Alaska Communications Systems Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good day and welcome to Alaska Communications Systems Third Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Tiffany Dunn, Manager, Investor Relations. Please go ahead, ma'am.

[Tiffany Dunn:]

Good afternoon, and welcome to the Alaska Communications' Third Quarter 2016 Conference Call. I'm Tiffany Dunn, 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 2016 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 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. 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, I'm pleased to report the results consistent with the long-term directional view we previously provided where we noted our expectations of total wireline revenue growth of 2% to 5% with business in wholesale revenue growth at or above 8%. For this quarter, overall revenues grew 3.2%, driven primarily by business and wholesale revenue growth of 8.3% and broadband revenue growth of 14%. With regards to our bottom line, while we are tracking toward adjusted EBITDA expectations, more importantly, we now expect to exceed our original guidance on free cash flow and are now targeting approximately $8 million this year, primarily due to a more efficient use of capital in 2016. On the operational fund, we reported strong sales results the last time we spoke and I'm pleased to note that our sales performance continues to be solid. Our sales funnel -- both near and long-term -- is strong. An essential part of supporting our sales team is giving them products our customer's value. We completely revamped our business internet portfolio, simplifying and standardizing our product while emphasizing features valued by business customers. As I have noted in the past, speeds are only a part of the story. Reliability and security are critical as businesses increasingly adopt cloud strategies. Service levels, upload speeds, available firewall and security options are all features making our business internet portfolio well-received by our customers. We have enhanced our value proposition with a compelling bundle for small business called Cloud Business Office -- a combination of business internet, cloud-based Office 365 and hosted voice over the internet. A basic package for a five-person office can be had at a very compelling price point for under $400 a month. After this, our recent deployment of cloud audio conferencing solutions mega [ph] switch platform and we see us bringing innovation and value to our customers, positioning us as the provider of choice. Moving on to Slide 6; I'll briefly discuss the CAF II order issued by the FCC a couple of days ago. I'm pleased to have reached this important milestone that creates long-term certainty for us in this area of high-class support. The order is generally consistent with our expectations wherein our current level of support of $19.7 million per year will continue for the next 10 years. The order covers approximately 31,500 locations and unserved and partially served census blocks in our service area. In exchange for receiving this support, we expect to deploy broadband to about 26,000 new unserved locations over this 10-year period. We have to report detailed deployment plans to the FCC by October 2018. As we develop and refine our deployment plans, we look forward to sharing more details with you in upcoming calls. With that, let me hand the call to Laurie. Laurie?

[Laurie Butcher:]

Thank you, Anand. As shown on Slide 8, we are pleased to report strong performance for both the quarter and year-to-date and we continue to be a leader among our peers. Total wireline revenue grew 3.2% year-over-year for the quarter and 3.6% year-over-year for the first nine months of the year. Viewing our growth, business and wholesale representing over 60% of our total revenue grew year-over-year 8.3% for the quarter and 9.6% for the first nine months of the year. This was in turn driven by business and wholesale broadband growth, which increased year-over-year 18.5% for the quarter and 16.6% for the first nine months of the year. As expected, consumer and regulatory revenues decreased year-over-year reflecting planned reductions in lower speed connections and ongoing general industry trends as customers move from traditional Telco services to new technologies, including those that contribute to our growing broadband revenue. Consumer revenue representing 17% of revenue declined 6% year-over-year for the quarter and 6.5% for the first nine months of the year. While consumer broadband revenues declined 4.5% year-to-date compared to last year, it was actually flat when comparing this quarter to third quarter of 2015. This shift is consistent with our expectation that consumer revenue will stabilize in 2017. Regulatory revenues representing 23% of our revenue declined 1.9% for the quarter and 2.5% for the first nine months of the year. Turning to Slide 9, we highlight the strength of our balance sheet and our year-to-date performance. We ended the quarter with strong cash balances of $21.9 million and total debt of $179.7 million. We remain committed to growing our revenue and adjusted EBITDA and are on-track to achieve guidance of approximately $228 million and $59 million respectively for the year. As Anand noted, 2016 provided a unique opportunity to achieve growth while exercising certain capital spending efficiencies. Those efficiencies were achieved through a combination of two factors -- first, the nature of the 2016 projects, which are driven by sales activities that included lower than typical capital build requirements as many locations already on our network; and second, our greater scrutiny on project opportunities to employ smarter spending. As a result, we are reducing our capital spending guidance to approximately $32 million, an increasing cash flow guidance to approximately $8 million. It's important to note the lower 2016 capital spending reflects conditions for this year. We continue to see long-term growth opportunities in the market and maintain our longer term directional view of approximately $35 million a year in capital spending. In summary, we continue to be confident about our annual performance for 2016 and look forward to reporting our future progress. With that, let me hand the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you, Laurie. Moving to Slide 10, let me wrap up my remarks by addressing a question I get most often from our investors

