Alaska Communications Systems Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good day, and welcome to Alaska Communications Systems First Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tiffany Smith, Manager, Investor Relations. Please go ahead.

[Tiffany Smith:]

Good morning, and welcome to the Alaska Communications First Quarter 2018 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 displayed on your screen. For others, you can go to our investor website, www.alsk.com, click on the Events section, go to the first quarter 2018 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 of 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. As was noted in our earnings call release, we will not be conducting a live Q&A at the end of the call. Instead, we will respond to questions, which had previously been submitted. 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. Our performance for the quarter is consistent with our expectations and positions us to meet our performance guidance for the year. Our financial metrics are generally flat compared to the same period a year ago with the exception of business and wholesale, where we have recorded our first decline in several years, driven by year-over-year reductions of approximately $2.8 million in our rural health care revenues. Overall for the year, we expect rural health care revenues to decline about 30% compared to the approximately $21 million in 2017. However, as I noted before, this is but 1 vertical in our business and wholesale segment, where we expect to demonstrate growth on a full year basis with strong performance from other customer verticals. Our expectations of full year growth in business and wholesale are driven by several factors. First, on a macro level, the economy of the state continues to show signs of stability, driven by increasing oil prices currently at about $70 a barrel. Oil companies are investing in their operations in Alaska with our largest customer in this segment having had an exceptionally successful exploration season over the winter months and committing to substantial investments in their in-state operations. The state of Alaska is taking steps to get its fiscal house in order. The legislature is finalizing plans to allow some portion of the state's permanent fund earnings for balancing the budget, which was previously off-limits. So what does this all mean for us? We exceeded our sales goals in the first quarter and the funnel for our Enterprise & Carrier customers is robust. Sales results translate into revenue over the next several quarters and we expect to see continued performance from our Enterprise & Carrier customer segments. An important demand driver is our access to the new Arctic submarine fiber, where we acquired capacity from our partner Quintillion. This system went operational at the very end of 2017. In addition to the capacity on this system, we have invested in last-mile fiber in several of the Arctic communities. We are now providing services and continue to actively sell into these markets. In fact, most recently, we won a large school district contract and we look forward to long-term relationships with our customers in these new markets. This is also an opportune time for me to alleviate shareholder concerns about Quintillion. Neither our company nor any of our employees were involved in any of the allegations that have been published in the press. We are operating under contracts negotiated and honored by both parties. While these allegations are unfortunate, they should not detract attention from the fact that there is now fiber infrastructure and competition for the first time in 5 Arctic communities, which thus far have been subject to high cost and completely inadequate communications infrastructure. These communities are excited to have this new capability and we are excited to be in these new markets. An important driver of our growth in 2018 and beyond will be from our carrier customers. This is driven by end-user demand from wireless, where we see growth in small cell backhaul services as fiber [indiscernible] expand. Additionally, we see our carrier customers driving demand from other end-user customers and we will see the beneficial impact of such business for several quarters to come. Also with our satellite network operational, we are serving new customers and migrating existing customers to this more cost-efficient solution compared to our previous approach of using third-party capacity. In our mass market segment, we are creating growth opportunities with our fiber-fed Wi-Fi, with broadband speeds in excess of 100 megabits per second. We are rolling out this program in the metro areas, serving multidwelling and multitenant buildings as well as increasing our presence on military bases. We are actively using fiber-fed fixed wireless to provision of services under the CAF II program and remain on track with our service commitments. We intend to share details of our CAF II deployment plan and associated capital expenditures later in the year. In both our Enterprise & Carrier as well as our mass market segments, we have a distinct and differentiated value proposition in the market. We believe we can deliver on that value proposition in a manner that will enable our expectations of long-term top and bottom line growth. With that, let me hand the call to Laurie. Laurie?

[Laurie Butcher:]

