Alaska Communications Systems Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Good day and welcome to the Alaska Communications Systems' First Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Leonard Steinberg, General Counsel. Please go ahead sir.

[Leonard Steinberg:]

Good day and welcome to the Alaska Communications’ first quarter 2016 conference call. I’m Leonard Steinberg, Senior Vice President and General Counsel. With me today are Anand Vadapalli, President and Chief Executive Officer and Laurie Butcher, Senior Vice President of Finance. During this call, we will be using a slide deck that we would 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 at www.alsk.com, click on the Events section, go to the first quarter 2016 earnings call event, and click on the presentation. We will indicate which slide we are on so you can track the presentation material throughout the call. Additionally, we have added a schedule to the website that provides historical data regarding our reclassification of certain revenue categories to provide an apples-to-apples comparison of our wireline business today compared to periods prior to the sale of our wireless business. 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 on our website. Following our remarks, we will open the lines for questions. With that, I would like to turn the call over to Anand. Anand.

[Anand Vadapalli:]

Thank you Leonard. Good day and thank you for joining us. Let me begin by reminding our investor that at our year-end 2015 call two-months ago, we covered in great detail our perspective on our business plan, the state of the Alaska economy and our views on our long-term performance. Those comments remain the backdrop for our call today. Starting with Slide 5, I’m pleased with the strong performance towards our business plan and for the quarter. Once again, we continue to deliver industry leading broadband revenue growth with 11.4% increase over Q1 2015. With an increase of 11.9% for the quarter business and wholesale revenue growth again serves as a foundation for our total wireline revenue growth of 4.8%. Consistent with our business plan, top-line growth will position us well for cash flow performance for the year. As demonstrated by our growth in business and wholesale we continue to take market share. For example, in the first quarter of the year we signed a contract with the state’s largest educational institution valued at $6.8 million over five-years providing a wide range of local, regional and national data services to serve students, faculty, researches and staff. The network we will provide enables the institution to effectively utilize its Arctic Region supercomputer and position the institution to become a world-class research facility ensuring capacity for the future while also meeting their current budgetary needs. Also using the strengths and foundation of our core network, we continue to position ourselves as a premier cloud enabler for businesses in our market. In addition to the partnership with CyrusOne that we discussed last quarter, we have added to a roaster of services both business continuity and security solutions with Barracuda and secure onsite and cloud storage solutions with Nimble Storage. We’re also pleased to report that due to the quality of our network, we are now the only Microsoft Express Route partner in Alaska providing a secure connection to the Microsoft Azure cloud. We see these moves as a natural extension of our commitment to serve business customers. Additionally, I’m pleased to note our growing strength with our Voice-over-Internet and SIP trunking products. Our customers appreciate the value of these products as we migrate away from legacy voice to an all IP product set for our customers. Combined with our data network and cloud enablement product, our product set is an important differentiator in the market. We are performing well. Our customer relationships are solid. We continue to innovate and develop partnerships to meet our customer’s business needs. We are performing consistently to our business plan and remain confident in our opportunities ahead. With that, let me hand the call to Laurie. Laurie.

[Laurie Butcher:]

