Alaska Communications Systems Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good day everyone, and welcome to the Alaska Communications Systems Third Quarter 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tiffany Dunn, please go ahead ma’am.

[Tiffany Dunn:]

Good morning, and welcome to the Alaska Communications third quarter 2015 conference call. I am Tiffany Dunn, Manager of Investor and Board Relations. With me today are Anand Vadapalli, President and Chief Executive Officer; Wayne Graham, Chief Financial Officer; Leonard Steinberg, General Counsel and Laurie Butcher, Senior Vice President of Finance. During this call, we will 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 at www.alsk.com, click on the Events section, go to the third quarter 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. 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 lineup for questions. With that, I would like to turn the call over to Anand. Anand?

[Anand Vadapalli:]

Thank you, Tiffany and good morning. Starting with Slide 5, as we come close to wrapping up 2015, I have to note that this year has been an important milestone capping what has been a journey of transmission for Alaska Communications, a journey that has positioned us as a unique company in our sector. A journey where we expect to continue top-line growth while growing EBITDA from our 2015 guidance level and prudently investing capital to drive free cash flow growth overtime. Our work has positioned us as a pure play provider of broadband and IT managed services primarily to business and wholesale customers. We have been growing these revenue streams for several years now based on a growing rooster of new customer relationships. Our performance this quarter continues our trend of revenue growth in broadband, business and wholesale and total service and other revenues. We have built a strong competency in selling to and serving enterprise business and wholesale customers. We compete and win in the marketplace on the strength of our culture of service, our local relationships, the quality and reliability of our network and a portfolio of broadband and IT managed services products that add value to our customers. At the same time we recently completed our actions related to the achievement of synergies and avoided costs from existing wireless operations in Q2 of this year. As anticipated our adjusted EBITDA performance was strong sequentially. As the quarter reflected the effects of these actions. The final tranche of these lower expense levels will be reflected in our Q4 performance. Combined with anticipated revenue growth this will allow us to achieve further sequential improvement for adjusted EBITDA meeting our guidance of $54 million to $56 million of exit run rate adjusted EBITDA for 2015. The quarter also saw the completion of a major milestone the refinancing of our senior loan facility. We now have one of the best balance sheets in our sectors with high levels of cash and undrawn facility at our disposal. This quarter's financial results are an important score card of our continued operational performance this year. More importantly they reflect the substantial completion of our journey of transformation that started in 2011. Today I will turn to the future and discuss why I see continued momentum and opportunity in the market. Moving to slide 6, let me first talk about our management team that will drive us in our next phase of growth. First after nearly five years of partnering with me and helping us in transforming Alaska Communications, our CFO Wayne Graham will be stepping down at the end of November. I owe Wayne a dead of gratitude and applaud him for working a seamless transition for his role. Stepping into his shoes is a very capable leader Laurie Butcher. Many of you have previously met Laurie on our investor trips back East. Laurie has been with the company for 19 years and has been a leader in our finance team. She has been supporting me and Wayne over the last many years and is now stepping up to serve as the overall leader of our finance organization. In the core sales and operations side of the house I am pleased to align deeply experienced leaders who are already part of Alaska Communications to more focused roles. Bill Bishop will lead our business and wholesale market. Until recently Bill was our enterprise sales leader driving our industry leading top line performance and he deserves significant credit for bringing focused, disciplined and excellent performance in our sales results. Mike Todd will lead our consumer market. And until recently headed our engineering and