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Alaska Communications Systems Group Inc. (NASDAQ:ALSK)

Q4 2013 Results Earnings Conference Call

March 6, 2014 5:00 PM ET

Executives

Leonard Steinberg - General Counsel

Anand Vadapalli - President and CEO

Wayne Graham - Chief Financial Officer

Laurie Butcher - Vice President, Finance

Analysts

Barry Sine - Drexel Hamilton

Frank Louthan - Raymond James

David Barden - Bank of America Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alaska Communications Systems Fourth Quarter and Full Year 2013 Earnings Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, March 6, 2014. I would now like to turn the conference over to Leonard Steinberg. Please go ahead.

Leonard Steinberg

Good afternoon. And welcome to the Alaska Communications fourth quarter 2013 conference call. I am Leonard Steinberg, General Counsel and with me today are Anand Vadapalli, President and Chief Executive Officer; Wayne Graham, Chief Financial Officer; and Laurie Butcher, Vice President of Finance.

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 and will move to pages as we talk.

For others you can go to our Investor website www.alsk.com, click on the Events section, go to the Fourth Quarter 2013 Earnings Call Event and click on the PDF version of the presentation.

As we go through our prepared remarks, we will indicate what page we are on so you can track the presentation material. 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 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 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 the line up for questions.

With that, I’d like to turn the call over to Anand. Anand?

Anand Vadapalli

Thank you, Leonard. Good afternoon and thank you for joining us today. I'm pleased to report to you strong performance during an important year for the company. On page five of the deck, we begin with a reminder of how we create value. First, are we growing broadband revenues, second, are we growing EBITDA, and third, are we reducing debt.

We believe that as long as we are consistently answering all three questions affirmatively, we are creating strong shareholder value. For two years in a row now, we clearly answered two of the three questions. We are growing revenues and we are reducing debt. With the AWN transaction closing in 2013, 2014 now becomes the baseline year from which to measure long-term EBITDA growth.

Turning to page six, we delivered on the overall financial results for the year with several important accomplishments in 2013. One, closing the AWN transaction was an important milestone. The transaction contributed $65 million to the $106 million in debt reductions for the year. Additionally, the transaction provides us a predictable stream of cash flows for our wireless business.

Two, we are very pleased with our continued broadband growth, driven by various investments we have made in sales, service, product and network. Our customers want our products and our results show it.

Third, our focus has been and remained the high margin business segment. We have grown well in this area and see continued opportunity for solid performance through 2014 and beyond.

Fourth, we recently announced the acquisition of our remaining ownership interest in TekMate. TekMate is a leading IT services firm in Alaska and we look to extend TekMate’s capabilities to increase our portfolio of managed services for our business customers.

Fifth, we launched an ongoing program to invest in our Access Network. This program will meet the growing bandwidth needs of our customers. It will also deliver improved operating efficiencies from modern network architecture.

Last but not least, we started taking the steps necessary to align our overall cost structures to fit the post-AWN operating model for our business. A few examples of actions already taken include reducing our overall workforce by about 5% in December and certain choices we made about our go-forward spend on consumer marketing and promotional activities.

In 2014, we expect to further realign wireless cost structures to fit our expectations and plans for subscriber metric, while we manage our cost structures related to the consumer significant products. These hard but necessary choices will allow continued investment in our focus area of business broadband.

Turning to page seven, I’d like to talk more about our performance in broadband. We achieved double-digit growth in broadband revenues through the year, with 19% year-over-year growth in business and 15% year-over-year growth in consumer. Sequential growth is also strong, a great indicator as we head into 2014. These results validate the market opportunity and we are taking market share.

Turning to page eight, serving our business customers is our highest priority. We have added experience sales and managed services leadership in this area to further accelerate our capabilities and growth.

We expect these investments will drive an improving growth profile from the levels we are currently experiencing. Later in the call, Wayne will talk about the financial contribution TekMate will make to our results.

We are excited to have the management team and employees of TekMate as part of Alaska Communications and extending their products and capabilities into our managed service offering.

