Alaska Communications Systems Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Good day and welcome to the Alaska Communications Systems First Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Tiffany Smith, Manager, Investor Relations. Please go ahead, ma'am.

[Tiffany Smith:]

Thank you. Welcome to the Alaska Communications First Quarter 2017 Conference Call. I'm Tiffany Smith, Manager of Investor and Board Relations. With me today are Anand Vadapalli, President and Chief Executive Officer; Laurie Butcher, Senior Vice President of Finance; 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 presented on your screen. For others, you can go to our investor Web-site, www.alsk.com, click on the Events section, go to the First Quarter 2017 Earnings Call event, and click on the PDF version of the presentation. We will indicate which slide we are on so you can track the presentation material throughout the call. Now, as we get started, 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. Forward-looking statements are statements that are not historical facts and may include financial projections, estimates to shareholder returns, or other descriptions of the Company's business plans, objectives, expectations, or intentions. You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially from expectations 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. You can find these reconciliations in the appendix to our presentation and on our Web-site. Following our remarks, we will open the line for questions. With that, I would like to turn the call over to Anand. Anand?

[Anand Vadapalli:]

Thank you, Tiffany. Good day and thank you for joining us. Starting with Slide 5. We are making progress to our business plan. Our operating metrics grew all on fronts, driven primarily by our performance in total broadband, which grew 11% on a year-on-year basis. We made solid progress enhancing our capabilities to drive future differentiation and growth. Our net partner Quintillion turned up their dead horse to Fairbanks fiber link in April, providing a much needed extension of our Conoco Phillips fiber asset, all the way to our network in Fairbanks. I am very pleased with the progress we are making on our managed IT services partnerships, in particular with Microsoft, where we are enhancing our cloud solution capabilities, establishing Alaska Communications, as the cloud enablement partner for Alaska businesses. While Laurie will cover further details, we achieved a major milestone in wrapping in our refinancing process when we repurchased 89% of our convertible notes that mature next year. All of this work has mitigated the debt maturity overhand on our equity, while allowing management to focus on driving market performance. Moving on to slide six. I'll conclude the section of my remarks by providing additional colors on our market opportunity and performance. I characterize our longer term growth opportunity in three broad areas. One, growing with the market. As organizations consume more broadband in pursuit of cloud strategies. Two, continuing to take share and three, increasing our share of wallet with a focus on managed IT Services. This slide provides customer examples from the recent months that illustrate each of these three growth drivers. Our relationship with the leading national carrier is strong and is reflected in our continued expansion of services with the carrier. The relationship growth is based on the quality of our sales and service teams and our ability to meet future needs of the customer. We continue to take share with some key customer opportunities as illustrated by our recent win with an Alaska native cooperation in one of from new Arctic fiber markets that have been enabled by our Quintillion partnership. Our wins are based on solution design and sales relationship and we expect to drive further results in these geographic markets over the next several years. Lastly, I'm gratified to see a continued progress with taking an increased share of wallet we have managed IT services. We are improving our internal competencies every day, while we are broadening our external partnerships, bringing new capabilities to the Alaska market. Leveraging the strength of partners like Microsoft, we can bring world class solutions Alaskan businesses and we see these partnerships as very beneficial to us. With that, let me hand the call to Laurie. Laurie?

[Laurie Butcher:]

