Leonard Steinberg – General Counsel
Anand Vadapalli – President and CEO
Wayne Graham – CFO
Frank Louthan – Raymond James
Julia Senior – Bank of America Merrill Lynch
Barry Sine – Drexel Hamilton
Alaska Communications Systems Group Inc. (ALSK) Q2 2013 Earnings Call August 1, 2013 5:00 PM ET
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Alaska Communications Systems Second Quarter 2013 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).
I would now like to turn the conference over to Leonard Steinberg, General Counsel. Please go ahead, Sir.
Good afternoon, and welcome to the Alaska Communications second quarter 2013 conference call. I am Leonard Steinberg, General Counsel and with me today are Anand Vadapalli, President and Chief Executive Officer; and Wayne, Chief Financial Officer.
During this call, we’ll be using a slide deck that we would encourage everyone to have available. For those listening to this call via the webcast the presentation will be presented on your screen and we will move the pages as we talk. For others you can go to our investor site at www.alsk.com click on the events section go to the second quarter 2013 earnings call event and click on the PDF written presentation.
As we go through our prepared remarks we will indicate webpage we are on so that you can track the presentation material with our prepared remarks. In addition please note that Anand will refer to a CEO letter to investors that has also been posted on our investor website.
Now as we get started please review page 2 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 the actual results could differ materially from expectations as a result of a variety of factors, many of which are outside the Company’s control.
Additionally any non-GAAP measurements referred to during this call have been reconciled to their nearest GAAP measure. You can find these reconciliations in today’s press release. Following our remarks, we will open up the lineup for questions.
With that I would like to turn the call over to Anand. Anand?
Thank you, Leonard. And welcome to everyone joining us on the call today. Today we’ll share with you another quarter of solid results. Now that the Alaska wireless network transaction has closed, we will also provide a longer term view of our business. Please turn to page 4, where I’ll begin by providing some highlights for the quarter.
Our results for the quarter were stellar. I’m particularly pleased that our broadband revenue has experienced nearly 21% year-over-year growth not only that we experienced top-line performance we also have now reduced our debt by $95 million for this year. While $65 million in debt reductions came from closing AWN, the remaining $30 million in debt reduction was accomplished through cash from operations. We are almost to our goal of paying down a $100 million for the year and fully expect to meet this stated objective.
Looking ahead at the rest of 2013, we see us maintaining good momentum in our business performance. We recently commenced work on expanding our broadband capabilities by upgrading parts of our access network with fiber-to-the-node program.
In 2013, this investment is focused on business customers and anchorage, combined with an expansion of our product capabilities we see this as an important element of future growth. So far this year we are pleased with the take rate of our voice-over-internet product launched for business customers earlier this year.
We have a new Ethernet product updates along with new capabilities on our customer portal for our business customers. Our sales funnel is strong, our sales teams are performing well and we see our momentum continuing in broadband growth.
We are supporting our investment in growth with a program to eliminate waste and simplify our business. We had adopting LEAN as a framework to drive service improvements to our customers and grow EBITDA while we grow the top-line.
Turning to page 5, we also achieved a milestone accomplishment by closing the AWN transaction. As a reminder AWN is a wireless infrastructure company that owns and operates the most extensive and advanced wireless network in the State of Alaska. AWN began operations on July 23, 2013 and was formed by combining the wireless networks of Alaska Communications and GCI.
We entered into this transaction to the create economies of scale in a capital intensive business, create predictability of cash flows from our wireless operations and create a strong network in Alaska to better compete against national players.
While AWN operates the network, Alaska Communications and GCI operate independently as the retail entities selling wireless services in the market. On this note Verizon turned on its LTE network in May this year and we believe they are operating about 100 cell sites in urban markets in our state.
At this time, we understand that Verizon’s network is 4G data only and Verizon is not yet in the retail market. We expect that they will begin to change over the next few months, as Verizon introduces their sales efforts to supplement their network turn up.
How does AWN creates value for us? Out of the gate from the $100 million we received upon close we paid down our debt by $65 million creating immediate value to our shareholders. Second, on an ongoing basis AWN generates revenues in three ways; first, AWN receives wholesale revenues from its retail parents, Alaska Communications and GCI. These wholesale revenues are expected to be about 70% of the parent company’s wireless retail revenues and a pass through of 100% of high cost support revenues or CETC.
