General Communications, Inc. Q3 2008 Earnings Call Transcript

General Communications, Inc. (GCNM)

F3Q08 Earnings Call

November 6, 2008 2:00 pm ET

Executives

Ronald A. Duncan – President, Chief Executive Officer, Director

John M. Lowber – Chief Financial Officer

Analysts

Jonathan Atkin - RBC Capital Markets

Ana Goshko - Bank of America

[James Krome] - Regiment Capital

Anthony Klarman - Deutsche Bank Securities

Liam Burke - Janney Montgomery Scott LLC

Kevin Seagraves - Fort Washington

Presentation

Welcome and thank you for standing by for today’s conference call. At this time I need to remind all parties that you are in a listen only mode, however we will be doing a question and answer session today. (Operator Instructions) I need to remind all participants today’s conference is being recorded. If you have any objections to this recording, now would be the time to disconnect.

We’ll go ahead and get today’s call started. We are going to turn it over to Mr. John Lowber and he is Chief Financial Officer for GCI.

John M. Lowber

Thank you all for taking the time to participate on our call today. I am John Lowber, the company’s Chief Financial Officer. I’ve got Ron Duncan with me, our President and CEO, and the usual supporting cast. We will all be available to participate in the question and answer session which will follow my initial comments. A copy of our detailed press release can be found on our website.

The conference call is being recorded and will be available for playback for 72 hours beginning at 4pm Eastern time today. The playback number is 866-376-2452 with an access code of 7461. In addition to the conference call you may access the conference through the Internet. To access the call via net conferencing log onto our website at www.gci.com and follow the instructions. The webcast will be available for replay for the next two weeks.

I will now read our usual cautionary statement about forward-looking comments and then we’ll get started. Some of the statements made by GCI in this presentation are forward-looking in nature. Actual results may differ from those projected in forward-looking statements due to a number of factors. Additional information concerning such factors can be found in GCI’s filings with the Securities and Exchange Commission.

We are very pleased with the third quarter results again on both operational and financial fronts. We had a nice quarter with good metrics. It was an extremely busy quarter with many key initiatives under way. We set new records once again for revenues and cash flow reflecting a continuation of the strong performance we’ve been seeing in consumer business metrics over the last few quarters. Many operational items were accomplished during the quarter, the orderly and timely execution of which was necessary for us to meet our financial goals for the year.

We completed the Alaska wireless transaction and purchased the remaining 20% interest in Alaska DigiTel that we didn’t own. We completed construction of and recently turned up our new fiber facilities in southeast Alaska from which we are already realizing an EBITDA return in the form of increased revenues and decreased costs of approximately $6 million per year.

We have made considerable progress with our urban and rural wireless facilities expansion efforts and have recently turned up GSM service in a dozen communities in the Norton Sound region. We have recently turned up our EVDO Rev-A data service and we estimate at this time that we have twice as many sites and service as our nearest competitor. Our new redundant fiber root to Fairbanks is nearing completion and is expected to be placed in service before year-end.

Third quarter revenues totaled a record $151.2 million representing an increase of 12.8% over the prior year quarter. All of our business segments but for network services recorded revenue increases on a year-over-year and a sequential basis. EBITDA which excludes share-based compensation expense totaled a record $46.7 million, which compares to $38.9 million that we recorded last year. Excluding a $640,000 non-cash charge for contribution of fiber capacity to the University of Alaska, EBITDA would have exceeded $47 million for the quarter.

Net income and earnings per share for the quarter were down when compared to the prior year due mostly to increases in depreciation and interest expense. Our EBITDA margins increased both year-over-year and sequentially. On a sequential basis revenues were up 6.2% and EBITDA was up 6.5%. On a year-to-date basis revenues and EBITDA are up 10.1% and 12.3% respectively. Net income and earnings per share are down from last year due to increases in depreciation and interest expense resulting largely from our ongoing capital expenditures programs.

Our financial results benefited from a full quarter of activity from the United companies and Alaska Wireless following our acquisition of those companies effective June 1 and July 1 respectively of this year. The effect of infrequently occurring items pretty much offset each other this quarter, so the reported EBITDA is pretty representative of the actual run rate for the quarter.

Our financial results are labeled as preliminary as our auditors have not yet completed their review but we don’t expect any material changes to them at this time. Late last year when our Alaska DigiTel subsidiary decided to expand its coverage of the urban areas of Alaska, including the rollout of the EVDO Rev-A a decision was made to replace DigiTel’s existing Lucent platform with Nortel equipment.

