Alaska Communications Systems Group, Inc.
Q1 2014 Earnings Call Transcript

Published: 9 May 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Alaska Communications Systems First Quarter Earnings Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. (Operator Instructions). I would like to remind everyone that this conference call is being recorded. And I would now like to turn the conference over to Laurie Butcher, VP of Finance. Please go ahead.

[Laurie Butcher:]

Thank you, good day and welcome to the Alaska Communications first quarter 2014 conference call. I am Laurie Butcher, Vice President of Finance and with me today are Anand Vadapalli, President and Chief Executive Officer; Wayne Graham, Chief Financial Officer; 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 first quarter 2014 earnings call event and click on the PDF version of the presentation. We will indicate what page we are on so you can track the presentation material throughout the call. Now as we get started, please review page three for our Safe Harbor statement. During this call, company participants will make forward-looking statements as defined under the U.S. security 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 measures referred to during this call have been reconciled to their nearest GAAP measure. You can find these reconciliations in our earnings call press release. Following our remarks, we will open the line up for questions. And with that, I'd like to turn the call over to Anand.

[Anand Vadapalli:]

Thank you, Laurie. Good morning and thank you for joining us today. Before we discuss results from this quarter, let me begin on page 5. With the reminder of how we create value for our shareholders. We always ask ourselves three questions. First are we growing broadband revenues? Second, are we growing EBITDA? And third are we reducing debt. Our results over the last two years reflect progress and achievement on all fronts. The quarter sets the foundation and the pace of performance our investors should expect from Alaska Communications. Turning to page 6. I'll cover some important highlights in the first quarter they're translated into very strong financial and operational performance. First, our top-line growth was robust with core revenues growing nearly 8% lead by continued strength in broadband. This is driven by various investments we have made in sales, service, product and network over the last couple of years. We are proud that our customer's want our products and the results show it. Second on our last call, we announced the acquisition of the remaining interest and technique and IT services company. We close the transaction in the first quarter and the first few months of operating results have been stellar. Sales are exceeding our expectations, creating opportunities for us to sell higher margin connectivity products. Third, we see continued success in the marketplace, in addition to several strategic wins, we are welcoming a strong roster of businesses as new customers to Alaska Communications. They show that not only can we grow with the market, but we can gain market share. Lastly, we are making progress in repositioning our retail wireless operations providing a competitive platform going forward. Turning to page seven. This slide highlights [our] continued strength in broadband revenue performance. We achieved double-digit growth year-over-year as well as sequential growth in both consumer and business broadband. These results demonstrate our ability to take advantage of the market opportunity. In fact over the last several quarters, results would indicate that we are outpacing our competition in growing business revenues. Turning to page 8. Last quarter, I spoke about the TekMate transaction. The new leadership we brought on board late last year, in the area of managed services is helping us drive results from this investment. We are exceeding our budgeted levels in both revenue and EBITDA. We see our salesforce becoming increasingly trained and comfortable with the services that TekMate has to offer. In fact in conversations I have with business customers, a discussion on IT services usually gets their attention and leads to other conversations about the breadth of services we offer. We see managed services as an area of growth over the upcoming several years and a driver a core connectivity sales. Turning to page 9, I am pleased to share with you several strategic customer wins this past quarter. First, we are proud to enter into multiyear relationship with the Anchorage School District, which is the largest in our state serving over 50,000 students, teachers and staff. Using this relationship as trigger event, we are investing in fiber to nearly 100 schools in the greater Anchorage area. This investment in furthering an important relationship will create long-term growth potential for us. Not only will the investment advance the technology mission of the school district, this increased fiber footprint will allow us to improve service coverage in many neighborhoods furthering our broadband network capabilities. We have seen clear examples of exponential growth in bandwidth consumptions in schools with the availability of fiber. And we see this enabling strong long-term revenue growth from one of our largest existing customers. Second, with the signing of the contract with the large national carriers, I am particularly pleased with our reentry into the wireless backhaul business. As you may recall, the day we closed the AWN transaction, we moved the existing book of wireless backhaul revenues to AWN. It speaks to the strength of our network and the strength of our relationships with our customers that we are now back in this business. We expect to compete for this business and we expect to win more opportunities overtime. Last but certainly not least, I am pleased to say we are winning new business customers every month. We are now the underlying carrier for a couple of large national retailers that we think will open [shop] in Anchorage. We are competitive and we are winning in the business marketplace. While we win these new business customer relationships, we continue to strengthen our existing relationships and services with other Alaska-based carriers as their provider of choice. I saved these examples and stories to emphasize a few things. One, these wins are the result of sustained work led by our sales organization. I am very pleased with the level of maturity and process we have developed for managing strategic customer relationships. Two, we hardly ever win because we are the lowest price. It is the strength of our network, overall solution quality and the trust our customers have in our people that allows us to be successful. Three, we see continued solid top-line performance driven by our work and product. Our voice over internet product is doing very well in the targeted small medium business market segments. Most recently we launched up to gigabit Ethernet services on the new fiber-to-the node program. On the network side, we extend our leadership position as the only carrier in Alaska with an e-access certification from the Metro Ethernet Forum extending our carrier Ethernet 2.1 Certification from last year. I look forward to sharing more customer stories over the upcoming quarters and the attendant revenue growth that should come from these actions. Turning to page 10, let me wrap this section with a few brief comments on wireless where we are making progress on several fronts. First on the network side; AWN is making progress in its capital program and we see improvements in network. We recently announced a major upgrade of coverage in various fair banks community and we will continue to report progress through the course of the year. Second, we have taken a comprehensive approach to retail operations and are making changes on many fronts. Combined with simplified no annual contract plans, we are launching a pilot program for devices that we call bring it, buy it, or finance it. Additionally we are launching a fully packaged four in a box product this summer that extends our reach with new distribution channels. These steps should improve our competitive position in the market and we look forward to reporting progress in upcoming quarters. With that let me hand the call over to Wayne. Wayne?