Second AWN will generate roaming revenues on its network. Third, AWN will sell wireless backhaul to other carriers. AWN’s objective is to maximize its fleet cash flow distributions to its two owners. These distributions from AWN create value for our shareholders by providing us an important source of future earnings as we’ll include them in our adjusted EBITDA.
In the first four years we are eligible to receive $190 million in total preferred distributions and distributions proportionate to our one-third share thereafter. The AWN preferred distribution structure mitigates risk to our cash flows from both Verizon’s entry into the Alaska market and changes to the CETC program.
AWN is a milestone in our long-term plan in which we create value to growth and deleveraging.
With this update on our business activities, let me turn your attention to our long-term business plan. Moving to page 7, we have three levers to create value, first we’ll deliver the retail broadband revenue growth, second we will improve our EBITDA over time and third, we will deleverage and improve free cash flows.
In short growing top and bottom-line and deleveraging allows us to transfer value from the debt to the equity side of the ledger. So what gives us this confidence, let’s turn to page 8. We operate in a market with the strong economy that is a foundation for our growth. Alaska has a strong economic profile with state and local governments that are fiscally healthy.
As you can see the state has many attributes that will result in our customers doing well which will result in continuous demand for our services. Now turning to page 9, we operate in a billion dollar and growing telecom market. We’ve been saying that we only have about a 20% share in the market, if we hold our own in the market we grow; if we take share our prospects are even brighter.
Now turning to page 10. Our network is the foundation for our business products. We are one of the leading Ethernet carriers in the country having recently received the carrier Ethernet 2.0 certification. Importantly we’ve built in the type of enterprise class reliability demanded by our customers. We had now extending this reliability with our investment in fiber-to-the-node program in our access network. Our success in monetizing this investment will drive further build decisions over the upcoming years.
Turning to page 11, layer on top of this network is a comprehensive set of solutions to our business customers. These solutions range from connectivity to Managed and IT service capabilities, every day we see examples of how this rich product portfolio is allowing us to create point of entry with new customers and opportunities to do more with existing customers.
Turning to page 12, we extend these capabilities to serve our consumer customers. We know we do compete in video, but we can target specific consumer sub-segments and make this market segment perform for us.
Moving on to page 13, as I noted earlier in addition to our wireline network we now have access to the AWN network. No other wireless carrier has nor do we anticipate them ever having a network with over 300 cell sites in virtually every rural and urban location in Alaska combined with an extensive Wi-Fi network to support the broadband needs of our customers.
AWN provides the strong basis for long-term competitiveness against national players. Now we do recognize that moving to AWN means we must migrate our customers operating on our legacy CDMA network to the LTE GSM network of AWN. This will take time and may create some variability in our connections as we managed through this transition period.
Moving to page 14, I’ll conclude this portion of my remarks by briefly reiterating the importance of two key principles of our operating model. One, we are incorporating the LEAN framework into our company, we started this year focusing on key areas such as supply chain management, encouraged by our success we are rolling out LEAN to every level of the company.
As many of you know LEAN is an exercise that involves the frontline employees to drive process improvements. Its focus is on eliminating waste and taking small incremental steps that generate improvements to simplify how we do business. This will benefit our customers as it makes it easier to do business with us while helping us manage expenses that why we believe we can generate EBITDA growth.
In addition to LEAN we’ve been using the net promoter score approach to measuring customer satisfaction. We believe satisfied customers who promote us are the most prudent and methodical way to gain market share. It is not by our advertising or out discounting your competitor.
With LEAN we have a systematic way to eliminate waste, with NPS we track and improve our service experience to grow share. They are two sides of one coin and both rely heavily on the highly skilled employees of Alaska Communications, empowering our people and providing them the tools they need is an essential part of how we do business. We are at heart in service business; our employees are an important reason why our customers do business with us. Our operating model emphasizes having satisfied and successful employees, when our employees create value for customers; we create value for our investors.
With this, let me hand the call over to Wayne to report our financial results for the quarter and provide guidance. Wayne?
Thank you, Anand. Let’s start with page 16, as Anand said, the key to driving value is by delivering top-line growth. As you can see we did that in virtually every revenue category. Business revenue was up 8.9%, wholesale and other was up 8.4% and consumer was up 7.1%, roaming was up 45.9%. The only weak spots were access and CETC was declined 3% consistent with our expectations and wireless retail which performed well sequentially but year-over-year performance was affected due to the lifeline certification process. Most importantly as Anand discussed earlier broadband revenue growth are most metric was stellar, growing 20.8% in a quarter.