Accordingly the remaining depreciable life of the Lucent equipment should have been reduced resulting in increased depreciation charges on a prospective basis. We recently learned that this had not been done, so we are therefore going to restate our first and second quarter results in order to report the necessary increase in depreciation expense.

The increase in depreciation expense net of income taxes and minority interest will reduce previously reported first and second quarter net income by an estimated $500,000 and $600,000 respectively and earnings per share by about a $0.01 per quarter. The correction will have a modest to positive effect on previously reported EBITDA resulting from its effect on the minority interest in DigiTel. The third quarter and year-to-date included in the schedules to the press release includes the effects of the accelerated depreciation of the Lucent equipment.

Alaska continues to be a pretty good place to do business. The state appears to be well-positioned in spite of the recent decline in oil prices. Employment is still growing, mortgage foreclosure rates are less than half of the national average and the commercial real estate market is holding up well. Hundreds of millions of dollars will be spent over the next few years in anticipation of the construction of a natural gas pipeline.

According to the Alaska Department of Revenue, the Alaska general fund is projected to break even with an average fiscal year oil price of $74 per barrel. Maintaining a $60 average price per barrel through the remainder of the fiscal year would result in a projected average price per barrel of approximately $82 and would result in an estimated general fund surplus of $1.5 billion. Relative to other parts of the US we feel pretty fortunate to be doing business here in Alaska although we’re watching developments very closely.

Consumer; the consumer segment continues to deliver strong customer metrics and stellar financial results. The consumer segment experienced year-over-year and sequential growth in wireless, video and data revenues. Consumer revenues were up approximately 17.1% over the prior year and just over 7% on a sequential basis. Voice revenues were down slightly due to reductions in USF revenues.

The gross margin percentage increased 969 basis points compared to the prior year and improved 719 basis points sequentially. The third quarter margin reflects the beginning of the transition of the former Dobson traffic off of all of our network and our free use of the AT&T mobility network for a period pending completion of our own wireless facilities.

We have turned up parts of our network, but expect to accelerate that process and begin carrying increasing amounts of traffic on our urban GSM wireless network this month. The consumer results are being favorably affected by our statewide local services expansion, our ongoing efforts to move customers onto our own facilities, and our facilities based wireless expansion.

We estimate that we now have attained a 33% market share of the local access lines in Alaska and approximately 68% of our lines are on our own facilities. Our video on demand product is continuing to wrap up and with only three communities remaining we are nearing the end of a four year effort to convert all of our video services from analog to digital.

Some of the more significant customer metrics for the consumer segment for the quarter included an increase of 1,100 cable modems, 1,100 local access lines, 3,800 local services lines added to our own facilities, 4,200 wireless subscribers including those of Alaska Wireless and an additional 6,000 HD/DVR converter boxes deployed. Across all business lines we now have approximately 88,100 wireless lines of service. These and other related metrics are detailed in the attachment to the press release.

Consumer EBITDA excluding share-based compensation expense totaled $17.99 million for the quarter as compared to $11.14 million a year ago and $13.2 million in the prior quarter. On a year-to-date basis consumer revenue is up 14.8% and the EBITDA is up almost 35%.

Commercial; third quarter revenues were up 10.6% versus the same quarter of 2007 and were up 9.9% on a sequential basis. Increases in wireless, data and video revenues far outpaced a slight decline in voice revenues on a year-over-year basis. Although wireless revenues were flat on a sequential basis, voice, video and data revenues were up smartly. Ad sales were particularly strong during the quarter.

Commercial margins enjoyed a 111 basis point increase compared to the prior year quarter and were flat on a sequential basis. Commercial EBITDA is up 32.1% compared to the prior year quarter and was up 5.8% on a sequential basis. On a year-to-date basis, commercial revenues are up 8.4% and EBITDA is up more than 25%.

Notable commercial metrics for the quarter include an increase of 800 local access lines and additional 2,500 access lines served our own facilities. Commercial cable modem accounts were flat and we experienced a seasonal decline of commercial video subscribers, primarily related to hotel rooms. Network access services; he network access business declined as expected during the quarter as what had been the Dobson traffic had begun traffic began moving off of our network on the 1^st of July. Declines in network access revenues were being offset by reduced costs in our wireless business as part of the unwinding of our reseller agreement with Dobson.

