Alaska Communications Systems Group, Inc.
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Good day and welcome to the Alaska Communications Second Quarter 2020 Earnings Call. Today’s conference is being recorded. [Operator Instructions] At this time, I’d like to turn the conference over to Tiffany Smith, Manager, Investor Relations. Please go ahead, ma’am.

[Tiffany Smith:]

Thank you, and welcome to the Alaska Communications Second Quarter 2020 Conference Call. I’m Tiffany Smith, Manager of Investor and Board Relations. With me today are Bill Bishop, President and Chief Executive Officer; Laurie Butcher, Chief Financial Officer; Diedre Williams, Senior Vice President of Operations; and Leonard Steinberg, General Counsel. During this call, we’ll be using a slide deck that we’d encourage everyone to have available. For those listening to this call via the webcast, the presentation will be displayed on your screen. For others, you will find it on our investor website, www.alsk.com. Now please review Slide 3 for our safe harbor statement. During this call, company participants will make forward-looking statements as defined under U.S. securities laws. You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially as a result of a variety of factors, many of which are outside the company’s control. Additionally, any non-GAAP measurements referred to during this call have been reconciled to their nearest GAAP measure. These reconciliations are in the appendix to our presentation. Following our remarks, we will open the line for questions. With that, I would like to turn the call over to Bill. Bill?

[Bill Bishop:]

Thanks, Tiffany. Hello, and thanks, everyone, for joining. Let’s turn to Slide 4. We are excited to report our second quarter results, which demonstrate the power of our fiber strategy. Total revenue increased 3.6% year-over-year, with business and wholesale broadband growth of 12.1% year-over-year. It is a testament to our customers and the Alaska Communications family that we continue to grow in these uncertain times. I am proud of our employees for continuing to provide exceptional customer service while working remotely. And for maintaining a strong network that enables our customers to connect to their businesses and homes without interruption. During the quarter, we continue to strengthen and lever our fiber infrastructure. We sold our first 100 gigabit circuits on our subsea fiber and completed turning up service to an anchored tenant on our prefunded high capacity fiber network in Alaska. We pride ourselves on being first to market and are doing so once again by bringing the Microsoft Azure Stack Hub to Alaska. We continue the path of investing in our fiber network and have taken on several initiatives. With that, I would like to introduce Diedre Williams, our Senior Vice President of Operations, to give you more details. Diedre?

[Diedre Williams:]

Thank you, Bill. Turning to Slide 5. The map on this slide shows our current fiber network, which includes a complete fiber ring around the state of Alaska, meshed infrastructure in the metropolitan areas, dual fiber entrances into the large military bases and two undersea cables to the Lower 48 and throughout the Pacific Northwest. As one of the largest fiber providers in Alaska, we continue to strategically augment our existing fiber-based network and part of our fiber initiatives this year include upgrades to our Alaska Fiber ring as well as our subsea optical transport network. This work enables us to increase bandwidth and capacity in our existing fiber ring, effectively connecting customers with redundant service across Alaska and the Pacific Northwest. Turning to Slide 6. As Bill mentioned, in the second quarter, we turned up service for an anchor customer on one of our prefunded high capacity fiber project in Alaska. This was just one prefunded fiber project with which the company has been involved. Work is in progress on another prefunded fiber build from the coast of Oregon to the Interstate 5 fiber corridor. This project is expected to be complete by the end of the year. While it provides capacity for the anchor tenant, the company has additional capacity on the fiber available for incremental revenue opportunities. Also, the company is still actively deploying fiber for the 5G wireless backhaul build. In fact, so far this year, an additional 24 sites and 8,000 fiber miles were added to our network. This is a multiyear build that remains a priority for us. It is another opportunity where fiber bits for the anchor tenant also creates future opportunities in both the business and consumer markets. Another exciting opportunity this year is expanding our partnership with Microsoft to bring hybrid cloud solutions to Alaska with Azure Stack Hub. With a shift to a remote work environment, providing a secure network and eliminating the need to maintain on-premise infrastructure is top of mind for many of our customers. Azure Stack Hub will give customers in the state of Alaska, the ability to achieve low latency and the confidence of a local presence for sensitive applications. We’re combining Azure Stack Hub with Azure Express route to give Alaska enterprise and government agencies, the confidence to move to the cloud and realize the associated benefits. Across Alaska, or not all communities can be served by fiber, service via satellite is imperative. We can now serve our customers with our own satellite earth station, reducing our costs and increasing available capacity for our customers. Fixed wireless or Fi-Wi is another piece in the expansion of our consumer broadband network footprint. It is a fundamental component of our rural broadband strategy. And we are actively evaluating urban solutions at this time. An additional area of focus is on fiber to the home, particularly for multidwelling units. We continue to increase that presence and now offer such high-speed connectivity to approximately 6,700 locations, pushing higher broadband speeds and connectivity further into our consumer market. I am excited about the projects and opportunities we have before us in 2020. The demand for broadband continues to increase, and we are committed to providing the most advanced fiber network that meets the needs of our customers, both now and in the future. With this, let me now hand the call to Laurie, who will cover our financial results. Laurie?