Thank you, Anand. Turning to Slide 8, let me start with our performance report for the quarter. Total revenue increased 0.7% on a year over year basis reflecting total broadband growth of 11.1% offset by lower equipment sales. Business and wholesale, representing approximately 61% of our total revenue through 2.9% with business and wholesale broadband tripling `12.8%. Our business and wholesale growth for the quarter was impacted by the timing of non-recurring revenue items which always have a certain variability. Consumer revenue representing approximately 16% of our total revenues declined 2.1%. However consumer broadband grew 4.5% and on a sequential basis consumer revenues were essentially flat. Now representing two consecutive quarters of our targeted relatively flat performance. Regulatory revenues representing approximately 23% of our total revenues declined 2.9% percent. Adjusted EBITDA of $14.1 million increased 1.5% from the first quarter of 2016. Net capital spending was $5.1 million for the quarter and adjusted free cash flow was $7.5 million. Turning to Slide 9 and focusing on the balance sheet, we substantially completed our debt restructuring. In March, we entered a new $195 million senior credit facility with two trenches totalling a $180 million and a revolver of $15 million, which extended our maturities out five to six years. Using proceeds in cash on hand, we repaid $86.8 million in existing debt, paid $6.5 million in debt related expenses and placed $94 million in restricted cash designated for the repurchase or settlement at maturity of our 6.5 convertible notes due in 2018. As a result, at March 31 we reported total debt of $268.6 million which included $94 million of notes and net debt of $171.3 million compared to $162.8 million at December 31 for 2016. This increase in net debt is not due to us increasing the size of our overall borrowings, it reflects our lower cash balances. Rather than borrowing more and increasing our debt balances, we chose to use cash on the balance sheet to pay a portion of the existing principal and all of the related financing fees. Although this brings our near-term cash balances down, it was a purposeful choice that will result in lower interest payments over time. In April we took yet another step in simplifying our debt structure and successfully repurchased 84 million or 89.3% of the convertible notes in an open tender process. Today $10 million still remains in our restricted cash for the settlement of the balance of these notes. As we've previously mentioned, our board has also authorized the stock repurchase program for up to $10 million of the company's outstanding shares. Currently we are in the process of establishing the implementation mechanics for the program, including setting up a trading plan for future purchases. Turning to Slide 10, we are reaffirming guidance of total revenue between $229 million and $235 million dollars, adjusted EBITDA between $59 million and $61 million and net capital spending between $35 million and $38 million. Although we continue to expect the timing of revenue and cash flow to fluctuate quarter to quarter, we are also providing 2017 full year guidance for adjusted free cash flow between $4 million and $7 million. There are a couple of factors that contribute to our guidance relative to 2016 performance. First we have a lower than expected capital spending in 2016 which we anticipate to come back to normal levels in 2017 and we expect to have additional interest expense in 2017 relative to the remaining outstanding balance of our convertible notes which are scheduled to mature in May of 2018. Offsetting these increased expenses is the expected growth in adjusted EBITDA this year. We believe 2017 free cash flow performance will provide the baseline from which we expect to see annual increases. In summary, we're confident about our annual performance for 2017 and look forward to reporting our future progress. With that, let me turn the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you, Laurie. Let me wrap up by reiterating our three drivers of value creation, performing to our business plan and driving top and bottom line growth remains central to our thesis. We have a strong commitment to allocating capital in a manner that maximizes long-term shareholder value. And lastly we'll continue to look at strategic actions that enable scale and geographic diversification. I look forward the same progress on all fronts in the future. With that, let me open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We'll hear first from Barry Sine with Drexel Hamilton.

[Barry Sine:]

Hey, good afternoon. Laurie, I’ll start with you, I think if I heard you correctly, I was trying to jot everything down. You talked about some non-recurring items in business and wholesale. Could you go through what those were and what impact they had on the growth rate?

[Laurie Butcher:]

Sure. Thanks for the question Barry. Actually if you look in our earnings release it's kind of a good visual of what I was talking about, our business and wholesale categories by line item have categories of equipment and installation and our MIT services which are offering onetime projects, those two line items for us this quarter were relatively low. So on a quarter-over-quarter basis, of course, you know we don't provide guidance by line item or by quarter, but those types of non-recurring services can be very cyclical or variable in nature. So it just happened to be a low equipment quarter.

[Anand Vadapalli:]

Yeah, Barry. This is Anand. If I can just provide a little more color. I mean I think if you look at the underlying performance of business and wholesale, we had 12.9% in broadband growth which is the core recurring revenue that we track and that was just absolutely rock solid growth. And effectively it was these onetime equipment sales, professional services and insulation kind of work that varies on a quarterly basis. So again, while you know, we are not looking at any quarterly or line item guidance, we remain very comfortable with our longer term directional view of business and wholesale continuing to grow at above 8% CAGR and certainly we also are very comfortable that the overall revenue guidance for the year. So it's you know, hope that gives you a little bit more color.

[Barry Sine:]

You know, that's very helpful. So Laurie, while you were speaking I was running my numbers on my calculator, if I did the math right, if I take those two line odds out, the rational items collectively grew about 6.4%. That's still a little below 8% that you guys aspire to, anything else. And you know - and I guess what I'm going to is obviously you guys are facing a bit of a headwind from an economic standpoint in the state?