A decrease of approximately $6.2 million of switch voice revenues was partially mitigated by a $3.2 million increase in data revenues in the current quarter as compared to the same quarter of the prior year.

Network access revenues decreased as expected by approximately $3.1 million on sequential basis. Network access EBITDA decreased approximately $3.7 million as compared to the prior year quarter and approximately $3.9 million on a sequential basis.

The gross margin percentage increased 201 basis points as compared to the prior year and 44 basis points sequentially.

We carried 255.8 million network access minutes during the third quarter, a decrease of 65.6 million minutes as compared to the prior year quarter and a decrease of 70.4 million minutes on a sequential basis.

Year-to-date revenues are down 3.82% and EBITDA for the nine months ended September 30, 2008 decreased by approximately $5.7 million or 8.7% versus the same period of the prior year.

Our average rate per minute for all of our long distance traffic totaled $0.0837 per minute compared to $0.0873 per minute a year ago and $0.0779 in the prior quarter. The decrease from the prior year is largely due to a rate decrease effective the first of this year while the sequential increase similar to what we experienced last year is due to a seasonal change in the traffic mix and the transition of the former Dobson minutes off of our network.

Managed broadband. Managed broadband revenues were up a very nice 33.9% compared to the year ago quarter and were up more than 8% on a sequential basis. Revenues for the third quarter totaled $9.9 million as compared to $7.4 million in the same quarter of the prior year and just over $9.1 million in the prior quarter. Quarterly EBITA almost doubled to $3.8 million as compared to the year ago quarter and increased $652,000 on a sequential basis.

As noted last quarter, the managed broadband segment will benefit from the United Companies’ acquisition and that a good portion of United’s unregulated activity will be recorded in the managed broadband segment.

Regulated operations. Our new regulated operations segment generated $5.9 million in revenues during the quarter and $1.3 million in EBITA. The prior quarter included one month of revenue totaling $1.9 million and EBITDA of $359,000 following the June 1 acquisition of the United Companies.

Other items of interest. Wireless expansion and transition. Our wireless initiatives continue to be a very high priority as we wrap up the remainder of 2008. We’re swapping out the SIM cards of our various wireless customers in anticipation of the accelerated transition of their traffic onto our own GSM network. Our wireless subsidiary Alaska DigiTel has been enhancing its CDMA facilities to meet the requirements of our strategic roaming agreement with Sprint. Just this week we began offering a very compelling wireless data product under our GCI and DigiTel brands.

We are continuing to work on our rural wireless expansion and have recently turned up the first of two regions that we expect will be operational and will encompass more than 50 rural communities by the end of the year. We plan to provide service in 60 additional rural communities during 2009.

Local service expansion. We’re continuing to roll out local services in additional markets in Alaska. The next market we plan to serve is the Prudhoe Bay area which we expect will be in service by year end. We plan to provide service in five additional markets in 2009 with two more scheduled for 2010.

Fiber capacity gift. During the quarter we provided a gift of fiber capacity valued at approximately $30 million to the University of Alaska. Access to this additional capacity will allow the University to advance its research and education mission which we hope will provide benefits to all Alaskans. We will also work with the University to explore ways to solve connectivity issues primarily affecting rural Alaska.

Legal and regulatory. Our regulatory folks continue to be focused on negotiations for local and wireless service interconnection with incumbent carriers. Today we have interconnection agreements in place to cover 97% of the accessed lines in the state.

We’ve received approval from the Regulatory Commission of Alaska for local interconnection agreements including Alaska Telephone Company, Cordova Telephone Company and Arctic Slope Telephone. Additionally, we received approval from the RCA for wireless interconnection agreements with ACS, [ADAC], Arctic Slope Telephone, Alaska Telephone, Bettles Telephone, and North Country Telephone.

We have new negotiations underway in some of the remaining wireless areas. These efforts will allow us to eventually provision local services and turn up our own wireless facilities in these new markets.

The RCA granted us USF eligibility for our wireless operations in the Mukluk study area and we received the necessary approval of the Alaska DigiTel transaction on August 8, 2008. The DigiTel transaction closed about a week later.