operations area. Mike understands our network and what we can sell where. And also understands our operating cost structures and how to drive operating efficiencies. [Randy Redder] will lead our shared services organization supporting both business and consumer markets. Randy has until recently led our IT managed services team and was the key leader behind the buyout of Techmet and integration to Alaska Communications. Lastly I want to acknowledge with gratitude the service of David Heisenberg who led the wireless strategic transaction and was instrumental in exceeding all our expectations and synergies from this transaction. David now completes his second tour of duty with the company and will also be separating at the end of November. With these changes we are in the right markets at the right time, with the right team. I take great pride in our people. These leaders represent some of the best talent we bring to bear. This team has been critical to our performance over the last many years and now will help me lead our growth over the next several years. Let me now briefly discuss the focus areas for this team. First and foremost, we remain committed to driving top-line growth differentiated by customer service and reliable networks. Business and wholesale which represents 54% of our revenues will lead the way. Our growth will come from an increased integration of our IT managed services capabilities with our broadband network offerings. This approach to integrated solutions selling will not only add value to our customers it sets us apart in the market and moves this away from price based competition. Much like we have done for the state of Alaska broadband network we will provide 24X7 managed services for our customers' broadband and IT infrastructure. We will also leverage our partnerships with strategic customers like ConocoPhillips to drive further growth in the oil and gas sector given our recent investments on the North Slope. A big part of reliability is security. We are increasingly focused on cyber security solutions for our customers. We have recently deployed products in this area while we are building strong internal competencies securing our own networks and system. Finally, we will be opportunistic to pursue transactions that allow us to acquire capabilities in and out of Alaska to grow our business and wholesale revenues. With the healthy balance sheet we have the capital to pursue these types of transactions. We expect business and wholesale revenue to fuel our top-line performance and be approximately two- thirds of our service revenues in a few years time. On the consumer side our message is simple. We are focused and we are looking to stabilize our top-line while improving margins. Consumer represents less than 20% of our revenues. But in a two player market, we do see opportunity in the long term. On the shared services side, we will drive synergies by converging our customer and internal IT and network capabilities. By driving capital efficiency in the process we intend to drive the right kind of investments in IT and in our network to accelerate our market performance. At the same time shared services will also work to streamline our construction management practices and other service delivery functions to shorten delivery cycles and accelerate revenue recognition. Finally, our journey with lean will continue. Driving customer service improvements and eliminating waste in the organization. All these programs are in the context of two themes in the company. First we intend to build on our culture of service. We have deployed net promoter score companywide and improving customer service as measured through MPS improvement is now an important aspect of our compensation. Our customers choose us for service and improving this every day will be key to our success. Second, we renew our commitment to our people and investing and their success. We have made many hard decisions as we have sized our company appropriately. And at every step of the way our people have stood up and served our customers with unwavering commitment. We will bring great focus to developing a culture that increasingly empowers our people, rewards collaboration and team work and will continue to drive accountability and performance. Ultimately this commitment to doing things right and importantly doing the right things will drive growth and margin expansion. With greater rigger and focus on capital allocation we intend to deploy every dollar of cash to expand free cash flow and generate the most long term return for our shareholders. With that let me handle the call to Wayne. Wayne?

