Alaska Communications Systems Group, Inc.
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Good day and welcome to the Alaska Communications Systems Second Quarter 2018 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:]

Hello and welcome to the Alaska Communications Second 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 second 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. 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. We are pleased to report solid top and bottom line performance for the quarter and year to date, positioning us for good results for full year 2018. First, I'm pleased to note several positive developments relative to the Rural Health Care program. Alaska Communications played an important role in presenting a compelling and consistent message to the FCC, emphasizing the importance of broadband in delivering health care in the communities we serve. Our concerted effort resulted in very positive change. In June, the FCC increased the budget for the 2017 funding year from $400 million to $571 million, also indexing the program funding to inflation adjustments annually. In addition to providing much needed funding, as Laurie will note later in her remarks, this allowed us to release the reserves we had taken for pro rate funding reductions. Additionally, the FCC approved the rates associated with our 2017 funding year contracts, which now allows the USAC to process the contracts and release over $18 million in accounts receivables over the next couple of months. These two developments are a big deal in mitigating the uncertainty we've had around this program. We will continue to have ongoing engagement with the FCC, as it pertains to the 2018 funding year rates and going forward administration. It is appropriate to take pause and express my appreciation to the FCC, our congressional delegation, my team and our customers for all the support through this process. The second and probably more important theme I want to highlight is the diversity of our revenue streams and the overall strength of our core business, further supported by the continued improvements in the overall Alaska macroeconomic climate. Strength in the oil and gas sector has an overall positive benefit for the Alaskan economy. Most recent economic reports, including one from the Anchorage Economic Development Corporation indicate a turnaround for the state's economy. This will only strengthen our prospects in the market. As I report operational performance, let me start first on the business and wholesale front, where we exceeded our internal sales targets through the first half of the year with contracts in education, oil and gas, wireless backhaul and federal customer verticals. Most recently, we announced a significant new customer acquisition in the education vertical with the Kuspuk School District. This is an example of the opportunity we see in this space, our ability to add value to our customers and the opportunity for growth. I'm particularly encouraged by our continued performance in providing wireless backhaul. We've been able to translate our strength in this area into new contracts and are well positioned to build on this line of business. The investments we make to serve wireless backhaul create the basis for significant fiber densification of our network. This improvement in our access network creates collateral benefits in all lines of our business, moving us that much closer as a true fiber company in terms of our asset mix. Moving on to our performance in the consumer segment, we are demonstrating top line growth, reflecting the results of certain pricing actions in the market, combined with lower than expected levels of churn. As we deploy our new technology based on fiber fed WiFi and fixed wireless, we expect to gain share on the consumer side with a competitive broadband product. Further, we are actively working on our CAF 2 obligation. We expect to support about 9000 locations under this program in 2018, including about 2000 locations using fixed wireless. We continue work with the FCC on certain classifications that we need in order to establish the plan for the remaining locations we need to enable during this 10-year program ending in 2026. The other area of focus in the consumer segment is changing how we do business. Over 80% of our consumer bills are now delivered online. We are approaching close to 50% of our orders and a third of our travel tickets created online. These changes in our operating model are important, as we look to drive a scalable platform and improve our margin profile. As I conclude the section of my remarks, I'll make note of an important network extension as we serve certain opportunities, leveraging our relationships and those of our carrier partners. A recent contract will enable us to fund the construction of a fiber link between our landing station in Oregon to the main Pacific Northwest fiber corridor. We see this project as a win-win as the customer faces upfront, they get exactly what they want and we are left with a stronger network. We have a distinct and differentiated value proposition in the market. We believe we can deliver what our customers value and support 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 year-over-year performance for the quarter and year-to-date