Guidance and economic prospects. As I mentioned the last several quarters, this will be the last year we provide financial guidance on a quarterly basis. This is one more reminder that beginning next year we will provide guidance on an annual basis only. Each quarter we will indicate whether or not we believe we are on track to meet the financial goals we established for the year.

Last quarter we were hesitant to revise our guidance for the full year as we were uncertain as to the financial impact of our wireless transition. Although we still don’t have the visibility we would like to have in that process, the strength of our recently completed quarter has compelled us to revisit the matter. Accordingly, we are increasing our revenue guidance for the year by $10 million and our EBITA guidance by $5 million. We’re now expecting revenues in the range of $560 million to $570 million and we expect our EBITDA to exceed $170 million.

Liquidity and capital expenditures. We ended the third quarter with $38 million in cash and investment securities and $96 million available to draw under our revolver. United subsidiaries have also arranged $10 million of additional financing that can be drawn if needed.

In light of the current condition of the financial markets we feel fortunate to have a very supportive and what we think is a very financially sound bank group and that we have a facility in place that will meet the reasonably foreseeable requirements of our business plans. Our existing indebtedness including our capital leases will require approximately $14 million of the amortization during the next year.

We invested approximately $68.1 million in capital expenditures on a consolidated basis during the third quarter. Our revised capital expenditures requirements for 2008 excluding the capital lease of the new satellite capacity have increased by $15 million and are now expected to total as much as $240 million for the year.

During the third quarter we made investments in the following areas: For our business lines primarily set-top boxes and items supporting our statewide rollout of local service $15.9 million; for IT projects $4.3 million; for support and expansion of our network $5 million; for product management primarily focused on the digitization of our cable plant and the rollout of our video on demand product $3 million; for expansion of our wireless facilities including those of our wireless subsidiary $14.5 million; for construction of our new fibers to Fairbanks and Southeast Alaska $22.5 million; and $2.9 million for United Companies’ network enhancements.

Our major capital expenditures initiatives for 2008 include approximately $78 million [inaudible] of our wireless facilities, $61 million for long-haul fiber and network capacity, $25 million for our statewide rollout of local services, and $76 million for other projects including cable plan expansion, digital cable conversions, real estate, IT, new products including VOD, expansion capital for the new companies that we acquired, and growth and maintenance capital.

To recap, our more significant cash sources and uses for the first nine months of the year on a simplified basis we generated approximately $129.1 million in EBITA, raised approximately $129 million through net borrowings under our senior credit facility, and received $38 million from fiber capacity agreements for total sources of approximately $296.6 million.

We used a net of $34.6 million to acquire the United Companies, $24.7 million to acquire Alaska Wireless and the remaining 20% of Alaska DigiTel, invested $189 million in capital expenditures, and incurred approximately $39.8 million in cash interest expense.

Including the effect of the net changes in working capital, our cash balance increased approximately $26.4 million.

To summarize the increase in debt, since the first of the year we raised $129 million net of principal payments, we recorded a capital lease of $98.6 million related to the new satellite and we assumed the $43 million as part of the United Companies acquisition. These items accounted for $270.6 million of the $273 million increase in debt since the first of the year.

At quarter’s end the interest rate on approximately $458.4 million of our $814 million in debt was fixed. Early in the quarter we purchased an interest rate cap which limits the LIBOR element to 4.5% on an additional $180 million of debt. Our cash interest expense at current rates on our facilities at the end of the quarter was running at approximately $57.4 million per year. Compared to the last two quarters, annualized cash flow of approximately $182 million, our cash interest coverage is approximately 3.17 times and our leverage on net debt is 4.27 times cash flow and on gross debt our leverage is 4.4 times.

In conclusion, we are very pleased with the results for the quarter. Going into 2008 we knew the business plan was fraught with execution risks and in order to accomplish our myriad goals the organization would be stretched to the maximum. Credit has to be given to our operating folks for their focus, hard work and dedication in meeting the challenges that always seem to materialize. Our folks have risen to those challenges and the results of their efforts are being evidenced in our financial results.

We will now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jonathan Atkin - RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets

I have a quick question for you regarding wireless and also with respect to long-haul fiber. On the wireless, on net migration is that happening as customers upgrade their phones or renew their contracts or are you doing that more based on network readiness? How are you dictating which batches of customers are migrating over to your own facilities for GSM? And then you mentioned a wireless data offer. Is that based on EVDO on the CDMA network or can you clarify how you’re offering the mobile broadband?