[Wayne Graham:]

Thanks Anand. As showed on slide 8, we are pleased to report strong performance for the quarter. On the left hand side of the slide, total service and other revenue grew 2.5% on a year-over-year basis. Business and wholesale which contributed 54.3% of total service and other revenues grew 6.2%. Consumer revenue which contributes 18.2% of our total service and other revenues declined 4.7%. Other revenue grew 0.6% fueled by equipment sales and installations which are part of our IT managed services business. On the right hand side of the slide you can see what continues to make us a leader in our sector. We grew the top-line and have done so consistently for the past several years. Turing to slide 9, you can see a deeper dive into a key area of our growth broadband revenues. We consistently performed well in this area and we posted growth of 7.6% for the quarter. As you can see on the right hand side of the slide as with total revenue we again continue to outpace our peers and have done so for the seven quarters we’ve tracked the comparisons. Turing to slide 10, we present a bridge for sequential adjusted EBITDA performance to show our path to achieve our 2015 exit run rate target. Run rate EBITDA is an important indicator as we move through the year. We sold the wireless business in the first quarter and we have spent much of our year completing the transition services arrangement from the sale. We have been winding down our cost structure and realizing synergies from being more focused service provider. We told our investors that Q2 would be our lowest EBITDA quarter in the year and we would see a pickup in Q3 as we lowered our cost structures. As we have always done we continue to perform to our plan. Q3 benefited from lower labor cost and favorability in certain cost categories. Bottom line we demonstrated solid improvement and adjusted EBITDA sequentially and we expect to achieve our adjusted EBITDA run rate target of between $54 million and $56 million by the end of the year. Slide 11 summarizes our leverage position and we continue to have good news over-performing to our targets. Cash balances remain strong at over $40 million even after buying back $10 million of our convertible notes. We further have $10 million undrawn on our revolving credit facility. Importantly the refinancing of our senior debt was completed in the third quarter and we do not have any maturities due before 2018. Once we achieve our run rate adjusted EBITDA targets, we anticipate being one of the lowest levered companies in our sector at 2.9x. As a management team we are excited about our future. I joined Anand almost five years ago and we achieved what many people said couldn't be done. We repositioned the company, deleveraged substantially and have achieved consistent top-line performance. As Anand has said with the refinancing complete and the wind down activities coming to a conclusion we can say that our transformation is nearly complete. Going forward we will create value through consistent top-line performance, driving EBITDA and free cash flow growth. At a personal level I am pleased that this transformation has provided growth opportunities for many great people inside this company and there is none better than Laurie Butcher. Turing to slide 12, I am please to introduce Laurie. We have worked side-by-side during this journey. She is a deeply experienced leader who has been with the Alaska Communications for 19 years. Her extensive knowledge of the company and her financial background provide her with a solid foundation for success and she is the ideal leader to take the reins of the finance organization for the next phase of success at Alaska Communications. Laurie.

[Laurie Butcher:]

Thank you, Wayne. First let me say I am very excited to lead the finance team. I have been committed to the success of Alaska Communications for a long time and I look forward to contributing further. With the completion of our transformation this year we have great opportunities to drive growth and I believe in our vision for the future. Working with Anand and the executive team and building from our yearend financial performance my focus will be on driving margin expansion and in particular free cash flow growth. With an exceptionally strong balance sheet driving free cash flow growth combined with rigorous capital allocation strategies will benefit share price performance overtime. Turning to slide 13, as noted earlier continued benefits from the wind down to the wireless business resulted in an increase adjusted EBITDA for the quarter. And we will continue to see additional benefits in Q4 from the remaining wind down activities. We are on track to achieve our targets for the year and we are reaffirming our guidance for 2015 of total service and other revenue of approximately $220 million, run rate adjusted EBITDA exiting 2015 of $54 million to $56 million. Net capital expenditures of $34 million to $36 million and net debt by year end of approximately $159 million. With that let me hand the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you Laurie. I would like to officially welcome you to your new role. As we turn to our last slide 14, I will offer the following parts. Earlier I said I was optimistic about our prospects. Why is that? With all the strategic activity over the last several years and to some degree in spite of such activity we have built a platform for industry leading top-line performance. Now with all the work of transmission behind us as a focused company and management team with an excellent balance sheet we have the capability and the financial capacity to return significant value to our shareholders. There is great opportunity in our market and we are well-positioned to take advantage of such opportunity. Our brand is critically important to us and customer service and reliability will continue to define how we go to market. Top-line growth is what makes us unique in our sector and will ultimately drive adjusted EBITDA and free cash flow expansion. As we execute to our vision of the future I know that Alaska Communications offers excellent value creation potential for our investors. We look forward to providing further updates on our progress at upcoming calls. Thank you for joining us today. With that let me open the call for questions. Operator?

[Operator:]

[Operator Instructions] And we will go first to Barry Sine with Drexel Hamilton.

[Barry Sine:]

Good morning folks. I wanted to start by talking about the business there where obviously you are seeing very good results and in fact if I am doing the math right, it looks like you have seen an acceleration in the growth, year-over-year growth rate there versus what you did in the second quarter. Maybe we can talk a little bit about what is going on and can discuss this by geography so first of all, your core market is obviously metro anchorage what are you doing there? Have you put more fiber in additional sales and what are you seeing competitively in terms of response?