[Anand Vadapalli:]

You know, Barry, again, I really don't want to set any expectations on a quarter-over-quarter kind of basis. I think you know I'll reiterate that, we remain very comfortable with our longer term directional view of 8% or higher for business and wholesale. I think that remains a very achievable goal for us as we drive performance. In particular relative to your comment and with respect to the economy, I think I stand by it what he said, I mean this is now third year of you know relatively low oil prices and we've continued to demonstrate growth. And now particularly with the opening up of some of the northwest Alaska markets to the Quintillion partnership and assets, we will slowly start seeing growth from those markets that was not previously available to us as well. So again, in terms of both opportunity and outlook, I think we even more comfortable with some of the previous part of history set for ourselves.

[Barry Sine:]

Okay. And then on consumer, you had a modest decline, but still a revenue declining consumer. And I know in the past you guys have talked more aspirationally about getting that segment stabilized and you appointed a business unit manager to take responsibility for that. Could you talk about what you did in the quarter and you know is that still a realistic aspiration to get that big total [ph] revenue stabilized?

[Anand Vadapalli:]

Yes, very good question. In fact, as I think Laurie noted in her prepared remarks, you're right, while there was a very modest decline year-over-year for the quarter. But if you actually look sequentially Q4 performance and Q1 performance really have been relatively flat on a sequential basis. And you know, we certainly as we've said before, go to market in a very targeted way really in the 95,000 locations where we have 10 megabits or higher speed and you know on penetration in those - in that in these network locations you know, it's still in the 25% plunge. So you know when you look at the number of connections that are at 10 megabits and higher, our penetration in the cable network is still only about 25%. So you know, we continue to see you know our performance there on a very targeted basis and I believe last quarter I made some remarks about some of the work that we’ve done on military bases in terms of a you know, essentially an industrial grade Wi-Fi solution providing you know consumer enabled - consumers solutions and you know we see that as an attractive operating model to further our performance in consumer. So consumers, yes, I think you know, the goal of keeping the revenue flat and stabilizing is something that we continue to target. It's a lot of hard work that goes in there, but that's our target. But I also want to emphasize that on the consumer, something that's equally important to us is our operating model and how we continue to take costs out of that business. You know, I've always said that when I look at you know the volume of work which drives cost, its disproportionate to the revenue that consumers tributes to our topline. And we have to address, you know, that proportionate spread of cost and that's a goal that we have and whether it is online capabilities, whether it is these Wi-Fi enabled buildings you know or other changes. There's a lot of focus almost an equal amount of focus on managing cost as there is on stabilizing top line. Both of those are important to us.

[Barry Sine:]

Okay. And then my last question, kind of continuing on the same theme via the Connect America Fund. You've agreed to take funds that will increase that addressable broadband market. Could you give us an update on that? Have you decided on an network architecture. Have you started build, that we’ve seen any homes come into service, what's the updated outlook for that Connect America Fund. I think that's in the Kenai [ph] if I'm not mistaken?

[Anand Vadapalli:]

Yes, I’ll start and then I also let Leonard provide a little bit more color. You're correct Barry. Our commitment over the next decade is about 30,000 locations of which about 26,000 are un-served locations that will be added with the 10 megabits or highest capability. And clearly by definition, these are un-served. So you know, it's really now a question of what is the penetration that we can achieve which would be you know a function of the demographics and the affordability in some of these areas. And the vast majority of these locations are in the combination of the outskirts of Fairbanks and Kenai. And I'll let Leonard give you a quick update on where we are and our plans.

[Leonard Steinberg:]

Sure. Thank you, Anand. We have a team of planners and engineers working on this project now. We have an obligation to provide the Federal Communications Commission with lists of all the locations that we intend to serve by October of 2018. So as you can see that's a little ways out. And we actually believe will take a substantial portion of that time to complete that process, there's a tremendous amount of work to be done to just make sure we have got this planned and engineered properly. We are looking at a variety of technologies. And I would expect that we will probably implement with multiple technologies to meet our obligations and we'll have more to report on that as we go forward.