Turning to page 17, let’s look at our other key financial results. Adjusted EBITDA was up 32.9% or $8.4 million and was aided by a $7.7 million of higher revenue, $3.8 million of lower subsidies on wireless equipment partially offset by $0.9 million higher roaming expenses and $1.5 million higher labor expenses. Cash interest expense increased $1.2 million, we benefited from $0.5 million lower interest expense, because we have lower net debt balances.
However, we had $1 million in higher borrowing costs associated with fixed rate interest swaps which became effective on June 30, 2012. Also our debt amendment last fall increased our borrowing cost from LIBOR plus 400 to LIBOR plus 450 which added $0.5 million of higher interest expenses.
Later we’ll talk about how interest expense will be lower from these levels going forward. Free cash flow was up over $12 million and benefited from timing difference on our capital spend program in 2013 versus the prior year. Our net debt balances stand at $510 million at the end of the quarter and have come down 6.8% year-over-year.
Coming to page to slide 18, let’s touch on what’s driving our performance. While we continue to see erosion in access lines, our broadband connections have grown sequentially across every customer segment and our broadband ARPU year-over-year has performed well, going anywhere from 16.3% to 31%.
Now turning to page 19, we’d like to talk about the rest of the year. This is a transition year for us, with AWN now closed our go forward financial profile will look different. We’d first like to walk you through our revenue categories to help understand our profile from the first half of the year before we closed AWN to the second half of the year which other than 22 days in July will reflect our post AWN results.
Starting with business and wholesale revenue, for the first half of the year we generated about $55 million in revenue, now we’re targeting about $50 million of revenue in the second half of the year. Remember that backhaul revenue moves to AWN at close which will result in lower second half revenue. We are out of the backhaul business going forward, but we agreed to move all existing backlog contracts at closing to AWN.
Our next revenue categories consumer and access are unaffected. We expect performance in the second half of the year in consumer to track how we performed in the first half and we expect our access revenues to be slightly higher. We’ll continue to generate CETC revenue and we expect it to decline 10% in the second half of the year. In the post AWN world CETC should be thought of as a pass through. We’ll receive CETC monies and we will remit those to AWN.
We’ll continue to report the revenue but have a new category of expense equal to the revenues we’d recognize. This revenue stream should not be viewed as fundamental to our go forward performance, because it is a non-EBITDA affecting pass through. Wireless roaming moves to AWN both wireless service and other revenue other than a few exceptions stays with ACS and continues to be an important revenue category for us. We are targeting consistent performance for the first half of the year. With this new roadmap our guidance for revenue for the full year 2013 is between $340 million and $350 million.
Now let’s move to page 20. We have many moving parts regarding our go forward cost structure. We no longer will incur roaming COGS with the cost to operate our wireless network. AWN will also provide significant support for our wireless equipment cost so subsidies will be dramatically reduced. While we generate these savings we’ll also have two new expenses which is wholesale charges to AWN, which should be about 70% of our wireless retail revenue and the CETC pass through. Importantly the AWN annual distribution of $50 million will be paid pro rata monthly and will be counted in our adjusted EBITDA going forward.
We continue to work through this cost structure and rather than provide line-by-line analysis we’re focused on adjusted EBITDA, which we believe should be between $105 million and $110 million for the year. Our guidance for capital spending will be about $50 million with about $10 million to $15 million dedicated to our fiber-to-the-node program. We think this is a somewhat elevated level from what you should expect from us going forward.
Cash interest expense which was $18.3 million for the first half will be lower in the second half, because of continued debt reductions and the unwinding of 50% of our interest rate swaps and is targeted to be about $35 million for the full year 2013. Free cash flow is expected to be between $20 million and $25 million and we’re targeting net debt to be between $420 million and $430 million by the end of the year. That’s guidance for 2013.
Turning to page 21, we’d like to provide a directional view beyond this transition year 2013. We call it our first full year. As I said earlier, we have many moving parts in our business and once we close out this year we’ll provide guidance for what would then be 2014, in the interim because of the transformative nature that AWN has to our financial profile we’d like to provide a view point of our go forward results.