[Anand Vadapalli:]

Barry, good morning this is Anand. Thank you for the question. So let me take a shorter responding to that. So our approach over the last several years has been very consistent. We emphasize a lot on service. We emphasize a lot on the reliability of our networks and we certainly invest in building our relationships with our customers. And what you are seeing frankly and I appreciate your comment about acceleration of growth is really an impact of the work we have done over the last several years. We have been building a book of customers’ new relationships that now every time we add a relationship that provides a record of past performance when we go sell to other customers. So a few years ago we won significant business with certain rural healthcare providers. Last year as you know we won the business with the state of Alaska. This year between both the transaction as well as the services contract we’ve entered into strategic relationship with ConocoPhillips. Last quarter in Q3 we had again fairly substantial wins and in fact we talked about our record sales month in the month of July. So what you are seeing right now is us building on the momentum that we have created over the last few years. And those results are playing out for us. Certainly we continue to deploy more fiber behind each one of these opportunities. In fact that is one of the consumers of our success base capital is investing behind these kinds of opportunities. So we continue to drive fiber investments and build on those relationships. Additionally IT managed services for us has been and will continue to be a driver of growth increasingly for our customers it's not just the provision of a broadband connection but it is the management of that connection and more importantly managing that with our IT infrastructure -- with their IT infrastructure that makes difference. So for us Barry we continue to see that playing itself out in the marketplace and we continue to see really good opportunities when I look at the sales funnel. I am very optimistic about our growth trajectory as we go into 2016.

[Barry Sine:]

And for the anchorage fair banks market are you fully engaged in that market with all the same attribute you just discussed or is that market still little further behind?

[Anand Vadapalli:]

Very much so. This is not just about anchorage. We are following the same approach state wide. Obviously as you note anchorage fair banks [indiscernible] represent some of the communities where we have been traditionally pretty strong. Now earlier this year when we made the investment in the North Slope, we are now seeing increasing interest from customers there. I have talked about the building of the sales funnel. I can see that both in the sales funnel and the revenue pick up from this sector both in terms of managed services as well as connectivity. But certainly our recent entry into the oil and gas sector is giving us some really strong near term opportunities, some of the pressures on oil price is notwithstanding we are seeing some near term pick up in our revenues there. So, this is a consistent approach across the state Barry.

[Barry Sine:]

And you mentioned the North Slope I know your investments there still relatively new. The results for the quarter does that represent any initial revenues from that network expansion or is it too soon to start seeing revenue contribution from the North Slope?

[Anand Vadapalli:]

It's a little bit too soon. As we have said we expect to see some meaningful pickup as we go into 2016. 2015 for us was a lot about implementing the network there and fulfilling all our obligations to ConocoPhillips which I am pleased to note that we have substantially completed on schedule and we have great feedback from the customer. That certainly has given us good conversations with other operators in the slope. I know that additionally we have done some new contracts with other oil and gas suppliers here in the state that we have already signed. So, we continue to see a lot of interest from other operators and I expect this to play itself out in 2016 and 2017.

[Barry Sine:]

And then obviously on the consumer side you are not seeing the growth there. But the trends that I am seeing there, looks to my eyes as if the losses in voice lines have picked up a little bit that's accelerating. Can you talk about some of the trends that are driving business there?

[Anand Vadapalli:]

Sure thing. So consumer for us really is reflecting the transition that in many ways we have initiated, at the macro level we sold our wireless business which was substantially consumer. Further we’ve decided that we are only going to start offering higher speed broadband products for home internet. So we have deliberately narrowed the focus of where we want to sell. So for us what you are seeing at some level is a reflection of the choices that we have made in the market as to how we compete. That being said, I certainly see longer term opportunity here which is why now you see a full time leader dedicated to consumer. We have also recently made in the last month, month-and-a-half some pretty significant changes to our pricing and product approach on consumer. Today our customers can get all they can eat internet, the highest speed that they can get for one price $79.99 effectively we have one product in the marketplace at one price. That is a dramatic simplification of how we do business for our customers. It just makes it really easy for them. Equally important Barry that's a great simplification of how we do business inside the company and that can only have beneficial impacts on our cost structure and our margins. So by the way since the time we launched that in the last, I think it was the third week of September we are actually seeing a significant pick up in our gross edge activity related to home internet. So I expect that we will work hard at stabilizing these revenues. We are certainly focused on margin improvement and this is yet again one of the two players market for long term I actually see opportunity in this space for us.