Turning to page nine, last year we invested approximately $10 million in our Access Network program, including certain monies from the CAF I program. This investment has enabled speeds between 25 megabits to Gigabit Ethernet services, covering approximately 5,000 business locations and 7,500 consumer locations, including fiber directly into about 100 buildings.

We expect this investment has enabled higher speeds for market opportunity, north of $20 million. Early sales results indicate we are gaining new customer relationships and gaining share, in addition to revenues from upgrades with existing customers. I will note that for 2014 we’ve allocated $10 million in our CapEx program towards customer-driven initiatives and Access network expansion.

Turning to Page 10 for a brief discussion on wireless and the consumer segment overall. Authority for the consumer segment is to manage for financial performance while not losing focus on customer service. We see continued solid top line performance driven primarily by unlimited use Home Internet products.

At the same time, as I noted previously, we are controlling our investment in stimulating demand in order to manage the level of spending and improved profitability. In this context, it is also appropriate to highlight the Connect America Fund Phase II or CAF II program.

The outcome to CAF II will be an important element in our consumer broadband strategy. This long-awaited program will determine the availability of broadband to Alaskans.

We have worked extensively with the FCC to provide a realistic mechanism for funding the needs of broadband in Alaska. We are now awaiting the outcomes of the CAF II program so we can assess how do this new program will be structured and how it affects our business plans.

Moving onto wireless. Our retail performance has been a disappointment in 2013. On the one hand, AWN distributions mitigate the financial impacts of weakness in wireless. On the other hand, as we've noted in previous calls, this has also been a year of transition for our customers through a new network.

This network is yet to be built to the same standards of performance we maintained in our legacy CDMA network. Though we will note that very strong program of capital investment by AWN to make its network the best network in the state of Alaska. We expect these network improvements will help mitigate some of the performance issues.

Additionally we’ve also given considerable talk to how we think differently about our wireless retail operations. First our retail operations need to fit within the margins we get from AWN. Second, we need to do so in a manner that allows us to target and perform well in selected segments in the market in order to stabilize our subscriber metrics. We look forward to sharing our progress at upcoming calls.

Turning to Page 11. Our assessment of 2013 performance sets our priorities for 2014. First, we’ve done well in business and we intend to double down on business broadband with investments in our network and in managed services.

Second, we need to manage our overall cost structures. And this begins by managing the consumer segment for financial performance but doing so in a way that does not compromise our commitment to customer service.

Third, we’ll continue to leverage the various investments we've made in the last couple of years in the network, in our systems and in our processes in order to drive profitable top line performance.

With that, let me hand over the call to Wayne. Wayne?

Wayne Graham

Thanks Anand. We’ve moved to Page 13 where we’ll talk about fourth quarter performance. Now that we’re reporting a full quarter without AWN, we’ll be talking about top line without what we call AWN-related revenues.

AWN-related revenues are items such as roaming and backhaul which we transferred to AWN at closing of that transaction and it affects year-over-year comparisons. We also call to your attention two significant events from fourth quarter last year, that affect comparability.

The first was a large equipment sale valued at $1.5 million. The second was a transaction at wholesale revenue with another carrier, also valued at $1.5 million. Curbing these two events out, it is important to understand comparability of the year-over-year results. As you can see comparable revenues were slightly higher year-over-year.

Turning to Page 14, you can see that our areas of focus are doing well. Business and wholesale was up $1.4 million, or 5.5% year-over-year although not reported on this page business and wholesale was up sequentially by over $0.5 million or 2% which shows continued strength.

Consumer revenue grew $0.2 million or 2.8% year-over-year. Other revenue was down slightly reflected continued expected erosion in Access revenues. Our three key categories, business and wholesale, consumer and other represent what we call total service and other revenue and reflects the ongoing revenue streams from our core customers.

As you can see, this revenue category was up $1 million year-over-year. Our challenge in the quarter was wireless which offset the performance in our core business. From a financial point of view, performance in total service and other revenue is important because it also reflects products that we sell on our network which are higher margin.