As you can see, we are optimistic about our prospects and believe we can lead our industry in broadband revenue growth. From an adjusted EBITDA perspective we’re targeting $90 million. Our capital program is targeted to be around $45 million and contemplates continue to fiber-to-the-node investments. We need to invest a growth, but will be prudent and make sure our continue capital program generates returns for our shareholders. Interest expense will come down significantly from the $35 million level in 2013 and we anticipate it being approximately $31 million. We’ll continue to use our free cash flow to reduce debt. Our goal is to achieve 3.5 times net debt leverage ratio.
Under this directional view, we’ll have about $410 million of net debt and be at approximately 4.5 times leverage. We’ll move this leverage ratio down as we pay-down debt and grow adjusted EBITDA. As an example of how quickly we can do this if we improve our EBITDA performance by $2 million or about 2% our leverage ratio moves down to 4.4 times. We’re committed to this type of dynamic.
We covered a lot of ground discussing our transition year 2013 and our directional view beyond 2013. Before handing the call back to Anand, we’d like to provide further insights based on questions we’ve received lately. First let’s turn to page 22. From a financial point of view we’ve moved from a company with $126 million of adjusted EBITDA to a company with $90 million. Why is that? This is something we contemplated back when we were negotiating the AWN transaction over 18 months ago, this slide provides a reconciliation. In the past we generated wireless adjusted EBITDA and used this cash to fund wireless CapEx resulting in free cash flow of about $50 million.
Under the AWN World we have no wireless CapEx and our distribution is tied to this historical free cash flow. However, because we are accounting the distribution as adjusted EBITDA going forward our adjusted EBITDA number will be lower. Just to emphasize our free cash flow is not affected it’s only your basis for reporting adjusted EBITDA. Also since we signed the deal, we contemplated moving our backlog contracts to AWN, which at the time generated about $3 million of adjusted EBITDA.
Finally and probably most importantly is our SG&A expense, which has grown about $15 million since we announced our long-term plan in 2011. This spending was necessary to fund many long-term growth initiatives such as our sales teams, our expanded product and marketing teams, our investment and process improvements and LEAN, funding and training and NPS tracking to drive customer experience improvements and adding additional depth to our leadership team. We don’t intend on ramping from this level of higher spending, but we believe it is necessary to fuel our long-term growth.
Second, we aren’t in a position to provide standalone guidance for AWN. Our adjusted EBITDA from wireless for the next four years will be our preferred distribution not our proportional earnings. This was intentional that AWN management team has focused on consolidating the wireless networks in generating significant operating synergies. The underlying financial performance of AWN will be reported as equity and earnings in our GAAP financial and investors will have visibility into its performance. But for the next four years we’ll focus on our preferred distribution structure as a determinant of adjusted EBITDA.
Third, we want to make you aware that as AWN owners both GCI and ACS have certain penalty threshold should it fall below predefined future connection threshold levels. They are different for either company, for us if we have less than 117,000 connections in the future we are subject to lower distributions after that date. We do not expect this impact to be a significant portion of the $190 million of total distributions as only about $22 million of the total distributions are subject to this performance provision. To calibrate the timing and extent of the threshold we offer an example, if we maintained our current connection counts our preferred distributions are not affected until 2015 and could be $1.7 million lower that year. That’s a year and a half from now and is very manageable.
We look forward to describing our performance in the post AWN World and look forward to working with our investors to walk through any questions they may have. I will now hand the call back to Anand.
Thank you, Wayne. Let me wrap up with slide 24. In addition to this slide deck, I’ve also published a letter our investors posted on our investor website. In this letter I discussed what we believe on three questions our investors should ask us to understand how we deliver value to our shareholders. One, are we growing broadband revenues? Two, are we expanding EBITDA? And three are we growing free cash flow and deleveraging?
We doubled our broadband growth in a year. We’ve deleveraged and will continue to do so. We’ve established a record of doing what you set out to do. You are investing in a company that is committed to long-term growth and one that has strengthened its balance sheet with bold moves. Combine that with 800 plus employees of Alaska Communications focused on our customers and I know we can deliver on our business plan. Wayne and I will be in New York and Boston in the week of August 12th. If you would like to meet with us please reach out to Wayne so we can schedule time.
Operator, please open the call for questions.
Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Frank Louthan with Raymond James. Please go ahead.