[Wayne Graham:]

Thank you, Anand. Turning to page 12, you can see that our areas of focus are doing well. Business in wholesale revenue was up $1.8 million or 7.2% year-over-year, consumer revenue grew $0.2 million or 1.9%. Other revenue was up $1.8 million or 12.9%. In total, our core category of service and other revenue was up $3.8 million or 7.7%. In addition to strong underlying organic performance, the TekMate transaction contributed approximately $1 million to the year-over-year performance and we benefited from an approximately $1 million revenue reserve release related to certain regulatory based revenue streams. Turning to page 13, we highlight our connection and ARPU metrics. As you can see, sequentially connections and ARPU performance continues to grow for both customer types. Our existing and new customers are demanding higher bandwidth speeds and our financial performance reflects this. Now turning to page 14, for those who regularly listen to our calls, year-over-year results are impacted by the movement of certain revenue streams which are now captured inside our AWN affiliate. Our cost structure has also changed now that we have this wholesale arrangement for our wireless operations. At the end of last year, we presented full year 2014 guidance and indicated that 2014 is our first full year following the AWN transaction. Our commitment is to drive to the guidance outlook. Importantly, Q1 is foundational for this guidance as it serves as the base to continue to grow our top-line while managing our margins. As you can see on this slide, our Q1 results are tracking very well relative to our 2014 guidance. One important point worth making is regarding seasonality and our results. Free cash flow was high seasonally given the light capital build during the quarter. Based on our results for the first quarter, we are reaffirming our guidance for 2014. And we’re pleased that we laid a solid foundation from which to perform throughout the year. On the leverage front, we're also happy to report that we've made all our mandatory payments on our term loan facility for the year, before we ended the first quarter, a great accomplishment. This represents over $13 million of early debt payments. We've made another $5 million in debt payments in Q2, so delevering continues and we did the value creation that benefits our shareholders. Cash balances continue to be strong. We're off to a tremendous start and we look forward to continuing to build on our performance throughout the year. We will remain focused and confident in our ability to create value for our shareholders and we intend to deliver throughout the year. With that, I'll hand the call back to Anand.