Ronald A. Duncan

We’re converting customers by giving them an incentive to come in to our conversion center or our stores for the SIM card swap. We’re contacting all of the existing GSM customers in batches and offering incentives to get them in. We need to physically grab the phone and we don’t have time to wait until the contracts are renewed, but so far we’re being adequately successful in getting folks in.

We got off to a late start because some IT systems weren’t quite ready on schedule but we’re basically on schedule with our projected requirements for switching the customers over and to date not having any materially difficulty getting them to come in to let us change their phones. They do get plan upgrades and some pricing benefits when they make the change.

The data offering that we just floated is based on the CDMA network in the EVDO Rev-A and it’s tied in as an adjunct to our cable modem platform or our cable modem product at some very aggressive and attractive pricing for our customers who are already GCI cable modem customers.

Jonathan Atkin - RBC Capital Markets

With respect to long-haul, any thoughts on the acorn builds and what impact that’s having on contracts and the pricing and so forth?

Ronald A. Duncan

I think the pricing is compressing as we sort of expected on the Anchorage/Seattle route. We continue to see that route priced quite aggressively although not beyond what we anticipated in our forecasts. We haven’t seen any real material impact on our business yet.

Jonathan Atkin - RBC Capital Markets

On the regulation side of things, any early read on how the upcoming change in Administration affects the business?

Ronald A. Duncan

I think two days is probably a bit early to tell other than the macro trends which have probably been better enunciated by the National Press than they would be by us.

Jonathan Atkin - RBC Capital Markets

Just back on wireless, I’m curious. You do have some unlimited national plans and maybe you don’t have visibility on this yet until everything’s on net, but roughly what portion of your wireless minutes are used outside of the state?

Ronald A. Duncan

I don’t have an answer to that but if you wanted to follow up with a phone call to Bruce, we could dig into that. That’s not one of the statistics that’s at my fingertips. I would note that with our arrangement for unwinding the Dobson agreement that we do have access to a very large pool of minutes that are available to us on a nationwide basis, so for the next four years the cost of a nationwide minute is not different to us than the cost of an on-net minute. So it’s really not a material metric in driving our cost equation.

Operator

Our next question comes from Ana Goshko - Bank of America.

Ana Goshko - Bank of America

The 6.2% quarter-over-quarter sequential growth, do you just have an approximation of what that would be adjusted for the acquisition, whether it’s pro forma for the full quarter of the second quarter acquisitions or if you just stripped out the impact? I’m just trying to get a sense of what the organic growth was quarter-over-quarter.

John M. Lowber

Just rough numbers I think we’re looking at about $30 million in annualized revenues coming out of the United Companies acquisition and cash flow I think historically was somewhere between the $7 million and $8 million run rate although we expect both of those numbers to ramp up here post acquisition. I think that was pretty representative of what we recorded in Q3. Alaska DigiTel has always historically been consolidated and the Alaska wireless operations were probably just barely incidental and I don’t want to spell those out specifically.

Anna Goshko

On the guidance revision, since there are so many moving pieces I’m trying to get a sense of is the increase in guidance the result of one of your segments outperforming your expectations or is it the fact that maybe the AT&T traffic is not coming off as fast as you thought and you aren’t having as many wireless conversion costs as quickly as you thought? Is it driven by outperformance or is it driven by the fact that some of the negative items may not be incurring as quickly as you thought?

Ronald A. Duncan

I think it’s a combination of outperformance which has really been there all year combined with a greater visibility and a greater sense of comfort on the wireless transition.

The majority of the AT&T traffic that’s going to go away has gone so that’s not a factor at this point. In the previous conference calls we didn’t have the wireless network up and running; we didn’t have the IT necessary to perform the conversions; we didn’t know what the customer response to getting those underway was going to be; and we really hadn’t had a quarter of operations under the new subsidiaries that we brought in. So there was confidence but a lot of uncertainty about how all that was going to come together.

I think what you’re seeing is very strong performance both on a customer metrics basis and on a financial basis and better clarity with respect to some of the unknown issues. There are still some unknown issues as we dig into these acquisitions. We’re learning more about how to run them and that sort of thing, but we’re increasingly confident and at this point it would be 170 or better and I would expect absence surprises to be on the or better side of that.

Operator

Our next question comes from [James Krome] - Regiment Capital.