Frank Louthan – Raymond James
Great, thank you. I just wanted to look at – the debt perspective here, where is, why 3.5 times is sort of the goal for leverage, I mean why wouldn’t you should go something below that, I mean your leverage has been such an issue with the industry? And then what do you think is the inflection point where it starts to snowball and you can get start to refinance a better rates and so forth where you think the banks are going to start to really see that his is a real change here?
Hey Frank, this is Anand. Let me start by answering the first part of the question and then I’ll hand it to Wayne for the refinancing part of your question. Again thank you for the question. Look in terms of a target we clearly seen your perspective that you’ve on several occasions have advised companies to target somewhere around the three times leverage and we understand that. Clearly we intended to get to a sustainable level of leverage for the company that’s important for the board and three and half times if you recall was also a leverage number in our credit amendment agreement that we signed with our lenders last year is at that level that the board has an option to consider a dividend payment again.
So it just seemed a reasonable number to begin with. It’s a good number to get to that doesn’t imply that we won’t target anything lower if that’s appropriate at that point in time but considering where we are today that’s the good number to shoot for and we are working hard to get there. So with that I’ll hand it to Wayne.
So I think with our bank group our first goal is to build credibility and if you look at the trading levels of our paper over the last 18 months it’s really rebounded. Our current facilities trading at par it was a time period where it was well below par and our convertible notes valuations have really appreciated in the market place. So we think that’s the sign from the as a banking lending community that we build credibility. The next thing we need to do Frank is build the track record. We came out a lot of years ago or 18 months ago and said we can grow this business and way that it hasn’t been grown.
We are making really, really good progress with that and particularly proud on the acceleration of the growth we have and when we look at across the landscape with other Telecom companies I think we are doing something really unique here. I think in the post AWN we’re all, we need to get a couple of quarters behind us post more continuing consistent performance and then we love to start having a dialogue sometime next year to address some aspects of our balance sheet with our bank now frankly our cost to borrowing is higher than it needs to be and if we could achieve some benefits there it’s only just going to have a powerful repel effect in sort of free cash flow and our ability to even further de-lever.
Frank Louthan – Raymond James
Okay, great. And can you on the local business on the broadband side. Can you give us some color on what percentage your subs can get a north of 12 megs that sort of thing and what’s sort of the baseline target there and what percentage your CapEx is going to be going towards those kind of efforts going forward?
Frank this is Anand I’ll take that question. Thanks again for the question. So if you recall we always talked in the past about the strength of our long-haul Ethernet, MPL let’s call and of course that remains for us is strong point in terms of capabilities. Our investment in the access network has traditionally been opportunistic. We saw some opportunities for revenue we would go after it. The work that we have done with sales over the last year has really shown us a significant opportunity for us to go capitalize in the market place and that really provided the impetus for us to go and make a proactive investment in this Fiber-to-the-Node program in our access network.
We certainly see a very meaningful return on this investment as you can appreciate Frank we are on a little bit of a fishbowl in the small market here. So we are sensitive to comparative information on the speeds and that what will offer certainly when the target goes into market. You’ll see a lot of that becoming public at that point in time and as we there is a couple of quarters of history behind us on this. We’d be happy to share more information on the percentage of network enabled and penetration and other statistics that would allow you to make your own judgment about how this investment is performing for us.
With regard to the second part of your question about how do we see a level of investment in this program, well, for this year as we indicated we are targeting between $10 million and $15 million in a total program of about 50. In his prepared remarks Wayne mentioned that we expect to see this continuing in our future now we set an overall growth CapEx of $45 million long-term. When I think about investments Frank it really depends on how we do with this investment.
If we do well we would be prepared to invest more because that is a signal that there is opportunity and we will absolutely go after that. So again we will be very disciplined and how we investment I’m very keen to see the success behind this investment and monetizing this and that will drive how much of that 45 reallocated to a proactive network that is going forward.
Frank Louthan – Raymond James
Okay, great. Thank you.
Our next question is from the line of David Barden with Bank of America Merrill Lynch. Please go ahead.
Julia Senior – Bank of America Merrill Lynch
Hey guys. This is Julia Senior for Dave. How are you? Congrats on closing AWN and just a couple of things. First on I guess the leverage target and more on the ability to grow EBITDA basically it looks like of the $90 million guidance, $40 million is going to be wireline so it seems like this is kind of the portion that needs to grow to offset the declines in the distribution from AWN. It’s going to be small at first but it’s going to get to be I think a pretty big step down in four years from now. So can you maybe just how you think about what is actually going to drive the growth in that wireline EBITDA that’s going to offset those declines. And then I’ve got a question on the wireless business after that.