[Laurie Butcher:]

Thank you, Diedre. Turning to Slide 7. Let’s review our revenue performance for the second quarter of 2020 compared to the same quarter in the prior year. Total revenue was $59.5 million compared to $57.4 million, up 3.6%. Looking at our individual customer groups, Business and Wholesale revenue was $40 million, and increased 8.1%. Consumer revenue was $9.2 million, with increased broadband revenue, partially offsetting lower voice revenues. And as expected, regulatory revenue of $10.3 million moderately declined. Our total growth revenues, which consist of business, wholesale and consumer broadband, equipment sales and installation and managed IT services increased 9.1% year-over-year. Broadband revenue alone, which represented 93.5% of our growth revenues and 60.2% of our total revenues, grew 9.9%. While our results were good, the COVID-19 pandemic has had some impact on our business. On the revenue side, we’ve seen a few customers to spend services or delay equipment purchases, while others are purchasing additional bandwidth. Responding to community need in the first half of the year, we’ve provided over $1 million of free services to health care and education customers. As they navigate remote caregiving and learning environments. On the expense side, we incurred approximately $800,000 in incremental operating expenses. Overall, even with these increased costs, we grew revenue, adjusted EBITDA and adjusted free cash flow. However, we recognize that situations can change, and we continue to monitor the impacts of COVID-19 on the business. Turning to Slide 8. Adjusted EBITDA for the second quarter was very strong at $16.5 million, increasing from $13.9 million in Q2 of 2019. In the second quarter, we benefited from several projects that positively impacted our bottom line as well as focused cost management. In the second half of the year, we believe we’ll continue to deliver steady performance and as such, we’re maintaining our adjusted EBITDA guidance. Our second quarter cap spending was $7.8 million, excluding pre-funded projects, compared to $11.9 million in Q2 of 2019. In 2020, we’ve taken a measured approach to CapEx. And during the quarter, we began some major projects that will be implemented over the course of the next several quarters. While the spend year-to-date has been lower than 2019 CapEx, we continue to expect to spend between $39 million and $43 million for the year, excluding our pre-funded projects. CapEx for pre-funded projects during the quarter was $3.1 million compared to none for the same period in 2019. As a reminder, these projects are prepaid by the customer while we retain ownership of the assets. For the second quarter, adjusted free cash flow was $8.6 million, or $5.4 million, excluding pre-funded projects. This compares to an adjusted free cash flow outflow of $3.1 million in 2019. The increase primarily reflects the improvement in EBITDA, the conservative CapEx strategy to date and the non-reoccurrence of executive severance paid in the prior year. At June 30, 2020, cash was $46 million compared to $28.3 million at December 31, 2019. And our $20 million revolver, and $25 million delayed draw instrument remain undrawn. We ended the quarter with net debt on the balance sheet of $131.7 million and net leverage of 2.54x as calculated under our debt agreement. At this time, turning to Slide 9. We are reaffirming 2020 guidance as follows

[Bill Bishop:]

Thanks, Laurie. Let’s turn to Slide 10. As I stated before, I am proud of how our employees have committed themselves to ensure our customers have outstanding service and network capabilities. Once again, they have risen to the occasion and they have served our communities. As Laurie noted, despite the impact of COVID-19, we grew revenue, adjusted EBITDA, adjusted free cash flow, and we have reaffirmed our guidance. As Diedre outlined, we are delivering on revenue-generating fiber projects and creating more opportunity to do the same in the future. Our strong performance has resulted in rewards for both the company and our shareholders. For shareholders, the company in June paid a special dividend of $0.09 per share, totaling approximately $4.8 million. For the company, in June, we became a member of a small-cap Russell 2000 Index, increasing our visibility and exposure to investors. We continue to have confidence in our long-term business plan and our ability to drive shareholder value. We are excited about our progress, and we look forward to keeping you updated. Again, thanks for joining. With that, I will open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question today from Barry Sine with Spartan Capital Securities.