Thank you Anand. As shown on Slide 7, we are pleased to report strong performance for the quarter. Total wireline revenue grew 4.8% on a year-over-year basis. Driving that growth business and wholesale representing approximately 60% of our total wireline revenue grew 11.9%. Consumer revenue representing approximately 17% of our total wireline revenues declined 7%. This decrease was anticipated and reflects planned reductions in lower speed home Internet connection as well as secular voice declines. Regulatory revenue representing approximately 23% of our total wireline revenue declined 1.9%. As you can see in our peer group comparison, we continue to lead our industry in top line revenue performance. Beginning this quarter, a year following the sale of our wireless business, we have reclassified our revenue streams in our earnings release and other public filings to provide more transparency into our wireline business. First our business and wholesale category has been expanded to include equipment sales and to breakout wholesale broadband as a separate line while combining voice and other revenues. We believe that moving equipment more closely aligns the components of our managed IT service offering and showing both business and wholesale broadband revenue gives us more visibility into the underlying customer types driving our broadband growth. Second, our consumer revenue has been condensed to combined voice, equipment and other revenue into one line and broadband into another. As part of that reclassification, certain installation discounts have been moved from broadband to other revenue to match the corresponding revenue streams. This resulted in an increase to consumer broadband ARPU. Finally, we have a clear reporting of regulatory revenue as a standalone category, because equipment sales and other revenues, which include the items like collocation, base and power and billing and collection revenues have now been mapped to our business and consumer voice categories. For comparative purposes, prior periods included in our earnings release have been recast to reflect these changes and a schedule of these reclassification for the past two-years have been posted to our website www.alsk.com. Additionally in our earnings release, you will see that business broadband connections have also been recast in the current and prior periods to exclude certain internal use circuits. This resulted in an increase to business broadband ARPU. Turning to Slide 8, you can see a deeper dive into what continues to be a key area of growth, broadband revenues. In this area, we consistently perform well and posted growth of 11.4% for the quarter. This growth was led by a 20.1% growth in business broadband and a 14.8% growth in wholesale broadband offset by a decline of 7.5% in consumer. As you can see as with total revenue, we continue to outpace our peers and broadband growth remains core to the value proposition we deliver to our shareholders. Slide 9 highlights the strength of our balance sheet and our quarterly performance relative to guidance. We ended the quarter with strong cash balances and as we mentioned on our year-end call, reduce debt with the repurchase of $10 million of convertible notes in January. We continue to be confident about our annual performance for 2016 and with strong first quarter results, we are reaffirming guidance for the year. One should know we do expect free cash flows to fluctuate quarterly due to the timing of certain payments, especially those associated with capital spending which accelerates in the summer month and cash interest expense, which is cyclically higher in Q2 and in Q4. A third factor is related to our purchase of our fiber optic cable system on a North Slope since 2015 from ConocoPhillips. In March of 2016, we had an early receipt of the final $2.7 million payment on the fiber from our joint venture partner Quintillion, which increased our free cash flow in the first quarter. And in April, we made the final payment of $5.5 million to ConocoPhillips, which will decrease free cash flow in the second quarter of the year. Although a combination of these factors will likely cause one or more of our quarterly free cash flow results to be negative, we remain comfortable with our annual 2016 free cash flow of approximately $5 million. Finally, as we continue to align our cost structure through the requirements of our company our sized, our audit committee conducted an evaluation of independent auditing firms. Following the careful assessment of several well qualified firms in the first quarter of 2016 the committee selected Mark Adams LLP of Alaska Communication independent Auditors for fiscal year 2016. We would like to take this opportunity to thanks our prior Audits firm KPMG for the past 10-years of service. With that, let me hand the call back to Anand. Anand.

[Anand Vadapalli:]

Thank you, Laurie. Let's wrap up with Slide 10. We have simplified and focused our business on areas of maximum opportunities. We have strengthened our balance sheet, we remain committed to growing revenue, expanding margin and increasing free cash flow. We have a demonstrable track record of growing top line and performing to the expectations we outlined. We have a plan of continued top and bottom line growth over the next several years. We are confident investors will appreciate the value creation inherent in our plan and our performance. Next week Laurie and I will be in New York to meet with investors. If you would like to schedule some time with us please reach out to Tiffany Dunn, our Manager of Investor and Board Relations. Thank you for joining us today. With that, let me open the call for questions. Operator.

[Operator:]

[Operator Instructions] And will take our first question, Barry Sine.

[Barry Sine:]

Good afternoon Anand, Laurie.

[Anand Vadapalli:]

Good afternoon Barry.

[Laurie Butcher:]

Good afternoon Barry.

[Barry Sine:]

Okay. Wanted to ask this quarters shift over on the consumer side. We are still seeing pretty significant line losses and in the script you talked about losing some low end customers. Could you talk about what type of expansion of broadband service we might see in certain areas both within the cash program and what you said us to that is and outside the CAF program stuff that you might do in a bit more populated areas and how that might impact broadband consumer subscribers going forward?

[Anand Vadapalli:]

Thank you Barry for the question. I'll answer part of this and I’ll request Leonard to address the status on the CAF program. So in terms of the consumer business, we have been focused for the last almost 18-months in increasingly moving to our 10 Meg or higher services. I think we've said in the past that we've stopped selling anything less than 10 Meg but we've grandfathered existing customers who have lower speeds. Today when I look at the broadband subscriber base on consumers almost half of our subscribers are 10 Meg or higher compared with about a quarters of the customers who were 10 Meg or higher a year ago. So we have significantly increased the percentage of the higher speed customers in our base. That is body design it helps with ARPU, it helps with churn, it helps the value preposition that we have in the marketplace. In terms of the focus at least in the foreseeable future, it's a lot about selling into the network we have outside of the CAF program and I'll Leonard talk to you about the CAF program in a minute. But outside of any build that we will do as part of the CAF program we have significant head room to sell 10 Meg or higher services in the footprint that we currently have. When I look at the number of customers that we have with 10 Meg or higher and the number of locations we have enabled 10 Meg or higher we have significant headroom to sell more. And that’s where we are focused and I think we have a good value proposition in the marketplace, our one price program has really simplified things in terms of how we go to market. Its $79.99 one rate regardless of what speed you get from us and we set you up with the highest speed that we can provide at your location. And in fact if at a later date, we go and improve the speeds in your neighborhood, we will give you the benefits of those higher speeds. So that’s resonating combined with the unlimited data we offer on the broadband network. So that really is how we are performing. Again, I noted in last quarter’s call in my prepared remarks that we expect to begin to stabilize these revenues starting 2017 and I still feel very comfortable with that assessment. So having said that, let me hand the call to Leonard to talk about the CAF program.