Growth in these revenue streams directly impact adjusted EBITDA and free cash flow. Weakness in wireless revenue doesn't have the same direct impact on adjusted EBITDA and free cash flow because of the mitigating impact of the AWN preferred distribution.

Turning to Page 15, we highlight our metrics for business customers, which as expected are strong. Connections year-over-year in ARPU are increasing. This is the same trend on consumer where we’re seeing solid performance with broadband connections.

Now turning to Page 16, we want to spend the majority of our time talking about 2014 guidance as 2014 is what we have been calling our first full year following the AWN transaction. We view it as our new baseline results because the fourth quarter was transitional. It was impacted by several factors as follows.

First, free cash flow in the fourth quarter was impacted by large CapEx spending amounts. This is a highly unusual trend for us, as our summer build season extended late into the year because of favorable weather. In the last few months, we are used to finish our core construction projects. We don't expect to see this amount of spending in any one quarter in 2014.

Second, EBITDA in the fourth quarter did not reflect the benefit of the new operating model for wireless that Anand spoke to earlier, and also had elevated levels of spending including promotional activity in our consumer segment, which will be lower going forward. But we do not report wireless margins separately.

Our AWN map model translates into margins of about 30% of retail wireless revenue. This margin is intended to recover the cost of our retail stores at our customer carrying support functions. We knew that we had to align our cost structure to reflect this operating model in the ongoing decline in a wireless subscriber base. We began to implement this plan in December. So the adjusted EBIT benefits we generated and intend to continue to generate are not reflected in the quarter.

Finally, the backlog issues we reported in Q3 did not begin to be clear until the latter part of Q4. Although, sequentially business in wholesale revenue was strong in Q4, it did not reflect the full benefit of the lower backlog. With this as a backdrop, we present guidance for 2014, that is consistent, or in some cases better than what we provided as our outlook back in July last year when we closed AWN.

Revenue is expected to be approximately $310 million, adjusted EBITDA $90 million, capital spending $40 million and free cash flow $20 million. This management team has consistently achieved its guidance targets and although we acknowledge the challenge of evaluating a transitional quarters such as this, we are committed to delivering on this outlook.

On the next couple of pages, we present bridges to take Q4 annualized results and mount them to our guidance. First, on Page 17, as revenue, we expect the acquisition of TekMate to result in $5 million to $7 million of revenue in 2014. Growth in core service revenue categories of business, wholesale and consumer are also expected to generate $5 million to $7 million of additional growth and wireless will continue to see declines impacted by the subscriber losses we incurred in 2013.

And although, we are managing this business to maintain our wireless customer base, we expect Verizon will enter the retail market in 2014, which will have a further impact on our topline in this area. We view 2014 as a year when strength in our core business will offset further erosion in wireless.

On Page 18 is a similar reconciliation to adjusted EBITDA. You can see that our margin on topline growth is attractive because we are focused on that growth. The other categories reflect the realignment that we’ve talked about that we struggled in Q4 and will continue through 2014. For competitive reasons, we are not elaborating on these changes other than to emphasize that we have a track record of delivering on our guidance.

A couple of final thoughts before handing the call back to Anand, cash balances are strong at $44 million. Net debt at December 31st stood at $413 million, which is well ahead of our delevering plans. And in January 2014, we made our entire required payments on our term loan facility for the year. So our trajectory for continued delevering continues. Anand?

Anand Vadapalli

Thank you, Wayne. Our market opportunity is strong, so we are performing to our plan. We are confident about our future. In closing, I would draw your attention again to the three questions we want you to ask of us.

First, are we growing broadband revenues? The answer is yes. Second, are we growing EBITDA? 2014 is our baseline year from which to measure long-term EBITDA growth. Third, are we paying down debt? The answer is again, yes. We’ve demonstrated that we are prepared to make bold decisions.

We've shown that we can be creative and opportunistic. We’ve demonstrated we make our numbers. We are disciplined and yet aggressive. And for those that follow the Alaskan telecom providers, you will note that we are winning and taking share in our target broadband market. We have a team of great people at Alaska Communications, and we fully intend to deliver strong results for our customers and our investors. Thanks for joining us today.