[James Krome] - Regiment Capital

With 68% of your access lines in your own network, how quickly does that get closer to 80%? How quickly does that ramp? Is it the end of the year? Is it 2009 timeframe?

Ronald A. Duncan

We’re probably three years out from being in the mid-90s on that percentage. We should be 90% or better on consumer by sometime early next year. We’re very close to that number right now on the consumer front.

The commercial front is a little more challenging because that requires us to continue building out our fiber network both the [PON] strategy and the fiber ring strategy. That’s a more measured build process that’ll take a couple of years to complete the build-out of the larger commercial facilities or all the commercial facilities essentially.

So 90% by sometime next year on residential and then 90’s plus in a couple of years on the commercial front. You’ll sort of see a plateau incur. You’ll see a continued steep climb I would expect through the latter portion of 2009 and then as a percentage of total access lines it’ll taper out a little bit until we get into the mid-90s.

[James Krome] - Regiment Capital

Have you lost any subs in the wireless transition? You said it was going well but you didn’t really talk about churn.

Ronald A. Duncan

We have constant churn in the wireless. I don’t know how we would identify a churn loss as a result of transition as opposed to ordinary churn. There will come a cutoff point sometime in the second quarter of next year when we need to have everybody transitioned, and if we’re going to lose subs they would be measured as of that date. We do expect that some percentage of the subs won’t complete the conversion but we’re obviously working to keep that as low as possible.

[James Krome] - Regiment Capital

Can you just detail some of the savings? It was asked by the previous caller but I would assume you get savings from integrating all your wireless businesses. I’m sure there’s something going on there. I don’t know if you could call out if there is or maybe there isn’t. I was just wondering now that the acquisitions are done not only on the wireless side but the United Companies, are there savings that you’re realizing?

Ronald A. Duncan

There are substantial synergies in both the DigiTel and the United deals. The United transaction has both revenue and cost synergies, probably more significant on the revenue side as we make better utilization of the terrestrial network that they had constructed and owned out in the Southwest Alaska region.

On the wireless side, as we get the networks integrated and we get all of the product operations consolidated in GCI there’ll be synergies. Those are cooked into both our projections and our guidance at this point. Those will accelerate some next year.

The principal change coming from wireless really is the shift in EBITDA from the carrier business to the wireless business as the AT&T carrier traffic goes away but as the operating costs of the resold wireless minutes also go away affecting essentially at the go-down a net transfer of I think it’s $12 million to $15 million a year or more in EBITDA from the carrier business to the wireless business and then accelerating as we grow the wireless business.

[James Krome] - Regiment Capital

Given the new guidance and given the cash flow you’re generating, I know the credit crisis is making people revisit things, but how much liquidity do you need to have on your balance sheet? What are the things that will allow you to redeploy some of the cash now that the acquisitions are done and the other acquisition’s well on its way.

Ronald A. Duncan

At this point I think that we’re very happy to have what we view as significant excess liquidity. In this kind of an economic environment I’m not sure that you can have too much liquidity. We expect ultimately to use little of the $100 million revolver that’s available to us but it’s very comforting to have that there as a pad at this point. The company’s outperforming on the cash generation front particularly when you factor in the almost $50 million that we’ll take in IRU sales that are not reflected in the current EBITDA calculation for the company. John summarized those in his cash summary.

I think that until the world rights itself we’re going to be happy sitting on the extra liquidity. We have no plans to deploy it for other purposes at this point and we think we have ample to do to stay focused on the current business plans for the next 12 months.

If credit conditions continue to ease and the company performs as I expect it will, we’ll have some more options and may have some other opportunities to discuss the use of that extra liquidity and extra capital in the 12 to 15 month timeframe.

But right now with the economy sort of uncertain on a global basis on a day-to-day situation we’re real happy; we’re very lucky to be operating in the Alaska market which appears to be the only recession proof market in the country; perhaps one of the very few in the whole world.

Our risk this year really wasn’t from the recession. It was from the possible collapse of our lenders in the credit system, and we think we’re past that now so we feel like we’re well positioned to be a counter-cyclical player.

Operator

Our next question comes from Anthony Klarman - Deutsche Bank Securities.