[Anand Vadapalli:]

Thank you, Wayne. As I wrap up this call, I'll leave you with a couple of data points. First, for 9 quarters in a row, we've grown business broadband revenue. This is an incredibly consistent record of performance driven by a team of great people here at Alaska Communications. Second is the substantial reduction in debt levels over the last two years including an accelerated pay down of debt this last quarter. We have a strong commitment to deleveraging, as we see that enhancing enterprise value on the equity side of the ledger. We had a great start to the year, our performance this quarter lays the foundation for the year and sets the pace of performance that you should expect from all of us here at Alaska Communications. Thanks for joining us today. With that, let me open the call for questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions). Your first question today will come from the line of David Barden of Bank of America. Please go ahead.

[David Barden:]

Hey guys. Thanks for taking the questions. I appreciate it. A few if I can. Wayne I think you called out a $1 million revenue reversal, could you kind of elaborate a little bit on kind of what that was and where that found its way through income statement this quarter? Second, I was wondering if you could kind of give us an update Anand, on kind of the cost initiatives that you talked about last quarter and now where we stand on that and where the run rate on the cost side is right now relative to that? And then if I could maybe the last one is just what the latest you are hearing on kind of Verizon's entry into the market, I think you said it coming later this year, just kind of touching base and making sure that that's still the game plan or if you have got a new information on that? Thanks.

[Anand Vadapalli:]

Thank you David. Wayne will take the quarter first.

[Wayne Graham:]

Hey, David. The $1 million has to do with that certain U.S. (inaudible) from prior periods that we released in the year however in the quarter and where it flows through on schedule five, it’s in the high cost support line.

[David Barden:]

Got it.

[Anand Vadapalli:]

David with respect to your second question on the cost initiatives. I think we noted last quarter on our call that we took several actions towards the end of the fourth quarter and consequently that a lot of the benefit of those actions was not reflected in our fourth quarter results and started reflecting in first quarter results going forward. And what you see in the results from the first quarter is a reflection of that. We continue to manage expenses fairly tightly to some degree that’s in our DNA. And we are comfortable that as we are growing revenues and growing top line that we will continue to keep a led on our expenses. We are very focused on our EBITDA and free cash flow numbers, and pleased with the growth we are seeing in the market and we are also actually very pleased with how we are able to keep our expenses under control. There seem nothing significant in terms of any one time things that we have seen in this quarter and it’s a lot of hard work every single day that is happening from a lot of the people across the company. And your last question on the Verizon entry. Now new information David at this time, as we have said before the LTE network is operational but we haven’t seen any news releases or any local past updates that would indicate or give us a better sense of retail entry, nothing further to report on that.

[David Barden:]

Okay, got it. And if I could just do one follow-up just on your kind of the large national carrier win, I mean we’ve been talking about kind of winning that business for a long time. Could you talk about kind of what got this particular piece of business over the finish line?

[Anand Vadapalli:]

Yes. So, this is something that -- first of all these kind of wins take some time to get in and then it does take sometime for the actual network to be built and the revenue recognition to start coming through the door. So there is just lead time involved in the whole cycle. But essentially, after we closed AWN and moved the backhaul business, the book of business to AWN, clearly there was a strong interest from this national carrier in continuing our relationship with us. And we believe it’s driven by a couple of things; one I talked about our network certification both last year with the carrier Ethernet Certification 2.0 and this year with the e-access certification. Meeting those technology standards and getting certified by the technology group in that carrier operations, that’s really important. We didn’t win that on price, we know that for sure. It was because we met that -- I mean I should say fairly exacting technical specification, one. Two; and I cannot overemphasize this. It is the significant relationship that both our sales and delivery and support teams have with that customer. They trust our people and that’s extremely important in these particularly large enterprise relationships we have a track record of performance of leading their [expects] and they really trust our people and that made the difference. And then after that it just was the matter of time getting the contract over the finish line and now it’s matter of little bit more time to get the network built and the revenue to start showing in our statements as well. And we expect to continue to bid for more opportunities in this area.