With that, let me open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) The first question is from the line of Barry Sine with Drexel Hamilton. Please go ahead.

Barry Sine - Drexel Hamilton

Good evening, gentlemen. Couple of questions if you don’t mind, the first I’m not sure I’m getting the full picture in terms of what is going on with wireless. Anand, you talked about adjusting the business so that you could fit within the margins you get out of AWN but also wanting to stabilize the subscriber base and so obviously that could mean adding enough subscribers to offset churn rate and it sounds like you already took some actions in December. And I'm hearing about a workforce change, so are you closing stores or you reducing footprint? What is going on in the marketplace of wireless?

Anand Vadapalli

Barry, thank you for the question. So, let me just start by saying that clearly we are not happy with the performance last year. And I think it’s also good to remind ourselves that with the anticipated retail entry of Verizon later this year, we certainly expect the competitive environment to get tougher. That said let me highlight a few things.

First, in terms of the competitive landscape, to some degree we see the national competitive dynamic place that falls in Alaska, as the national providers of all sorts of products in response to national competition. And clearly those parts have rolled out in Alaska as well as they are in the rest of the nation.

Now second, the retail owners of AWN have different approaches to how we go about our retail business. One owner has been aggressive in marketing and promotions including contract buyouts, and we made the choice to be more discipline to stay within our cost structures. And to some degree the performance that you see reflects a very conscious choice that we made.

The second thing Barry that I would like to point out is referring back to my prepared remarks. An important issue for us is certainly being dealing with the change in network from our legacy TDMA platform with the new LTE HSPA network. And our customers have come to expect the kind of rock solid reliability we fill into our legacy networks.

Now this isn’t happening consistently with the new network yet, but as you can see from the schedules in our press release, AWN is investing significantly in the network. They have already invested in the back half of last year, and those programs will continue through this year. So we certainly expect the AWN network to be the best wireless network in the state, and it’s certainly one reason why we believe so strongly in the future of AWN. So there is short-term pain and we are working this through and we expect that these wireless network improvements will begin to mitigate some of the performance that we speak.

And lastly, we are also -- we realize throughout that we have to change and do things differently. We cannot be doing things the same way and expect different results. So while I cannot at this time talk about the specific changes, we will have changes in product, in service, in sales, pretty much every aspect of how we go to business and [volumes]. We have taken a very hard look at, and we expect to begin rolling these changes out over the upcoming quarters and we will certainly be looking forward to share that with you.

At the end of the day, our goal is to ensure that wireless is not a drag on our top line, and more importantly not a drag on our bottom line. We are growing in our core broadband business and we will take every action necessary to ensure that the margin expansion from that line of business is not compromised.

Barry Sine - Drexel Hamilton

Did I hear you correctly to say that you would buy same stabilized subscriber base that you want to stop the decline in the subscriber base. And I’m -- taking that’s the mean what you just said, what changes coming up over the next couple of quarters. So let’s about third quarter of 2014 we are seeing no more decline in subscriber base on a sequential basis. Is that -- am I hearing that that’s kind of your aspiration?

Anand Vadapalli

Barry, I appreciate the question. But as you can appreciate, I’m not in a position to give you any specific guidance on the specific trends that you would expect to see in terms of connection comps. Clearly, we have our expectations. I will remind you that Verizon’s entry into the retail market will have an impact, not just on us but on every retail provider in the market. So we just have to be cognizant of that. Clearly, our goal, as I said, is to make sure that wireless is not a drag on margin expansion coming from the rest of the business and we would like to get at that and we need to work hard for that.

Barry Sine - Drexel Hamilton

So have you considered exiting the retail wireless business or just taking your payments from AWN? Obviously, there is a bit of a penalty if you don’t meet subscriber numbers, but might that be a better strategy.

Anand Vadapalli

Barry, the suspense of AWN is when both retail partners are performing to the fullest extent in the marketplace and we clearly are deeply committed to do doing so. We know we need to change how we compete. We know we need to do things differently and we will. We also know that we need to adjust our cost structures to fit into the post-AWN world. We started doing so in the fourth quarter and we will continue to do so. But it’s not just a focus on cost, it’s a focus on how also we compete in the marketplace. And as I noted in my prepared remarks, how can we focus on positive segments and make sure that we win there. It’s a balancing act, but we have committed to being in marketplace.