[Operator:]

Thank you. [Operator Instructions] And we will take our first question from Barry Sine with Drexel Hamilton.

[Barry Sine:]

Good afternoon. My first question, Laurie, I just want to clarify and make sure I heard something correctly that you talked about in terms of the consumer revenue. Consumer broadband was last sequentially what you expect the entire consumer segment to perhaps stabilize next year? Is that correct?

[Laurie Butcher:]

Yes, Barry. As you'll recall, at the beginning of the year, we put out some longer term directional guidance and in that guidance, we stated that we believe in 2017 the entire consumer segment will stabilize and we think this is really an important milestone along that path.

[Barry Sine:]

So obviously, broadband is much larger now than voice. So either way I guess you get stabilization from a whole segment, is keep growing, start grow broadband and then voice becomes a smaller part of the mix. Does that sound right?

[Anand Vadapalli:]

Barry, this is Anand. That is correct. Voice will continue to decline. The line loss dynamic that is structural in our industry will continue across the wave you're seeing. You're absolutely right, broadband is becoming an increasingly important mix of the value there and if you recall, part of our decline in the last 12 months also was a very conscious decision on our part, to stop selling any feeds less than 10 megabits per second. And as I noted on the previous call, right now more than half our broadband customers are at 10 megabits speed or higher, compared to only a quarter about a year and a half ago. So we are certainly seeing a shift in the composition of our base to high speed customers and the civilization in revenue, I'll follow through from that. This is really a shifting and repositioning of the business that is taking a couple of years to play itself out.

[Barry Sine:]

Okay. And my next question is around CapEx and the change in CapEx guidance. It sounded like one of the reasons was that you're obviously selling into locations where you've already bought fibers at a location, so you don't need to install a fiber again. How extensive is the fiber network? I guess in Alaska, there's three metros of any size, obviously Anchorage being the largest, Fairbanks and then Juno -- not that sizable for you guys, I guess. How far well are you in metro fiber deployment? I don't know if you have route miles or a number of buildings connected. How much longer do you need to keep putting fiber on the ground in those cities before you got it pretty well covered?

[Anand Vadapalli:]

It's a good question, Barry. When I think about fiber, I think about fiber really in three different layers; there is the supreme long haul fiber that connects us to the lower 48; then there is the long haul in-state fiber network that connects us, connects the various cities if you will; and then there is the metro fiber. And in large part, our surface capital that we deploy behind customer opportunities goes towards an extension of our fiber footprint in the metro areas where we are putting fiber extensions into customer locations. We have the large multi-story, multi-tenant buildings pretty well covered -- not all of them but substantially all of them, but there are still a lot of business parts in neighborhoods that we need to continue to reach in fiber, one-off buildings for larger enterprise customers and that's where we see a lot of our success capital going, is towards those fiber extension and in some cases electronics upgrades that we see. So, you are right. This year, the nature of sales opportunities that we got required us to spend less capital that we had originally thought. This is a little nice surprise for us, a favorable stunt and we'll take it. But to longer term again, we feel comfortable with the $35 million directional view that we provided, but obviously if we can get away by spending less, we will do so and we will continue to drive greater and greater efficiencies in our capital program so get better at it every year.