periods ending June 30. Total revenue increased 1.8% in the second quarter and 0.2% year to date, reflecting total broadband growth of 2.1% for the quarter and declining 0.9% year-to-date. Business and wholesale, representing 62.9% of our total revenue, grew 2.4% in the second quarter and 0.1% year-to-date, with business and wholesale broadband showing growth of 1.7% in the second quarter and a decline of 1.8% year-to-date. Consumer revenue, representing 15.9% of total revenues, increased 2.1% in the second quarter and 1.3% year-to-date. Consumer broadband grew 3.6% for the quarter and 2.4% year-to-date. Regulatory revenue, representing 21.2% of our total revenue, declined 0.2% for both the second quarter and year-to-date. Turning to slide 8, all of our financial metrics are performing to plan. Total revenue was 59.6 million in the second quarter and 115.6 million for the first six months of the year. Adjusted EBITDA reached 16.9 million for the second quarter and 31.3 million for the first half of the year, an increase of 14.1% and 7.6% compared to the same period in 2017. For the quarter and first half of the year respectively, net capital spending was 8.4 million and 17.1 million and adjusted free cash flow was 4.2 million and 5.9 million. As Anand mentioned, in June, it was announced that Rural Health Care funding for the 2017 funding year was being increased from $400 million to $571 million and that there would not be a funding cap. With this news, we reversed the 2.1 million in reserves previously recorded when we believed the USAC would fund approved contracts at 85%. Even more importantly, on July 9, subsequent to quarter end, we received notice that the FCC had approved the pricing of our 2017 contracts and had directed the USAC to begin the funding process. With over $18 million in accounts receivable related to those contracts, this was welcome news and we now anticipate receiving payment for approved contracts during the third quarter of this year. As Anand also noted in his remarks, we have recently signed an agreement with a carrier customer to build a fiber network from our landing station in Florence, Oregon to the Pacific Northwest fiber corridor. This project is an exciting contract for us, as it will result in the expansion of our fiber footprint in the Lower 48 without the typical impact to free cash flow. This project is being pre-funded by the customer, as the fiber is constructed and milestones are complete. The project will result in a revenue stream from an anchor tenant for 10 to 20 years, while additional capacity will be available for us to sell. We see this as a tremendous opportunity to diversify and grow and we are currently in discussions regarding similar projects over the next two years. Looking at our balance sheet, at June 30, total debt was 180.2 million, and net debt was 174.7 million compared to 186 million and 177.2 million respectively at December 31, 2017. Cash was 12.2 million compared to 16.2 million for those same periods. These balances reflect the retirement of the final 10 million of our convertible notes in May of this year, which further simplified our debt structure. Today, we reaffirm our guidance for 2018 and with our positive results expect to end the year on the high end of our ranges. We look forward to reporting our progress in future quarters. With that, let me hand the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you, Laurie. Let me conclude on slide nine by noting the high confidence we have in our business plan and our ability to deliver superior operating results. This comes from two factors. First, after more than a year of hard work, we've been able to resolve many of our issues with the Rural Health Care program. This enables us to focus on moving the business forward. Second, our business is strong with a diversified revenue base. Consumer mass market is now a growth driver for us. We will take share and do so profitably. Business and wholesale will continue to be a strong driver of growth, driven by the enterprise and carrier verticals. Education, oil and gas, carrier wireless backhaul and federal customers with all drive our performance for years to come. Our business is firing on all cylinders. This serves us well as we continue to proactively evaluate strategic options to further drive long term shareholder value. I look forward to reporting progress on all fronts over the coming months and quarters. With that, let me turn the call back over to Tiffany for pre-submitted questions.

[Tiffany Smith:]

Thank you. This question is for Laurie. When are you going to initiate equity buybacks?

[Laurie Butcher:]

Thank you for the question. At December 31, 2017, we were in compliance with all of our debt covenants. However, as defined in our debt agreement, we are not allowed to issue dividend nor initiate a share repurchase until we publish positive excess cash flow in our annual 10-K. We anticipate issuing our next 10-K in March of 2019 and we remain committed to executing on our buyback program and more broadly maximizing value for our shareholders. We look forward to reporting further in this regard.

[Tiffany Smith:]

Thank you. This was the only question submitted in advance. We thank you for your attention and look forward to reporting our progress on future calls.