[Leonard Steinberg:]

Thank you again Barry for the question regarding CAF. The FCC has yet to release a CAF 2 order Alaska, but FCC determined we did represent to the Centre of Commerce Committee that such an order would be released sometime in the second quarter of 2016. We do not know the precise terms that will be set forth in any such order, we expect to continue to receive a $19.7 million of annual support we receive today and we are optimistic that such and order will reflect key element of the CAF 2 proposal we made to the FCC in 2015. Assuming an order is issued sometime later this quarter, we look forward to sharing more information about its contents with you during our next earnings call.

[Barry Sine:]

Okay. That’s helpful, both of you thank you. Just to follow-up Anand I don’t think you gave this number out, but would you have the number of homes past where you have that 10 Megabit or higher in your footprint to get sense into opportunity?

[Anand Vadapalli:]

Barry it’s a good question. You are correct we have not so far disclosed the locations enabled. We obviously have that information, we are looking at that and other data that we could provide about the network to provide more color. So not today, but it’s something that we have received questions from our investors and we are looking at how we may be able to share that information with some of the competitive sensitivity that we have in the marketplace. So more to come in that regard and hopefully we can create more transparency in the future.

[Barry Sine:]

Okay. And then my other question on the business services side. In your slide deck you referenced a new large educational institution a customer, when did that customer fully come on board or are they already fully on board or not and were they fully on board for the first quarter as you are still more upside. And then if you could give us an update of anything that’s in the pipeline, do you have additional large customers that is sold but not yet fully installed?

[Anand Vadapalli:]

Good question Barry, thank you. So this large educational institution customer we signed the contract in late Q1 2016. So the services have not yet been provisioned, so the revenue opportunity from that does not reflect in our numbers quite yet. And we expect those services to start turning up here in the next several months and obviously the revenue benefit to flow immediately upon service turn-up. As far as other opportunities, as we talked about in the call last year, we had a strong third quarter last year in terms of very strong sales. We have been able to provision most all of that opportunity and some of the results that you have seen in 2015 and now in the first quarter are function of realizing some of those benefits. I continue to be encouraged and confident with the quality and the size of the sales funnel we have and the sales team continues to do well in the marketplace.

[Barry Sine:]

Okay. That’s great. Thank you very much everybody.

[Anand Vadapalli:]

Thank you Barry. I appreciate the questions.

[Operator:]

We will take our next question from Jason Bernstein from Odeon Capital Group.

[Jason Bernstein:]

Hi, thank you for addressing the lifeline question. Regarding the sort of the education contract, is it more front-end loaded, back-end loaded and you know how many sort of large contracts are out there, are you guys working on it any one time call it $5 million or above?

[Anand Vadapalli:]

Jason thank you for the question. I think in my prepared remarks, I talked about the overall value of the contract over the next five-years at about $6.8 million as the total contract value. Beyond that, I probably would not be able to give anymore color into the distribution of that revenue other than to comment that we continue to be a very heavy monthly recurring revenue kind of a business that’s mostly what we do. So there is no significant ups and downs if you will in terms of the revenue streams. That being said, in terms of other contracts, again, as I said in my answer to Barry a few minutes ago, I remain confident and actually encouraged with the opportunities that we have in the sales funnel and they are all a mix of run of the mill opportunities, some large ones and so on and so forth. So I think we have a good healthy mix in the funnel and the sales team continues to do well there. So I’m actually quite confident in the opportunities that we are looking at.

[Jason Bernstein:]

Great. Thanks, congrats on the quarter.

[Anand Vadapalli:]

Thank you Jason.

[Operator:]

That does conclude our question-and-answer session. At this time, I’ll turn the conference back to Anand Vadapalli for any concluding remarks.

[Anand Vadapalli:]

Well thank you all for joining us today. We look forward to reporting our progress next quarter and if you would like to meet with us in New York, please reach out to Tiffany Dunn and we can schedule sometime next week. Thank you for joining us.

[Operator:]

This does concludes today’s conference. Thank you for your participation. You may now disconnect.