[Barry Sine:]

Good afternoon or I guess, good morning, there in Anchorage. You guys had a great quarter in Business and Wholesale. So naturally, I’m going to ask about the Consumer side of the business. And Bill, you’ve discussed with me in the past how on the Consumer, if you could just stabilize that revenue stream, it has a pretty significant impact on consolidated results. And doing that, it really is driven by the network. And Diedre, I thought you did a great job with the data you gave us on the state of the network. I just want to tie that all together. So a couple of questions on that. Do you have a total homes passed number? And then I break that into, if I’m doing this right, four technology buckets. You’ve got kind of slow copper DSL, which speeds, I guess, below 10 megabit, that’s not all that competitive if there’s cable there. You’ve got the fiber. You’re saying fiber to the home, I thought you did a fiber-to-the-node architecture. So that’s 6,700. You’ve got the Wi-Fi, that’s 13,500. Correct me if I’m wrong, I believe that’s mainly in MDUs on the buildings. And then your new fixed wireless funded by CAF is 16,000. So if I add all those numbers together, I get about 136,000 homes passed. Could you kind of wrap all that together and kind of correct any of my math by getting any of that wrong?

[Bill Bishop:]

Barry, it’s Bill. Thanks for the question and good to hear from you. Your math is approximately spot on. Of course, a large percentage of that number, as you know, is still being said by our copper and DSL network. And as we look to the future, that is one area of our network that we would like to improve upon.

[Barry Sine:]

Okay. And then in terms of improving upon that, in the past, when I’ve talked to you about that, the economics just really haven’t worked out for fiber builds to a lot of your households. I think you have a lot of buried copper, you are doing a fixed wireless, and that’s the economics on your fixed wireless you’re doing now are pretty easy because the government pays for it and your underserved areas, so you should get high penetration. Knowing what you know now, would you do fixed wireless as an overbuild in some of those 100,000 homes passed, where perhaps GCI already has a cable network?

[Bill Bishop:]

Yes. Like Diedre mentioned in her prepared remarks, we are currently evaluating a urban solution with fixed wireless technology. So that is currently underway. I think you’ll hear us talk more about that in the very near future. But also, I don’t want to completely throw out fiber to the home. There are some areas, both in the U world and also the single resident homes where it does make sense or it would make sense to deliver a fiber-to-the-home solution as well.

[Barry Sine:]

Are you going to direct to the home or to the node and then to the home with copper?

[Bill Bishop:]

Direct to the home in some cases.

[Barry Sine:]

Okay. And then on the the subsidy revenue. And again, this may be for Leonard, the regulatory revenue, the high cost support, that’s – I believe that’s CAF revenue. That’s easy, that’s pretty stable. The rest of it state and federal subsidies have kind of been a mess, both – for both you and GCI over the last year. You’ve had some clawbacks, you’ve had some more rehearsals. Maybe you could give us kind of an update are things fixed now? Do you have some better visibility? And then maybe, Laurie, given what you know about what’s in the – in the regulation today. What can we – how can we assess the outlook for that revenue category?

[Leonard Steinberg:]

Thanks for the question, Barry. This is Leonard. Yes, the state revenues have really stabilized. We knew we were going to have a significant impact last year. We’re past that. And under the current rules, the state universal service funds have fairly stabilized. It doesn’t mean they couldn’t change at some point in the future. But from what we can see right now, we expect a fairly flat, perhaps modest – very modest decline going forward, but fairly flat. And the other portion of the regulatory revenues is made up of access. And a lot of that is tied to lines and so we do expect a very modest decline there, mostly as land lines decline. So I think that gives you a fair picture, Laurie, any more you’d like care to add?

[Laurie Butcher:]

No. I think that’s spot on, Leonard. And that’s in contrast to what we saw last year. We had such a speed decline as we had the COLR program moved off and its replacement. But I think it’s fair to say we expect a much more gradual decline really as voice lines declined.

[Barry Sine:]

So Laurie, am I correct, the way you reported high cost support, that’s CAF, and that should be stable. And then you call it access, that’s what Leonard was just talking about with more moderate declines going forward. Is that correct?

[Laurie Butcher:]

Yes. That’s absolutely correct, Barry.

[Barry Sine:]

Okay, those are my questions. Thank you team.

[Operator:]

[Operator Instructions] And that will conclude today’s question-and-answer session. I will now turn the conference over to Tiffany Smith for any additional closing remarks.

[Tiffany Smith:]

Thank you, and thank you all for joining us on the call today. We always welcome the opportunity to talk with our shareholders. So if you’re interested in meeting us – with us, whether by phone or perhaps one day in person again on roadshows, please reach out to me, Tiffany Smith, in Investor Relations. Thank you, and good day.

[Operator:]

That does conclude today’s conference. Thank you for your participation. You may now disconnect.