Thank you Julia. Let me take this question and then we’ll get to your wireless question thereafter. So let’s take a look at what we’ve done in the last year and half. In 2012 we grew broadband revenues 10% about 11% actually and in 2013 in the first six months we grew that same number by about 21%. We doubled our rate of growth in the last year. To me that’s a very strong indicator of two things. One there is clearly an opportunity in the market place and we see that every day. And two we are absolutely going after that opportunity and using it. So one part of EBITDA growth is absolutely going to come from top line growth. And we feel very confident about that. To me the growing top line is absolutely the right way to grow the bottom line but the second part is what we again mentioned in our prepared remarks is our focus on simplifying our business.
This is not one big project or a onetime flash in the pan kind of work. This is ongoing simplifications small incremental improvements that come from LEAN when our frontline employees look at things that are complicated that makes that lives of our customers more complex and this expands to simplify that, that effect is powerful and when you add six or seven of the small things in a year by the time you look back that’s had a significant effect in terms of both simplifying business of which means we can manage expenses why we are improving customer experience. So two things we will continue to grow revenues broadband revenues and two we will manage our expenses and tends us confidence in our ability to grow EBITDA from this first full year directional view that we’ve given. So hope that answers.
Julia Senior – Bank of America Merrill Lynch
Great. Thank you. And then I guess on the remaining retail wireless business I mean are you actually going to earn a margin on that business after you’ve paid your wholesale fees and paid to operate the stores. Is there actually an EBITDA margin we have there and then your 117,000 connection requirement is actually above where you are now. How can you grow that business when you got the same devices as GCI you’ve got the same network. So how do you differentiate to grow there and is there actually going to be an effect to do that.
So I can answer the margin question and then Anand can talk about growth. So the way we’ve structured guidance is that wireless retail business is breakeven and we don’t intended to be a breakeven business but we don’t intended to be a big contributor to EBITDA either.
And Julia the second part of your question which is how do we plan to grow the connection base from where we are today. Several things but most importantly the coverage and the quality of the AWN network in the state of Alaska. We believe that to be an important differentiator for us going forward. I can tell you that no national player will ever go into so many of the ruler communities that Alaska Wireless Network serves. Alaska is a huge state the dynamics and the needs of our people in our state are different and we clearly have a value proposition that we can use to compete against national (holder) on and growth. We absolutely have a need to do better in wireless than we have done over the last six months, I can tell you that’s the huge focus for us on the management team and with the AWN transaction now behind us and the entire focus on wireless operations that’s something that we are focused on, on a going forward basis.
Julia Senior – Bank of America Merrill Lynch
Thank you. Is there a breakdown of, how many of those connections out prepaid versus postpaid versus lifeline or is it just kind of one total number that matters?
It’s one total and its important, its connections not subscribers, so as we rollout things like share data plans and we’ve got multiple connections across one subscriber will get benefit for that dynamic.
Julia Senior – Bank of America Merrill Lynch
Okay, great, thank you.
Next question is from the line of Barry Sine with Drexel Hamilton. Please go ahead.
Barry Sine – Drexel Hamilton
Hello, good afternoon gentlemen. Couple of questions if you don’t mind, first this you may have covered this, I may have missed this, but in terms of the debt pay-down of $65 million you receiving a $100 million in proceeds what’s the delta there is that tax? And then on the tax treatment for the future distributions from AWN, I think GCI has disclosed that your distributions are about $80 million higher than what would be implied by your one-third stake, so with some of that treated as an asset there and some as, evident income, how is that treated from a tax standpoint?
Okay, so on the $100 million, $65 million is going to be used to pay-down debt after fees and expenses and the cost to unwind some of our notional swaps, we believe we’ll have about $20 million to $25 million of liquidity sitting on our balance sheet. We’ll make some decisions whether we’re going to dedicate that to additional pay-downs or not, but for the time being we’re going to park it on our balance sheet.
