to think of it differently? And then I understand how -- so you had a very good quarter this quarter, a lot of finishing up, I guess, a lot of projects. But then your backlog declined. So I'm just trying to think, it seems like it might be a challenge for this -- for 2020's revenue to kind of be at 2019's level. Is that fair or is there something we should think about?

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [21]

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Yes, a couple of things. One, there's no doubt that the gross margin in fourth quarter was an anomaly, in my view, and it should be more -- it typically should be more in line with what we saw in terms of full year of 2019. In terms of the backlog, Lee mentioned this in his comments, we have a very robust pipeline. Some decisions are coming through a little more slowly than we expected, largely because of travel bans that are delaying decisions with many of our customers. But we feel good about how that business is performing and feel good about the ability to rebuild that backlog.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [22]

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We generally, Allen, talk about bidding projects around the 20-ish percent gross margin basis. And so we -- in the first 2 quarters, we were able to get that up in terms of total results to, I think, 30% and 36%. The third quarter was back down closer to 23%. And then as Steve said, the fourth quarter was the anomaly of 14%, again, largely driven by the fact that we had one project where the overall budget, not our -- not what we're responsible for, but the overall project budget has exceeded what the customer was planning on. And so they are sort of trying to get that back in line across the entire project. And so they descoped a little bit of work for us. We may actually see some of that work creep back in here in the first quarter and recognize a nice benefit of that. So I would tell you that we're just consistent around the 20-ish percent in what we did. And then we rely on Ed Traupman and his team to deliver more than that.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [23]

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Okay. For CapEx, you pointed out a little over $5 million of onetime items in 2019. Is it reasonable to think that 2020's CapEx could be in the range of '19 minus that $5.2 million? Or should we think of it as different from that?

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [24]

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No. You're going to need to think of it, it will probably end up starting with a 2. And again -- right? We win these FPSOs and these FPSOs, for example, will come on throughout the year, and so we will be spending CapEx this year on awards that we received in 2019. The same thing with some of the rig awards that we get. And then, of course, it will obviously depend on what other spot markets or potential fleet wins we're able to achieve. But I think it's important to take out the onetime impacts of Lafayette and T-Mobile from last year. But I think we've always talked about CapEx for this business on a success-based run rate of a $4 million to $6 million a year -- sorry, $4 million to $6 million per quarter kind of run rate.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [25]

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Okay. My last question is, and this is just a little thing, on the income statement, you have the other expenses. I think it was around $1.2 million, but it was around half of where it had been running. And I wasn't exactly sure what's in that number or why the drop in that?

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [26]

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We had some changes in the earnout throughout Intelie and Cyphre. And so that runs through there. So you know, and I mean at the -- we've got the agreements on file out there about the earnouts on both of those. So the Intelie earnout actually went up a little bit because we're -- they're performing so well. The overall likelihood of them achieving their earnout has increased, which then run above the Monte Carlo simulations and determine what you think the value of the earnout is, which you then change and run through the income statement. And the earnout on Cyphre actually declined slightly.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [27]

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Congratulations for all your execution that you've done.

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Steven E. Pickett, RigNet, Inc. - CEO, President & Director [28]

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Thank you, Allen. Appreciate it, Allen. Thank you.

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Operator [29]

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(Operator Instructions) And I'm not showing any further questions at this time. I'd like to turn the call back over to Lee Ahlstrom for any closing remarks.

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Lee M. Ahlstrom, RigNet, Inc. - Senior VP & CFO [30]

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All right. Well, thank you, Victor, and thanks to everybody who joined us today for our call. Steve and I will certainly be available for any follow-up questions that weren't addressed on the call today, so feel free to give us a call or drop us an e-mail. And we invite you to join us again in May when we expect to report our first quarter 2020 earnings.

Thank you all, and have a good day.

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Operator [31]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.