[Barry Sine:]

Okay and on the Connect to America Fund, first, congratulations on that and then some questions. You are required to provide your employment plan to Federal Communications Commission a year from now. Does that mean the bill doesn't start until you've made that decision to file? Will the bill start sooner? Do you know at this point, is there a deadline? How long do you have to reach those locations and then my last question, I know you're still considering the details in terms of deployment plans. I'm wondering, are you looking at alternative technologies rather than just digging up a whole [ph] but that's when putting in a fiber; perhaps something -- I felt wireless, that might be a lot more cost-effective.

[Anand Vadapalli:]

Barry, Leonard will take the first part of your question and then I'll address the second one.

[Leonard Steinberg:]

Thank you for the question, Barry. Yes, in fact our last communications are quite pleased to have this milestone behind us and to have clarity that we will continue to receive $19.7 million per year for the next 10 years. We do believe the order is largely consistent with the proposal that we put in front of the FCC roughly a year and-a-half ago and we're very much looking forward to taking those steps to deploy more broadband and in fact generate new revenue. The plan that is required to be submitted to the FCC is in October of 2018, so that is nearly two years out and we'll have our network planning and engineering team work on that. To be more responsive to your question, there is a schedule in the FCC order for deployment. I don't have it right in front of me, but usually that it starts with 30% of the locations, are to be in service by the end of 2018.

[Anand Vadapalli:]

That's correct, Barry. So in some ways, the planning will start, but there's definitely construction that needs to happen to meet the 30% obligation by the end of 2018 and then it ramps up about 10% a year or so, getting us to the 100% mark by year nine or 10 and the schedule is actually laid out in the orders. So we certainly have a high level view of part process on the deployment plan, we'll refine that and certainly be transparent in sharing that as we have that developed in upcoming calls. And to your question on technology, yes, I think we will look at all of the technology options that are in front of us because again, the obligation that we have is to meet certain speed and performance characteristics -- minimum 10 meg down and 1 meg up with certain performance characteristics around latency and availability. The requirement or obligations are not necessarily around technology and we will certainly look at the most efficient technologies that will deliver the kind of service that our customers should expect from us. That is going to be part of our work over the next several months.

[Barry Sine:]

Okay. And my last question, how should we think about the build out requirements in relation to your CapEx budget? Is that something that you believe you can include in that annual roughly $35 million a year budget or is that something we're likely to see an increase and a possible $35 million?

[Anand Vadapalli:]

Barry, this is obviously part of the exercise that we are going through at this time, but I'm not sure that we can potentially accommodate this within the $35 million, but exactly what that may mean is something that we'll come out and share some more details on upcoming calls.

[Barry Sine:]

Okay, that's great. Thank you very much, folks.

[Anand Vadapalli:]

Thank you, sir.

[Operator:]

We will now go on to Toby Moore with Pinnacle Investment Advisors.

[Toby Moore:]

Good afternoon. Following up on the Connect to America Fund Phase II question, transferred [ph] a little bit; my question for you was going to be, the $19.7 million per year you received over the FCC, is it more like a government contract, or is that more like a subsidy in order to get this network built in this location? In other words there will be CapEx, out of pocket expenses for the company, more than the $19.7 million per year that you're being paid by the FCC?

[Anand Vadapalli:]

Toby, this is not a government contract. This is high cost support that is offered to this program and it's intended to fund the deployment and operations of the broadband obligations that we have talked about. And that's what this program is about. Now, the specific capital requirements as I mentioned and my answer to a Barry Sine, is something that we hope to be able to share with you and other investors on our upcoming calls.

[Toby Moore:]

All right.

[Anand Vadapalli:]

Thank you, sir.

[Operator:]

And we'll pause for just a moment. And this will conclude today's question-and-answer session. I will now turn the conference back over to Mr. Vadapalli for any additional or closing remarks.

[Anand Vadapalli:]

Thank you all for joining us and we look forward to speaking with you the next time. Have a good afternoon.

[Operator:]

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