Thank you, Anand. Turning to Slide 7, let me start with our performance review for the quarter compared to the same period in 2017. For the first quarter, total revenues were $56 million, down 1.3% year-over-year. Providing greater detail, business and wholesale revenue represented 60.3% of our total revenue. At $33.8 million, it decreased $0.8 million or 2.2% compared to the first quarter of 2017. While business broadband revenue decreased 16.1% due to the timing of price compression in the Rural Health Care Program, we are pleased with our wholesale broadband performance. Wholesale broadband increased 15.2%, driven by wireless carrier backhaul and strong federal end-user demand. As Anand noted in his remarks, we expect business and wholesale revenue to demonstrate growth on a full year basis. Our accounts receivable balance for rural health care customers, net of amounts reserved, was $11.8 million at March 31, 2018, up from $8.6 million at December 31, 2017. The company has not received any significant cash payments associated with this program since the third quarter of 2017 and has yet to receive any payments for the funding period beginning July 1, 2017. While USAC is currently reviewing and approving applications for customers, we cannot determine when payments will be made under this program. That being said, even with the delays in rural health care cash receipts, we remain in compliance with all of our debt covenants. We've accomplished this in part through significant cost-cutting measures as we closed out 2017. Those measures included reductions in staffing levels and impacts to employee wages with a combination of pay reductions and furloughs. We are always focused on rigorous cash management. And if the cash payment situation warrants, we will negotiate additional flexibility with our lenders. Our goal is to do our best, not to let near-term pressures impact our ability to invest behind the real long-term growth opportunities ahead of us. Consumer revenue, representing 16.7% of total revenue, was $9.4 million for the quarter, increasing 0.4% compared to the first quarter of 2017. Consumer broadband was $6.5 million, up 1.2% compared to the same quarter of 2017. Regulatory revenues, representing 23% of total revenue, were down 0.2% for the quarter compared to the same period in 2017. Adjusted EBITDA was $14.4 million for the first quarter compared to $14.3 million in the same period of 2017. This reflects our ability to manage the operating expenses of the business and compensate for near-term revenue pressures. For the first quarter, capital spending was $8.7 million, reflecting the timing of certain capital projects rolling over from the fourth quarter of 2017 and our continued investment in IT system enhancements. Adjusted free cash flow was $1.8 million for the quarter, down from $7.7 million in the prior year. The decline was directly attributable to two factors, first, the timing of our Q1 capital spending; and second, our interest payments, which in the prior year were heavily weighted in Q2 and Q4, while in the current year will be more smoothly distributed. Turning to page 8. At March 31, total debt was $184.5 million and net debt was $174.5 million compared to $186 million and $177.2 million respectively at December 31, 2017. Cash was $17 million at March 31, 2018, compared to $16.2 million at December 31, 2017. Additionally, I'd like to pause a moment to mention that subsequent to quarter-end, on May 1, we paid off the remaining $10 million balance of our convertible debt, which further simplified our balance sheet. Now looking forward, for 2018, we are setting guidance for total revenue between $225 million and $230 million, adjusted EBITDA between $55 million and $58 million, net capital spending between $33 million and $35 million and adjusted free cash flow between $5 million and $8 million. Guidance for 2018 is expected to be stable compared to our 2017 performance across all our key financial metrics. We look forward to reporting our progress to guidance in the future quarters. And with that, let me hand the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you, Laurie. I want to acknowledge the other announcement we had yesterday about reaching a cooperation agreement with TAR Holdings. Under the agreement, we added two new independent directors to our Board and agreed to support their reelection at our upcoming 2018 annual meeting. We are pleased to have reached this cooperation agreement with TAR Holdings and believe it's a good outcome for our shareholders. I'm pleased to welcome our newest independent directors, Wayne Barr and Bob Pons, to our board. Wayne and Bob bring to our board a wealth of experience in the telecom sector and we look forward to working with them in enhancing value for our shareholders. Let me wrap-up this call by reiterating the very strong commitment this board and management team has towards doing right by all our constituents, our shareholders, our customers and our employees. I look forward to reporting progress on all fronts over the upcoming months and quarters. With that, let me turn the call back to Tiffany for presubmitted questions.

[Tiffany Smith:]

Thank you. Our first question is for Anand. Alaska Communications has built undersea fiber and worked with others for fiber connection to both the interior and West Coast regions of the state. When can we expect to see the strong internet future in communities you already serve such a Fairbanks? And what changes can we expect to see this year?

[Anand Vadapalli:]

We remain committed to expanding broadband access across all our communities. Under the CAF II program, we expect to deploy broadband access to about 30,000 locations, the majority of which will be around the Fairbanks and Kenai areas. Also, as we expand our footprint of fiber-fed Wi-Fi and fixed wireless, we should expect to see significant improvement in broadband capabilities.

[Tiffany Smith:]

Thank you. Our next question is also for Anand. Why not prioritize restoration of dividend or paying down debt over stock buybacks?

[Anand Vadapalli:]

So the board is committed to a capital allocation strategy that is always focused on enhancing value for our shareholders. The different options include investing in the business, paying the dividend, paying down debt or a share buyback program. Now the board has established a share buyback authorization last year and we remain committed to executing to that authorization subject to the operable covenants we have in our credit agreement. Further, as Laurie noted in her prepared remarks, after quarter-end, we retired the remaining convertible bonds, further simplifying our balance sheet.

[Tiffany Smith:]

Thank you. Laurie, can you provide more clarity on rural health care revenue reductions?

[Laurie Butcher:]

Sure. Thanks for the question, Tiffany. As Anand noted earlier in the script, year-over-year we expect to see about a 30% reduction in RHC revenue to about $15 million this year. And the reduction is really driven by two things, first, the expected reduction in rural rates that are currently under review by the SEC; and second, estimates of continued funding gaps for the program as health care providers continue to increase their demand for capacity. Year-over-year, the revenue comparisons in the first two quarters of '18 will be challenged because we took some cumulative adjustments for the impacts of the program funding in the back half of 2017, while this year we expect them to be more consistently spread.

[Tiffany Smith:]

Thank you, Laurie. Anand, given recent federal regulation changes regarding Huawei, will you please help us better understand Alaska's exposure here and also for ZTE?

[Anand Vadapalli:]

Thanks for the question. Alaska Communications does not utilize any equipment made by these manufacturers in its network and we have no plans to do so.

[Tiffany Smith:]

Thank you. And those were the only questions submitted in advance. We thank you for your attention and look forward to reporting our progress on future calls.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.