Anthony Klarman - Deutsche Bank Securities

A question about the 2009 guidance. You reaffirmed that today. I’m just wondering if you could provide some sensitivity as to what you sort of incorporate in that with respect to the macroeconomic variables and are you assuming that the macro economy in the lower 48 in general gets no worse? And how sensitive will that number be to perhaps the spring and summer travel/tourism season in Alaska and how much sensitivity do you have to that in your business?

Ronald A. Duncan

Let me take that from a couple of perspectives.

First of all, at this point we haven’t issued formal guidance for 2009. We’ve stated a long-term goal of $200 million for ’09 and that is the goal category. I know we’re going to have a hard time getting you guys in the analytical community to differentiate between the goal and the guidance. We tend to be more conservative in the guidance, but I did say in my quote and I do believe that we are in a position to achieve the $200 million goal but that’s not guidance at this point. That really comes from our perspective from business as usual.

I would say that resets for that number would be if oil dips materially below $50 a barrel, that has an impact on the Alaska economy but given the strong position of the reserve funds in the state, it’s probably an impact that doesn’t trip in till 2010 or later. So that would be one that would give us some pause for a reset but I don’t think that’s going to happen.

I think we’re pretty well insulated from all but the most catastrophic consequences of a lower 48 economic depression at this point. Typically what we’ve seen is that when economic conditions get worse, the telecom traffic actually goes up from our commercial customers because you end up with telecom versus travel substitutions. In previous recessions we haven’t seen the drop in the enterprise traffic. In fact it’s been a bit counter-cyclical and I don’t have any reason to suspect that would be materially different this time.

We’re not seeing a significant impact in our enterprise business from the effects of the lower 48 and my anticipation is that unless the recession gets significantly deeper than currently anticipated, we really wouldn’t see that impact affecting our 2009 plan. The 2009 plan is driven very heavily by the consumer elements of our business particularly the wireless and the local telephony side of the fence. Those are predicated primarily on results in the Alaska economy which are driven most heavily by state and federal government spending and the resource industry.

Tourism is important only at the margins of the Alaska economy and tourism was kind of flat this year. It could be down some next year although with oil prices and gas prices going down, it’s hard to project that. I know our competitor thinks that the number of phone calls are directly proportional to the amount of sunshine but we really don’t see that effect. So absent really catastrophic lower 48 results, I don’t think we’d see anything that would cause us to reset that plan.

Anthony Klarman - Deutsche Bank Securities

On wireless, given that you have a lot of economic incentive built in to this transition agreement you have with Dobson or AT&T, have you seen the competitive response up there from the other major wireless carrier with respect to perhaps them trying to go out and proactively poach some of those subscribers during this interim process?

I ask that because I guess the time at which conversion subs are most susceptible to churn tends to be during the conversion process if something doesn’t go smoothly or if it costs a little bit more than people expect. Often that tends to be when you see a churn spike. It sounds like you haven’t seen that yet but I’m wondering if you’ve seen any competitive response while you’re in the middle of this transition period?

Ronald A. Duncan

ACS led off this year with a very aggressive price reduction in wireless. By our calculation almost a 25% price reduction in wireless which we believe then forced AT&T to follow suit. But ACS was actually the price leader in that reduction very early in the year. AT&T followed shortly thereafter. The net effect of that was to drive wireless pricing to what we thought it was going to be at in the four or five year range. That has obviously less impact on us that it did on our competitors because we’re still building share over that period.

Wireless pricing in Alaska is now at lower 48 average pricing essentially. I would be surprised if the parties drove it below the average level in the lower 48. With the construction of our statewide network we’re offering some very attractive plans that go to lots of places that our competitors don’t and we’ve led the way with some very attractive offerings for statewide unlimited plans in areas where some of our competitors aren’t as strong. We certainly are pushing the envelope on wireless data pricing for up here.

So I’m comfortable that we’re very competitive there and I suspect the price offerings, the price reductions early in the year were sort of anticipating our entrance into the wireless business but I think we’ll still be able to complete our conversions.

Churn is higher in the Alaska market than it has historically been in the lower 48 although I note the lower 48 churn has spiked very dramatically in the last quarter or two as well as a result of the recession. So it’s hard to say what the ultimate comparison will be.

Operator

Our next question comes from Liam Burke - Janney Montgomery Scott LLC.

Liam Burke - Janney Montgomery Scott LLC

Ron, you talked about pricing on the fiber optic links but to the lower 48 pricing being tough there. Then you addressed the question earlier about the competitive action on the pricing on wireless. Are those the only two areas in the business where you’re seeing direct competition either in pricing or aggressive marketing of competing services?