In terms of the dividend structure, the transaction is structured so the – the taxable amount from AWN is our proportional earning structure. We have attained certain tax opinions to confirm from that a swing, we feel very comfortable with that and as a company we have $200 million of NOLs pre-transaction, we’ve got nothing in the next four to five years that suggest we’re going to be on any kind of a tax paying mode, even if that structure somehow has some risk to it.
In terms of the percentage of the distribution, right now AWN is really focused on operating the network Barry, some of the things they’ve been – the management team hasn’t had visibility in lot of cases to our underlying operating structure because part of the regulatory approval process, now they couldn’t see what we’re doing in terms of roaming and the cost to operate some of our business. I think we’re – we’ve jointly dealt a long-term model for AWN well over a year to year and a half though. I think GCI is very good at growing companies and making them successful beyond everybody’s initial expectations and we intent the benefit from that long-term.
Barry Sine – Drexel Hamilton
Okay. My next question in terms of the results you reported for the quarter, obviously very, very strong revenue growth in multiple segments, but if I look at the contribution the breakdown business consumer wireless, it looks like in each of those the connections numbers things like broadband aren’t growing that significantly, but the ARPU is growing very significantly driving most of the growth. So could you talk about, pricing trends in each of those segments, what’s driving that and then the sustainability continue to get higher and higher ARPU going forward to drive revenue growth?
Barry, hey this is Anand, thanks for the question. So we see opportunity, significant opportunity in the marketplace both with existing customers and new customers, in fact as I mentioned in the investor letter that we published on our website. We care, equally if not more about keeping the customers we have, because our satisfied customers are the best advertising that we can get in the market. So clearly selling more into our existing base is an important thing for us and we do that well. We are certainly seeing a good traction with new relationships as well. And I think our results on a go forward basis in terms of a mix between connections and ARPU growth, we’ll continue to show how we are doing on both fronts.
So in terms of future growth, I think as I mentioned earlier, we see a strong demand for our product, I think if you look at any of the statistics, industry statistics on broadband consumption, it ranges anywhere between 30% to 50% CAGR, I can tell you that consumption is not different in the state of Alaska. So business customers consumer customers are consuming more of that – more of bandwidth every single day and we fully expect to participate in that as I mentioned in response to an earlier question, we think our investment in the access network will significantly increase our capabilities for business customers and allow us to go after this opportunity even more effectively than we are doing today.
Barry Sine – Drexel Hamilton
Okay and my last question, I want to refer to slide 22 of slide deck which is a very good simplification and understanding of EBITDA contribution, a little bit longer term so post AWN you have $50 million in AWN distribution obviously in the third and fourth years that drops to 45, but then subsequent to that that drops to just your one-third stake and that’s about $20 million lower, so instead of $90 million in total EBITDA, you kind of start out longer term with maybe a 70 or even a less EBITDA absent wireline growth. So can you talk about, kind of the long-term trends of wireline and, how you adjust for that once you get beyond that four year period and to guess, how your lenders will think about that?
So, I can talk a little bit about the wireless long-term trend with AWN and then I think on earlier answer to question about how do we grow the wireline business, how we grow actually about that. So the longer term trend with AWN is we’re talking about five years from now. That’s a long time and there is a lot that’s going to play out in those marketplace, a year ago we all thought that Verizon would be in the market with retail stores, they are not, I’m not saying that changes our outlook for Verizon, but AWN has had a very, very strong position in this market and yes we think about where free cash flow might be, but I think we only to get a little bit of time and worry about five years from now, maybe in a couple of years.
This clearly will be an area focused for their lenders, Barry and I think we talked about earlier is now do we have grown our creditability, we need to show a track record and our lenders are going to understand, that’s the underlying performance of AWN. So we need to get some time under our belt to start to understand, it’s always the free cash flow the AWN performing well into our distributions. It’s going to be part of the dialog we have with our lenders. I think for now we just want to focus on the preferred distributions we get and let the really good AWN management team accomplish things that, I think are being, if you are well above what we all expect five years from now.
Barry Sine – Drexel Hamilton
Okay, great, thank you very much Wayne.
At this time I would like to turn the call back over to management for closing remarks.
Ladies and gentlemen, thank you for your participation. Clearly this is a team where we’ve doubled our rate of broadband growth in a year, while going down close to a $100 million in debt during the same time. We had a strong and growing company and I look forward to reporting our process at our next call. Thank you.
And ladies and gentlemen, that does conclude our conference for today. We’d like to thank you for your participation and you may now disconnect.
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