[Barry Sine:]

Okay. Those are my questions. Thank you very much.

[Anand Vadapalli:]

Thank you, Barry.

[Operator:]

[Operator Instructions] Next we will go to Jason Bernstein with Odeon Capital.

[Jason Bernstein:]

Hi guys. Thanks for taking the question. Good quarter and my thanks to Wayne, you guys accomplished lot of things that I thank you people. Didn't expect it could be done at the time and we know we have a lot of things to win on that. My question is regarding the debt balance of $104 million on the converts. So, it looks like you paid down the $10 million -- is it reflected where that came from, is that revolver that paid those down?

[Anand Vadapalli:]

We took cash on the balance sheet Jason. And that's why we are already pleased what our cash balance are is that we are still about $40 million even dedicating that $10 million. We have been draw on the revolver and the draw revolver remain undrawn.

[Jason Bernstein:]

Okay so it was paid with cash. Okay. got it. All right. Thank you.

[Anand Vadapalli:]

Anything else Jason? Thanks for those kind words.

[Jason Bernstein:]

Yes no that's it from me. It looks like a great quarter.

[Anand Vadapalli:]

Okay. Thank you.

[Operator:]

Next we will go to Wayne [indiscernible].

[Unidentified Analyst:]

Hi guys. Congratulations on the good set of numbers.

[Anand Vadapalli:]

Thanks.

[Unidentified Analyst:]

As you go into next year you mentioned the revenue growth acceleration do you think you can carry that down to EBITDA in terms of margin expansion and does that come from higher gross margin with business and wholesale higher margin reps or does it come from just leveraging existing cost space?

[Anand Vadapalli:]

Glen, thank you that's a great question. So headline what I would offer to you is we expect all three numbers to grow. We expect top-line revenues to grow. We expect EBITDA to grow. We expect free cash flow to grow. So that said now let me walk through my thinking on each of those line items and talk about where I see that growth coming from. Business and wholesale today is about 54% of our total service and other revenues. This is the line item where we have said we expect to grow at about 8% a year. Consumer would love for it to stabilize and flatten but potentially even if we take a couple of points of decline, it's still only about 18% to 20% of our total revenue. That leads high cost support which we expect to be flat based on everything that we are seeing on cash support for Alaska and that leaves access which we have always said we are declined at about 4% to 5% a year as access lines declines. So if you add up all these moving parts, clearly the biggest part of our revenue is the one that's growing the fastest. The net-net you add up all these parts we expect our revenues to grow in the low single digits. So that's number one. Two, as long as we are selling on our network our gross margins are extremely high. And if you take overall revenue growth in the low single digit and consider that its substantial part of that revenue is flowing directly to EBITDA because we are selling on the network we have. We certainly expect to see EBITDA pickup in mid to high single digit as we go forward and that then leaves free cash flow. Certainly free cash flow is a function of how we deploy capital and we have said that we expect our capital to be about $35 million a year on a run rate basis to fund the kind of growth that we are looking at. So as long as we are keeping our capital in that range, any expansion of EBITDA goes directly towards cash flow and further as we begin to amortize our debt there is debt for the reduction there so ultimately we expect free cash flow to grow. So that's Glen how I see expansion in revenue EBITDA and free cash flow on a go forward basis. That is our business plan.

[Unidentified Analyst:]

Okay. That's great color. Wayne best of luck.

[Wayne Graham:]

Thank you so much. Appreciate it.

[Operator:]

[Operator Instructions] And it appears we have no further questions. I will turn things back over to our speakers for any additional or closing remarks.

[Anand Vadapalli:]

Thank you all for joining us and I am sure we will be talking over the next few months and wish everyone a safe and happy upcoming holiday season.

[Operator:]

And that will conclude today's conference call. Thank you everyone for your participation.