[David Barden:]

Great, thank you very much.

[Anand Vadapalli:]

You bet. Thank you.

[Operator:]

Your next question today will come from the line of Barry Sine of Drexel Hamilton. Please go ahead.

[Barry Sine:]

Good morning I guess in Anchorage, gentlemen.

[Anand Vadapalli:]

Good morning.

[Barry Sine:]

First question on wireless, Anand you call that a couple of items that I try to chop down pretty quickly that you guys are introducing to try and become a bit more competitive in the wireless space. And I guess those sounds like they are going to impact 2Q, so it sounds like we’re going to see another loss of subscribers there. I don’t know if you want to comment on that, but more specifically, one of the things that we are seeing in the marketplace is pretty aggressive price competition not just bringing on plans, but buyout your contract. And if I could -- last time I compared your rates with the GCI’s, they are lower, in some places considerably lower and then also on handset they do have a zero dollar plan for the iPhone 5S for example. Are you committed or willing to play hard ball a little bit in terms of pricing in wireless in order to keep the subscriber base up or is your view more to maintain premium pricing and if that result in some degradation in the subscriber base overtime so be it?

[Anand Vadapalli:]

Barry thank you for the question, a great question actually several of them. Let me see if I can address all of those. So, you are correct in terms of the national landscape what’s happening in the lower 48 gets played out here even though as you know there is only one national carrier today with a retail presence. But nonetheless, as that national carrier is responding to what's happening with the low 48 and setting their pace, those same changes overall into Alaska, clearly they're not doing anything different here. And of course the AWN retail owners are sensitive to that, respond to that. AWN responds to that with appropriate wholesale pricing and we all respond accordingly. Now clearly the retail owners of AWN have different approaches as to how we grow about our retail businesses. As you point out, one owner has been aggressive in marketing and promotions including contract buyers. Now we do this, but in a much more limited much more targeted way. In fact at the end of the day, our goal is to make AWN successful and contribute to the success of that venture. But we have also interpolate sense there that we need to do this within the wholesale operating model that AWN has established through wholesale rates and handset subsidies. And that drives our performance. So, we are doing everything we can within that construct. We believe some of these product changes I talked about will make us competitive. But those are not the only changes we are making, we are making changes in our channel, we made several changes to how we've gone about our relationship with our agents, we've gone about changing some of the retail compensation structures for our own people. So there is a lot in terms of the attention to both product and channel that we are doing to make sure that we compete effectively in the marketplace. And Barry in terms of results, we think we are getting more competitive. And the results will -- we hope will precedent overtime.

[Barry Sine:]

Okay. And then just one related on AWN, I noticed on the GCI call that there is now a dispute and I guess it’s going arbitration and you never have two organizations together with (inaudible) issue. Could you characterize it, what s exactly going on there? It doesn't sound all that significant and what's kind of your of things?

[Anand Vadapalli:]

So Barry, again thanks for the question. Look, first of all, I think I don't want to [lose] by particular picture which is we are pleased with the progress AWN is making with rolling out its LTE network. We know that AWN's role is maximizing the cash flow and they’ll realize that when the networks build is complete and these investments will benefit, both owners. We think AWN is much more valuable today than it was before as they are building out their network. And it will be done sooner than what owners thought it would be. And all that being said, this wholesale arrangement is unique and we’ve had to work through some of the issues related to that arrangements. To the credit of both parties, we anticipated that we may face some of these issues and we have set in place very expedited mechanism to resolve some of these disagreements and not really let them become a distraction. So, from our perspective, the long-term view is really what's important and we are very strong in our belief that AWN is valuable part of our asset portfolio.

[Barry Sine:]

Okay. And then last question Anand, just kind of shifting gears a little bit. You’ve done an awful lot strategically and operationally over the last year putting AWN in play and then really revitalizing the wireline part of the business. As you look out strategically, is there anything else that you think you might need to do? And I guess I'm specifically thinking network at fiber assets. Are you comfortable there, are there opportunities that you think you can address with some additional build out?