Ronald A. Duncan

There’s definitely aggressive marketing in the enterprise space for the Alaska based enterprise customers. We haven’t seen any loss of those customers yet but the pricing there is tightening and I would expect it to continue to tighten.

To date that seems to have been expressed mostly as substantial increases in bandwidth or capacity rather than revenue from customer reductions. So we’re seeing what I would see as material compression in the price per unit but most of that has been offset by increased bandwidth rather than taking their price reductions as a current dollar savings. Most of our enterprise customers have upped the bandwidth and kept the nominal dollar price cost.

So a lot of pressure on that certainly in the Anchorage area which is where the predominance of truly competitive facilities are. Once you get outside Anchorage our competitors don’t have as robust a network as we do and I think our statewide platform is helping us a lot in that regard.

I would characterize pricing throughout the market as aggressive other than on the wired residential telephony front. There seems to be little interest or little action from our competitors in the wired residential space.

Operator

Our next question comes from Kevin Seagraves - Fort Washington.

Kevin Seagraves - Fort Washington

Is the cost for the wireless migration in the fourth quarter guidance and in the 2009 budget number or is that separate?

Ronald A. Duncan

Yes, it’s included in the existing numbers that you’re looking at.

Kevin Seagraves - Fort Washington

On the cap ex front, I think you guys said a little over $240 million. Is some of that being pulled in from ’09 and are you guys able to give any kind of range for ’09 cap ex at this point?

John M. Lowber

We’ve got a hard stop on our credit facility at $125 million in cap ex for next year and I don’t think we’d have any trouble finding things to fill that out.

Kevin Seagraves - Fort Washington

On the commercial side, the margins there have been getting better. Is there acquisition help in there or is that just simply better top line?

Ronald A. Duncan

It’s a combination of things; number one being we had a tough 12 month period with comparables because we lost a large enterprise contract to a competitor probably six quarters ago and as that fades out, the comparables are getting better. But mostly what you’re seeing there now is steady improved performance in the business as we grow both share and revenue from existing customers.

It’s hard to grow that revenue in the pricing environment but the pricing environment is challenged primarily in the Anchorage market. Our statewide footprint, our expansion into the other areas of the state putting more of the lines and that reduces our operating expenses. So it’s fundamental performance but as you can see even from the revenue line you’ve got good growth in the commercial segment. Some of that benefits from the strong economy up here and what I would characterize probably as a rapidly expanding energy base segment up here.

There are a number of new office buildings being filled with professionals who are focused on resource development and the pipeline, and we’re capturing a lot of that business. That’s an important sector for us and one that’s helping to drive commercial growth. Also good commercial growth in the Prudhoe Bay environment where we have the only fiber facility to Prudhoe Bay and the energy sector’s driving a lot of increased utilization of bandwidth to the north.

Kevin Seagraves - Fort Washington

Have all the acquisitions or the outlays for the acquisitions taken place or is there more to come in the fourth quarter and into next year?

John M. Lowber

No. That’s all behind us at this point.

Kevin Seagraves - Fort Washington

What about IRU sales? Have you gotten the funding on all those at this point?

John M. Lowber

No. We’re expecting another $10 million to $15 million over the next 90 days or thereabout.

Kevin Seagraves - Fort Washington

In terms of Holmes Pass, I know you guys continue to build that out on the consumer side. It’s going to next year, just kind of expect the same kind of growth there that you’ve been adding quarter-to-quarter or is there anything that’ll make that accelerate faster?

Ronald A. Duncan

I think steady progress. There’s really kind of a constant build plan. The great majority of that homes that exist today that our plant doesn’t pass and there’s a portion of the capital budget that’s simply dedicated to building out the Triple Play residential facility past the new areas. It doesn’t show on Holmes Pass but it shows in lines on network. There’s also a portion of the capital budget that’s dedicated to building fiber facilities past the commercial network locations. So just kind of steady progress next year and beyond as we continue to build out on the fringes and the places where we’re not providing service on our own facilities today.

Operator

I’m showing no other parties.

John M. Lowber

That will conclude this quarter’s conference call. We certainly appreciate your participation and will look forward to the next one. Thank you very much.

Operator

At this time all parties may disconnect from today’s conference. We thank you for joining and have a great day.

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