Alaska Communications Systems Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, everyone and welcome to Alaska Communications Systems' Third Quarter 2017 Earnings Conference Call. Today's call 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 third 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 website www.alsk.com, click on the Events section, go to the third quarter 2017 earnings call event and click on the PDF version of the presentation. We will indicate which slide we are discussing so you can follow 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 website. 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; first, a brief commentary on our results for the quarter and year-to-date. The continued strength of our business and wholesale segment in particular the enterprise and carrier verticals delivered solid sales performance through this year. That said, while we've had growth, the sales performance has not translated into the financial results we have typically reported. First, is the timing of delivery of contracted sales, as several of our large dollar wins have customer dates furthered out into the future. So, on one hand this impacts us in the near term, while on the other hand this doesn't give us visibility into continued revenue performance in the upcoming several quarters. Second, is the impact on adjusted EBITDA as we adapt to the FCCs Rural Health Care Program that is both funding constraint and needs modernization. On this front, we're taking several actions to better prepare for 2018, including substantial advocacy work in this regard. All that said, we remain comfortable with the revenue guidance for the year and more importantly I remain confident in the opportunity ahead for us. To give you some color of our market performance, examples of our recent wins include, significant managed IT wins with existing and fresh customers, furthering our view that there is opportunity to be had and an increased share of wallet. Our strong carrier relationships are reflected in incremental backhaul business that we have won from national carrier customers. And we have secured our first customer opportunity concurrent with the turn up of our C-Band satellite capacity, improving what was already a solid business case for that investment. Broadly, core demand drivers for our business continue in their business trajectory. On the consumer side, video streaming continues to gain momentum, cloud migration is strong for businesses and 5G related small sell activity will drive backhaul demand on the carrier side. At the macro level the Alaskan economy creates both pressure and opportunity. We do see some deferral of spending deficient that is reflected in lower one-time revenues this year. At the same time, technology and cloud enablement allows businesses to be more cost efficient, creating longer term opportunity. In particular, in a state like Alaska, technology remains indispensable to the efficient delivery of services like education, healthcare and public safety. Additionally, we see several plants for exploration this winter in the National Petroleum Reserve Alaska and while there is optimism, it is too premature to comment on how this will ultimately shape out to be, which leads me to the next slide, Slide 6. We continue to create opportunities with our network and we have several deployments in play. Regarding fixed wireless, we have successfully trailed this technology and expect to use it extensively in meeting our cash to obligations in a capital efficient manner. We see applications in more urban markets, giving us a competitive network for the mass market segment, the residential and small business customers. This is a segment where we have traditionally been constrained with our access network and we see fixed wireless opening opportunities for us. We expect to be very targeted in the deployment over the next year, building both a technology and an operating model platform for driving accretive growth in mass market. And lastly, while we remain excited about future low earth orbit satellite technology, we have recently entered into an agreement to lease our own transponder space in the C-Band satellite operated by Eutelsat. We've traditionally leased capacity from other providers and this will create significant savings for us in 2018, as we migrate to our own network while giving us additional capacity to sell into. This also creates a bridging strategy while we wait for the LEO technology to gain pound. With that, let me hand the call to Laurie. Laurie?

[Laurie Butcher:]