Barry Sine - Drexel Hamilton

And the work force reduction you discussed, was that in wireless, or is that across the board?

Anand Vadapalli

There were certainly elements of wireless to it, but clearly we looked at the overall work force and made sure that we made the right choices in different parts of the company.

Barry Sine - Drexel Hamilton

Last question, the focused on the broadband business where your growth is coming from. Obviously, GCI had their call a few hours ago and they talked about things they are doing in broadband, their gigabit initiative and building out more fiber and so, and they saw some ads cable modem in 4Q where they had seen loss in the prior quarters. Are you seeing a competitive response that you’re feeling is, I mean is it little tough to gauge the market setting here in New York, what’s going on in Anchorage? Are you seeing a more competitive environment in broadband that you’re facing more recently?

Anand Vadapalli

Barry, again, thank you for the question. We are excited about our growth in broadband. We’ve invested behind it, and we are doing well. And I think you will see that our results reflect that. Given where we are in terms of market share Barry which we’ve said is around the 20% mark, we are certainly not in a position where we need to write down revenue to maintain market share. So, we are competing, we are competing in a discipline manner and we are winning. And I think if you look at results, you will actually see that we are taking share.

So if you look at what’s causing us to compete well, clearly we’ve been talking about our investment in sales and service over the last couple of years. Those continue to produce returns for us. In fact, on previous calls, I have said that these are the gifts that keep giving. We have added new leadership in sales with deep Alaskan roots and that I think will drive further long-term growth opportunities for us. We are investing in our networks.

As I noted in my remarks, our access network is a strong capable network. We are deploying Ethernet over copper. We are deploying GPON. We are driving gigabit speeds to businesses and we are winning. When I see the early sales results, they are very encouraging.

Our investment in managed services, TekMate, that’s a big differentiator. And our business customers want that level of differentiation. A big part was investing in a new managed services leader. And we are very optimistic about what managed services will do for us. So if you look at all of these put together, we see a continued growth trajectory in the business side.

Barry Sine - Drexel Hamilton

Okay. I’ll stop monopolizing the call. You take other questions. Thank you very much guys.

Anand Vadapalli

Thank you Barry.

Operator

Thank you. Our next question is from the line of Frank Louthan with Raymond James. Please go ahead.

Frank Louthan - Raymond James

Great. Thank you. Couple of things on broadband, let say, you’re offering some unlimited broadband versus I guess the caps at the other guy. And what happens if yes, when those caps come down and then unlimited advantage kind of goes away. And then have you looked at some of the different models for financing handsets, you are breaking out of different like AT&T next plan something like that. You feel you are going to need to go, offer some kind of plan like that to be more competitive in the marketplace going forward?

Anand Vadapalli

Frank, thank you. This is Anand, I’ll take the question. So first in terms of the data cap, it differentiated for us today. And it will continue as long as that particular arrangements works in the marketplace. And when something changes we’ll see where things go. But for now we are following our own and we’re doing well. Now of course as you probably noted Frank in the call, while as this network investment have been focused on business segments, there have been attendant benefits for the consumer market.

As I noted we are now providing upgraded speed to over 7,500 consumer locations. So we’ve continued to see some level of benefit from the Access network on the consumer side as well. But overall on the broadband side, clearly our focus has been met and we’re doing well there. And I think when I was answering Barry’s question I covered in fair amount of detail why I think we’ll continue to get on that side.

To the second part of your question on wireless and different models with handling device subsidies et cetera. Frank, all I would say is we are looking at everything. And pleased with what I’m seeing, I’m pleased with the plan that we have in place. And we know that the competitive market will only get tougher here soon. And we need to make some changes. So we’re looking at everything that’s going on in the industry and more and think what can we do differently.

Frank Louthan - Raymond James

Okay. Great. And as you’ve sort of increased your capabilities in the business side of the equation, do you see much from a competitive response standpoint from some others in the market. And how do you feel that you are going to continue to win business there?