[Anand Vadapalli:]

And the only I think comment I would make in this regard is you know, we certainly are taking a very hard look at fixed wireless as [indiscernible] last mile. We are testing it. We have a couple of pilots under way and we can - we believe we can be maybe actually able to deliver some greater speeds you know, and while we manage our deployment process using these. And Barry if you look at these 26,000 odd locations you know, I think the assumption we are making over the next decade as these locations get turned up, you know is approximately a potential 50% percent take rate. So if you think about that assumption that we have put forward you know, and you look at the ARPU that kind of gives you a sense of how revenue will ramp. Now it will take time obviously but that gives you a sense of how revenue may ramp to the cap locations over the next several years relative to consumer.

[Barry Sine:]

Okay. That's great. Thank you.

[Anand Vadapalli:]

You bet. Thank you Barry.

[Laurie Butcher:]

Thanks, Barry.

[Operator:]

[Operator Instructions] And next we'll move on to a question from Blaine Marder with Lighthouse Capital Markets [ph]

[Unidentified Analyst:]

Hi, Anand. Hi, Laurie. How are you?

[Anand Vadapalli:]

Hey, Glenn. Good afternoon. How are you?

[Unidentified Analyst:]

Good, thanks. So recently you saw the announcement [indiscernible] your largest competitor in Alaska is being acquired. And I'm wondering if you could give us a sense of what - if anything that could mean for the competitive kind of environment. And then just I’ll just follow up with a couple of more? Thanks.

[Anand Vadapalli:]

Sure. Great question, Blaine. Thank you. You know, obviously as you would expect you know we are following that transaction closely. But I'll just say that you know, our focus on business and wholesale and our - you know growth opportunity there, our entire focus is really on how best we add value to our customers. I think over the last several years we've demonstrated that our value proposition resonates in the market. We have a differentiated network, we provide superior customer service and our IP partnerships are a clear advantage in the marketplace. And frankly, I see these things continuing to set us apart. You know, even as our competitor works their way through their transaction. So you know we'll continue to play to our strengths. And I you know I believe that we'll continue to win in the market.

[Unidentified Analyst:]

Okay. And the multiples that those guys received was sort of shockingly high. So they are either nine times EBITDA multiple, as company sits here below five times, so I am wondering if you're board of directors has commented on this, is board of directors willing to sort of step up and actually explore your strategic alternative, so we can maybe get, I mean, we don't even need a 9, but a 6 or 7 multiple for outcome?

[Anand Vadapalli:]

Blaine again, good question. You know, look I have said in the past and I'll continue to say that you know where our equity trades I believe undervalues the operating performance of the company and I've you know I've said that fairly openly and now clearly you know on addressing some of the debt maturity issues, I think has removed at least some part of the overhang that may have existed on the company before. In terms of strategic actions and opportunities, again, you know I think I've been fairly open in my prepared remarks that we are looking for the right kind of opportunities that will allow us to develop scale and diversification. So you know I think we as a board and management team particularly with the wireless attraction, I think we have demonstrated that A we can do large and creative transactions and we are open to that and when the right kind of opportunities present themselves will take a hard look at it.

[Unidentified Analyst:]

Okay. I’ll look forward to that. And then finally just Laurie on the balance sheet it looks like the working capital was a $6 million use this quarter is that going to sort of lead down over the next couple of quarters to your benefit?

[Laurie Butcher:]

I believe it will. You know, again said, the uses of cash to working capital can be very cyclical by nature. So we of course, that's one of the reasons that we don't give guidance on operating cash flow. But we should see some benefit of that coming in the future quarter.

[Unidentified Analyst:]

All right. Thanks, guys. Good luck.

[Anand Vadapalli:]

Thank you.

[Laurie Butcher:]

Thank you.

[Operator:]

And at this time, we have no further callers in the queue. I would like to turn the call back over to Anand Vadapalli for any additional or closing remarks.

[Anand Vadapalli:]

Thank you. I just like to note that I'll be travelling to meet investors to mostly to the East Coast the week of May 15. So if there any shareholders who would like to schedule a meeting. Please do reach out to Tiffany Smith in Investor Relations to get a calendar. Thanks for joining us today and look forward to our next quarter call.

[Operator:]

Thank you. That does conclude today's call. We do thank you all for your participation. You may now disconnect.