Thank you, Anand. Turning to Slide 8, let me start with our year-over-year performance for the quarter and year-to-date periods ended September 30. Total revenue increased 0. 4% in the third quarter and 1.7% year-to-date, reflecting total broadband growth of 6.8% for the quarter and 10.5% year-to-date. Business and wholesale representing 61.5% of our total revenue grew 2.5% in the third quarter and 4.5% year-to-date. This reflects the expected impacts of lower Rural Health Care funding with business and wholesale broadband showing growth of 8.3% in the third quarter and 12.6% year-to-date. Consumer revenue representing 16.4% of our total revenues declined 0.7% in the third quarter and 1.7% year-to-date. However, consumer broadband grew 1.2% for the quarter and 3.1% year-to-date. Regulatory revenues representing 22.1% of our total revenue declined 4.4% in the third quarter and 3% year-to-date. Turning to Slide 9, adjusted EBITDA was 13 million for the third quarter and 41.8 million year-to-date, decreasing 5.8% from the prior year quarter and remaining flat to the same year-to-date period in 2016. The shortfalls in Rural Health Care funding have impacted adjusted EBITDA by 1.5 million for the quarter and 2.6 million year-to-date. As Anand noted, we've had solid sales performance for the year, however, longer lead times on deliveries have also impacted revenue growth and adjusted EBITDA. To be clear, part of the delay is the choice we've made to wait until we have clarity in Rural Health Care funding before we deliver new services. That said, while we hold off on delivering new services, we do continue to deliver services under existing contracts. Noting the cash disbursements from the RHD program have always had long lead time. Further as Anand mentioned, a portion of the long lead time is driven by customer desire due date. In addition to our attention to delivering on the backlog and driving our revenue numbers to further prepare for stronger adjusted EBITDA performance in 2018, we are taking several steps to reduce our operating expenditures with targeted reductions in certain areas and more effective resource allocation to fund our areas of growth like enterprising carrier. Our commitment to growing both adjusted EBITDA and free cash flow remains strong and in this regard while we do not have a new labor agreement, we continue to have constructive conversations with our partners with at the IBEW and how the best advance our common interest in securing the long-term feature of our company and our employees. For the quarter and year-to-date respectively, net capital spending was 13.5 million and 24.1 million. Capital spending in Q3 tends to be generally high due to the seasonality of construction in Alaska. Of the year-to-date spend, 14.5 million has been allocated to success based projects and to date top projects for the year have included backhaul for carriers, next generation 911 services, for government agencies, increased capacity and upgrades to our AKORN fiber and investments in satellite technology. We continue to pay significant attention to capital management and driving capital efficiencies. Consequently, for the year, we are able to manage our CapEx spending down without compromising our revenue production. Adjusted free cash flow was negative 4.2 million for the quarter and positive 6 million year-to-date. As a remainder adjusted free cash flow fluctuates from quarter-to-quarter, due primarily to the seasonality of our capital spending and the timing of the interest payment. Turning to page 10, at September 30, total debt was a 187.7 million and net debt was 172.4 million, compared to a 179.6 and a 162.8 million respectively at December 31, 2016. Cash was a11.2 million compared to 21.2 million at December 31, which was driven by our refinancing earlier in the year. Looking at the full year 2017, we reaffirm guidance for revenue and free cash flow. We expect total revenues to be between 229 and 235 million and given the uncertainty of Rural Health Care funding we are conservatively revising guidance for adjusted EBITDA to a range of 56 million to 59 million. With our emphasis on capital efficiency we are also reducing our guidance for net capital spending to 32 to 35 million. And we expect adjusted free cash flow to be at the high end of our range of 4million and 7 million. With that, let me hand the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you, Laurie. Let me conclude on Slide 11, by noting our confidence in long term growth opportunities. With significant attention to cost control and tight capital management, we expect to deliver on continued free cash flow performance. Our commitment to execute on the board authorized share repurchase program is strong. And we see this as an important tool to create shareholder value. I look forward to reporting progress on all fronts in the future. With that, let me open the call for questions. Operator?

[Operator:]

[Operator Instructions] And first caller, please go ahead with your question. And it appears that caller has disconnected his line from the conference. [Operator Instructions] And caller, please go ahead with your question. Your line is open.

[Unknown Analyst:]

Yeah, this is [indiscernible]. How are you all doing?

[Anand Vadapalli:]

Good thank you. How are you Greg?

[Unknown Analyst:]

Good thanks. So, my question is on the lines of capital allocation. You guys put in place a pretty sizeable buy back, you had the opportunity to begin buy back shares from - if I remember correctly on 4/1 and I am just a little - I understand the need to balance - keep in balance sheet in order, but I'm also surprised there has been more progress particularly given the - your comments regarding your share price being further pressed over the last couple of years and during the period of time that you have able to have made some more progress on this, on your buyback, so if you would please just comment on your strategy there and plans for the next couple of quarters.