Anand Vadapalli

Yes, there is always of course a competitive response. But again, the dynamic in our market is unique, very unique compared to frankly the rest of (Inaudible). In the wire line broadband slide serving business customers predominantly verified been two players. And as you consistently spread our share is fairly low.

So we are starting with a lot of offside. And consequently when we are going out and talking to customers, just the fact they’re showing up and creating a choice for our customers is hugely important.

Many of our customers value that now we have not noted those and giving them the ability to have someone compete for their business and customers value that. We have a good product and our customers value that.

And more importantly, I won’t emphasize the level of service that our people provide. Everywhere I go, when I talk to customers when I meet the customers regularly, the one thing that customers tell me all the time is how they value the service our people are providing to them.

Those differentiated (inaudible) are not easy to replicate by someone else. So we’ve continued to play to our strength and we win by adding value to customers and we’ll continue to do so.

Frank Louthan - Raymond James

Okay. Great. Thank you.

Anand Vadapalli

You bet.

Operator

Next question is from the line of David Barden with Bank of America Merrill Lynch. Please go ahead.

David Barden - Bank of America Merrill Lynch

Hey guys. Thanks for taking my questions. I love how Alaska spends more money because the weather is better.

Anand Vadapalli

That’s right.

David Barden - Bank of America Merrill Lynch

So, I guess, I wanted to ask a few questions. Just first, again on the guidance, Wayne, these look like really big numbers from a cost savings perspective. I could do some math about 5% of the base, roughly 40 people below that, 70,000 bucks, $2.8 million. I mean, it looks like a lot of people have to go and incrementally over the course of the year from the company.

And then, you’ve got an equal amount of the non-labor costs and then these other timing costs, which I’d like some more color on. So, I guess a couple of questions there. One, how is the piecing of kind of clawing all these costs out of the business going to go? And number two, how are you going to manage the organization to kind of stay focus well at this amount of stuff is going on? And then, I got a couple of follow-ups.

Wayne Graham

Really good questions, David. So, we put a lot of thought and planning in terms of our plan to achieve those savings. It’s one of the reasons why we started those in December means we wanted to take the time and make sure we had it right because we know there’s a lot to do. This is our post AWN model and we’ve been preparing for that model for sometime.

So, if you go to the individual element, I can understand how the headlines maybe seeing a little bit significant but it's not all just people. We've also done some things with incentive compensation structures that are tied to our new target that help us in terms of those labor savings. And that’s our commitment to achieve those targets that I think are very important.

And some of the other areas that Anand talked about on the consumer side, we had a lot of heavy promotional activity in the quarter and did something in terms of what Anand talked about is measuring our demand to our resources. It limits our longer-term opportunities in the marketplace, but we think those trade-offs are really appropriate in terms of scaling back from a more spending to achieve our target.

We came out in July of last year with $90 billion as a directional outlook and we are committed to doing that. And ever since we made that number in July, we have spent the time to put the organization in a position to deliver it and we are committed as a management team to make that happen.

Anand Vadapalli

David, this is Anand. If I could add on to comments by Wayne, in past calls, I also talked about our process improvement and lean was being undertaken in the company and we see benefits from that. We see many of our frontline employees, frontline group eliminating waste from the business and these small things add up. And in terms of managing the change, we take pride in terms of how we communicate and how transparent we are.

Transparency is something that we value outside and by the company and we will continue to do so. And frankly then, as I noted in my prepared remarks, some of these choices are hard but this allow us to invest in the areas we are growing the most, which is business development and we are committed to achieving the results that we set forth.

David Barden - Bank of America Merrill Lynch

Got it. And Wayne, could you elaborate a little bit on what that other timing variable is in the bridge?

Wayne Graham

There were several one-time things in the quarter that were unusual in nature. We’d rather not get into all the details of individual elements that some of them had to deal with certain customer-related activities. But they were typically one-time that we are not to going to have to incur it. An example is we had severance costs in the quarter. But we are not calling that out as an individual line item. It’s all part of that, either one-time category or guidance like.