[Anand Vadapalli:]

I think Barry that's a good question, I'm glad you’ve given me an opportunity to talk about that. Because truly, if you look at this script and the prepared remarks, I have spent a lot of time talking about the customers wins. And the reason I did that because that really shows what is happening in the marketplace and where our focus is and the success that we are seeing there. And I fully expect to be coming back and reporting more progress on that over the next several quarters frankly. And if you look at the Alaska telecom market, you will note that we are growing revenue faster than our competition in broadband. And particularly when you see a company like us that is starting with a lower market share, we don’t need to write down existing revenue is to compete and that gives us the unique market position from which to perform. And clearly, we started off a lot of investments in sales and service and product and network over the last two years; what you are seeing is a result of these investments playing out. The other thing that I’d point to you Barry is we’ve said consistently that we are looking at about $40 million of CapEx and we’ve said look, we will allocate the top certainly $10 million of that on an annual basis to growth opportunities and customer opportunities. Last year we invested in the fiber to the network program. That’s substantially complete, we’ve started selling into that. This year, as I noted in my prepared remarks, we are making a major investment of fiber after a specific opportunity with the Anchorage School District but when we are lighting fiber in 100 schools, that’s a 100 communities and neighborhoods in the greater Anchorage area. That only does a lot of goodness for us with the overall network in Anchorage. So we continue to see that benefit. And I should emphasize the impact of managed services and TekMate. We expect that to fuel continuous growth. This market for managed services is fragmented; in Alaska, we have a capable leader who is leading that and our results are exceeding expectations. So Barry, looking ahead, strategically, I think we have a lot of foundational elements in place on as it pertains to broadband; we are focused on the business market; and we'll continue to invest there; and we'll continue to grow. I'm very confident about what we can do on the business side where we have all are attention.

[Barry Sine:]

Okay. Thank you very much gentlemen.

[Anand Vadapalli:]

You bet, Barry. Thank you so much.

[Operator:]

And your next question today will come from the line of Jason Bernstein of Odeon. Please go ahead.

[Jason Bernstein:]

Hi, thanks for taking the call, nice quarter. Anand, could you go into a little more about the fiber-to-the-node build out and sort of when those opportunities will be available to end users once sort of the cycle completed on the CapEx there?

[Anand Vadapalli:]

Jason, sure. Thank you for the question. So as I've mentioned and I think in our prepared remarks from last quarter, the fiber-to-the-node program that we funded in 2013 is aimed at increasing our no density in the target markets and last year it was all about Anchorage. And what it does is significantly shortens loop length and puts fiber directly into many commercial buildings. In terms of technology, we're deploying VDSL, we're deploying Ethernet over copper and we're deploying GPON for the most efficient delivery of business internet. Again referring back to my remarks from last quarter, this investment from last year enables higher speeds for about 5,000 business locations and approximately 7,500 consumer locations. And we've said in the past that this enables about $20 million in market opportunities. And if you are selling into this network and it’s early days and we hope to show the results from this network in our business of broadband growth over the upcoming quarters.

[Jason Bernstein:]

Great. And just a follow up if I could. With the $5 million additional pay down in 2Q, what is the -- I assume that was for the term loan, what’s the pro forma term loan number now, is that 327?

[Wayne Graham:]

That's good number, 327.

[Jason Bernstein:]

Right. Okay. Thanks guys.

[Wayne Graham:]

You bet. Thank you.

[Anand Vadapalli:]

Thank you.

[Operator:]

And ladies and gentlemen, there are no further questions at this time. I will now turn the call back to management for any closing.

[Anand Vadapalli:]

Thank you ladies and gentlemen for joining the call and we look forward to speaking to all of you here in a few months. Have a great day.

[Operator:]

And thank you ladies and gentlemen. This does conclude the conference call for today. Again, we thank you for your participation. And you may now disconnect your lines.