[Anand Vadapalli:]

Thank you for the question. As I noted in my prepared remarks, our commitment to executing on the board authorized program is strong. Clearly this is one way we need to get to a certain set of conditions that are contained in our credit agreement before we can begin to execute on the program and you are correct, we have said in the past that we do believe that our shares are undervalued in the market and we see this as the buyback program as an effective a way to create some returns for our shareholders and certainly we are strongly committed to the program and as we execute that program, we will come back and report progress on it. So, thank you.

[Unknown Analyst:]

Sure, a quick follow up on that and I apologize a lapse in my understanding previously was that you guys had received approval from your bankers to begin executing on a program as the 4/1. Could you provide me the metrics that you haven't hit yet that I thought they had.?

[Anand Vadapalli:]

Yeah, so on current agreement does give us the flexibility to buy back shares based on board made the authorization for the third agreement also has the certain set of conditions that we have satisfied before we can do that and there is several of those including cash positions et cetera. So, we monitor those carefully and entirely our request is to ensure that we can pull the right kind of levers as and when we can to execute on the program that our board as authorized. So, as we are able to do so I will look forward to reporting progress on that to you.

[Unknown Analyst:]

Very good, thank you.

[Anand Vadapalli:]

Thanks.

[Operator:]

[Operator Instructions] And we will take our next caller. Please go ahead.

[Barry Sine:]

Hey, good afternoon folks. A couple of questions if you don't mind, first one maybe you could back up and give us a little tutorial on what is going on with the Rural Health Care, had they cut budget, or they eliminated do the just one out of the funds. Who approves that and what's the outlook and what - just the general tutorial if you don't mind.

[Laurie Butcher:]

Yeah, thanks for the question Barry, this is Laurie. Yeah, just as a remainder, starting at the beginning with the fund. Looking back over the last 20 years, this has been a fund that's been in place with a cap or a limit on it that has never been raised, but over those period of years those funds has really been underutilized. Over the last several years, USAC is really been promoting the program and as we all found in April, the 2016, '17 years for the first time was oversubscribed. So, it was a surprise to all of the carriers when ten months into the program, the program was suddenly cuffed and there was scramble for funding. This year frankly to date, this is an - various remainder of the program runs from July through June. So, where we are sitting today in Q3 or the quarter that we just closed is really the first quarter of a new funding year for USAC or for the program and today they have not announced what the funding will be. There has been an announcement that the fund is oversubscribed, so we do know that it's oversubscribed and we have gone through a process of trying to model what that oversubscription should be or could be. Again, they haven't made a decision so this is the - the announcements that we've done is really based on our best judgment and we have baked that judgment really into what we have done in adjusting our EBITDA guidance. We really didn't announce as they gave us a range of outcome and based on those outcomes we kind of book ended our results and adjusted accordingly.

[Anand Vadapalli:]

Hey, Barry this Anand. To add a little bit more color. The program funding level has been stagnant at about - at $400 million for 20 years. As a starting point the other program for education which is E-rate has seen substantial increases over the last several years, so in addition to the comments that Laurie made, just a couple of things to reiterate. We have a lot of work going on and not just us, by a lot of people including Rural Health Care in Alaska and the nation to both modernize the program as well as increase the level of funding. So, advocacy is a big part of it. In terms of what we are trying to do going forward. And an important play in terms of conducting our own business just again going back to the comments that Laurie made, we have been more conservative as to how we approach this. For example, we are not delivering on contracted revenue till we have better clarity on funding deficient and some of this part of the back log. But that's the choice that we have consulted with our customers and with their support we are holding back on delivering new revenue. But of course, we continue to deliver services that are already contracted, because in good conscience we cannot stop critical communication services to villages and remote Alaska that are so dependent on these services. So, we are approaching this in a very measured and calibrated way and certainly after the unexpected over subscription this year, as we go into 2018, we along with the rest of the industry are adjusting to the new realities that we are seeing with the program.

[Operator:]

[indiscernible]

[Anand Vadapalli:]

We may have lost Barry in the connection there.

[Operator:]

Not a problem. That will conclude our Q&A session for today. I'd like to turn the conference back over to Anand Vadapalli President and CEO for any additional or closing remarks.

[Anand Vadapalli:]

Thank you so much for your participation today and we look forward to our future calls. Have a great day.

[Operator:]

That will conclude today's conference. Thank you all, once again for your participation.