David Barden - Bank of America Merrill Lynch

Got it. Okay. That helps to understand that. So, I guess the second piece is just, kind of looking at the revenue side of it. Your year-over-year, I think business wholesale consumer was up maybe $4 million. The guidance has this now $5 million to $6 million. It’s a small number but I mean obviously, it’s kind of an expectation for an acceleration. I know one of the big opportunities that you guys have been looking at with State of Alaska and that big contract kind of coming up for renewals/bid, could you kind of elaborate a little bit on some of the drivers for this revenue acceleration? Is it just a code -- is it declaring the backlog that developed over the course of 2Q and 3Q, is that the State of Alaska stuff, give us some help there that would be helpful?

Anand Vadapalli

David, let me take that question and I will see, Wayne, wants to add any more color to it. But the exploration of growth on the business in wholesale side is, really couple of things. One, continued to maintain sales force, we have constructed our channels, some of these particularly the small medium business channels are relatively new one and we expect much of those performance going into 2014. We have invested in our strategic customer channels and they have been doing well and we expect strong performance from them. So, yes, more certainly one part of this is improve sales performance and we have invested in that.

The second one, as you have pointed out is the clearing of the backlog. This is an area that has [binocular] attention on our side and the results from clearing that backlog will contribute to some of the additional growth that we see.

The third one, really when we add a product set like IT-managed services to our portfolio, it brings in other kinds of revenue, because it just allows us to open other doors with customers. So there is that. We feel very comfortable with there be obvious thinking about our growth in business and also revenue.

Particularly with your question on the State of Alaska opportunity, that is still, that will still play some fortune course of this year and clearly, we believe that we have strong value to add to the state by bringing in competition, so we are looking forward to do so.

David Barden - Bank of America Merrill Lynch

Got it. Okay. And then, I mean, obviously, the economics, this is my last one, the economics of the wireless business are pretty much fixed in the form of these AWN distribution. So, with obviously some linkage to the sub-numbers so that, the day-to-day revenues and those such things probably aren’t that important in the short run, but the big variable has always been Verizon getting on the retail side and I anticipate you’ve baked that into your assumptions for this year? I guess, I know Alaska is a small place and I was, but do you have reason why you believe that to be happening and so when or that just kind of a conservative assumption that you are making for 2014?

Anand Vadapalli

David, just to clarify, you are enquiring about our assumption about Verizon entering the market?

David Barden - Bank of America Merrill Lynch

Yeah. The basis for making that assumption and the timing?

Anand Vadapalli

The timing, we obviously, we really don’t have an idea, in fact, if you recall last year we were thinking, it will be sometime last year. But then what we have seen Verizon do is turn up their network in parts of the state and I expect there is more build activity going on that they need to do.

In terms of the retail presence, it just activity that we see in the local market that give us a sense of what they are planning to do. So we certainly expect them to be in the market. Now, as we pointed out in the past, Verizon has spectrum for 4G, consequently 3G, they are still roaming on what’s now the AWM network. I think it will be interesting to see how they are thinking about activating their phones on the 4G network and what that means in terms of voice-over-LTE.

So I suspect some of these things are playing into the calculus but then this is just a, these are assumptions on our part. So we are assuming that they will be in the market. We are making some assumptions about timing. I think it’s fair to assume that they will here, timing can vary and that may create an upside or downside depending on when they enter the market.

David Barden - Bank of America Merrill Lynch

Got it. Okay. Thanks guys.

Anand Vadapalli

You bet.

Wayne Graham

Thank you.

Operator

At this time, I'd like to turn the call back over Mr. Vadapalli for closing remarks.

Anand Vadapalli

Well, thank everyone for participating in the call and joining us today. We look forward to reporting further projects at our coming calls. Thank you all.

Operator

Thank you, ladies and gentlemen, that does conclude our conference for today. If you’d like to listen to a replay of today's conference, please dial (303) 590-3030 or (1800) 406-7325 and enter the access code 4666717. Again, we would like to thank you for your participation. And you may now disconnect.

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