Alaska Communications Systems Group's (ALSK) CEO Anand Vadapalli on Q2 2016 Results - Earnings Call Transcript

| About: Alaska Communications (ALSK)

Alaska Communications Systems Group, Inc. (NASDAQ:ALSK)

Q2 2016 Earnings Conference Call

August 4, 2016 3:00 PM ET

Executives

Tiffany Dunn - Manager, Investor Relations

Anand Vadapalli - President and Chief Executive Officer

Laurie Butcher - Senior Vice President, Finance

Leonard Steinberg - Senior Vice President, Legal, Regulatory and Government Affairs

Analysts

Barry Sine - Drexel Hamilton, LLC

Operator

Please stand by. Good day and welcome to Alaska Communications Systems Second Quarter 2016 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Ms. Tiffany Dunn, Manager of Investor Relations. Please go ahead.

Tiffany Dunn

Good day and welcome to the Alaska Communications’ second quarter 2016 conference call. I’m Tiffany Dunn, Manager of Investor Relations. With me today are Anand Vadapalli, President and Chief Executive Officer; Leonard Steinberg, General Counsel; and Laurie Butcher, Senior 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. For others, you can go to our investor website, www.alsk.com, click on the Events section, go to the Second Quarter 2016 Earnings Call Event, and click on the PDF version of the presentation. We will indicate which slide we are on so you can track the presentation material throughout the call.

Now, as we get started, please review Slide 3 for our Safe Harbor statement. During this call, company participants will make forward-looking statements as defined under U.S. Securities Laws. Forward-looking statements are statements that are not historical facts and may include financial projections, estimates of shareholder returns, or other descriptions of the company’s business plans, objectives, expectations, or intentions.

You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially from expectations as a result of a variety of factors, many of which are outside the company’s control.

Additionally, any non-GAAP measurements referred to during this call have been reconciled to their nearest GAAP measure. You can find these reconciliations in the appendix to our presentation and on our website. Following our remarks, we will open the line for questions.

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

Anand Vadapalli

Thank you, Tiffany. Good day and thank you for joining us.

Starting with Slide 5, I’m pleased to report our performance is aligned with our operating plan for the year. We continue to deliver results consistent with the long-term directional view we provided on earlier calls.

For the quarter, our total wireline revenues grew 2.8% with business and wholesale growing 8.6%. Business and wholesale, which is our growth platform has grown nearly 25% over the last two years, now comprising over 60% of our total wireline revenues, compared to about 52% two years ago.

Moving on to Slide 6, let me provide some highlights on our performance in the business and wholesale market segment. First, we had a stellar quarter of sales in the second of 2016. It was one of our best quarters, driven in large part by the strength of our customer relationships and our ability to combine broadband and managed IT services to differentiate ourselves.

As we convert these sales into revenues over the next several months we expect to see an acceleration of growth compared to what we’ve shown in this quarter. I’m pleased and appreciative for the trust our customers continue to place in us.

This quarter we signed several significant contracts extending our relationships with strategic customers. We are continuing to win back the wireless backhaul business that we sold as part of the wireless transaction. We are seeing increasing strength in our rural healthcare business, primarily because of the innovation we are bringing to our customers.

Additionally, we are building out our managed IT services track-record in the market.

Businesses in Alaska, like most businesses these days, are monitoring their bottom line and investments very carefully. In fact, this scrutiny is creating opportunities for us as our customers are looking for better solutions. We set ourselves apart by bringing innovative, collaboration and solution-oriented thinking to the table, which is helping us grow our business. An example of this is the recently inaugurated Business Technology Center that enables our customers to experience firsthand the solutions we have to offer.

As a premier collaboration space in Alaska, we are offering the use of this facility at no charge to Alaskan businesses and non-profits, strengthening our brand in our community. This center is also a showcase for our many world-class partners to demonstrate their technologies and conduct programs for their and our customers.

An example of these partnerships at work is the first Microsoft ExpressRoute customer contract that we have now in place, providing secure and reliable Azure cloud-based Office 365 solutions to a local healthcare provider.

Security and reliability are paramount to us and to our customers, and we have the technology and partners to deliver these solutions. We see the opportunity ahead of us. And we have the confidence and focus to perform to these opportunities and deliver on our business plan.

With that, let me hand the call to Laurie. Laurie?

Laurie Butcher

Thank you, Anand. As shown on Slide 8, we are pleased to report strong performance for the quarter and the first-half of the year. Total wireline revenue grew 2.8% year over year for the quarter and 3.8% year over year for the first half of the year.

Fueling our growth, business and wholesale representing over 60% of our total wireline revenue grew 8.6% for the quarter and 10.2% for the first-half of the year. Business and wholesale broadband grew 13.2% year-over-year for the quarter and 15.6% for the first-half of the year.

Consumer revenue representing approximately 17% of our total wireline revenues declined 6.4% for the quarter and 6.7% for the first-half of the year. Consumer broadband declined 5.8% year over year for the quarter and 6.7% for the first-half of the year. As we said on previous calls, we expect this revenue stream to stabilize over the next year.

Regulatory revenues, representing approximately 23% of our total wireline revenue, declined 3.6% for the quarter and 2.7% for the first-half of the year. Nearly 40% of our regulatory revenue is high cost support, which we expect to remain stable over the next 10 years. However, consistent with our industry, we are experiencing moderate declines in our access revenues, as customers move from more traditional telco services to new technologies. And our access lines and revenue base continue to decline.

The strength of our business in wholesale segment helps us overcome these secular declines, and positions us as a leader in our industry in top line revenue performance.

Slide 9 highlights the strength of our balance sheet and our year-to-date performance relative to guidance. We ended the quarter with strong cash balances of $22.2 million and total debt of $179.5 million.

Operationally, we remain committed to growing adjusted EBITDA and free cash flow. In the first half of 2016, driving that growth with our strong performance in business sales, those sales many of which are still in the delivery cycle are expected to grow revenue even more in the second-half of the year.

Year-to-date free cash flow was $4.1 million and in line with our expectations. In last quarter’s earnings call, we talked about the fact our free cash flow this year would experience seasonality. These seasonal factors include the timing of capital spending, which is typically lower for us in the first-half of the year.

Interest expense, which is higher in Q2 and Q4 to the scheduled interest payments and cash flows related to our North Slope fiber network purchase.

In summary, we continue to be confident about our annual performance for 2016, and with solid first-half results, we are reaffirming our guidance for the year.

With that, let me hand the call back to Anand. Anand?

Anand Vadapalli

Thank you, Laurie. Let’s wrap with Slide 10. We are moving forward with focus. We draw your attention to the significant value potential inherent in our equity, considering our business performance and growth profile. With our expectations of EBITDA and free cash flow growth, we remain confident in our ability to create long-term value for our investors.

Thank you for joining us today. With that, let me open the call for questions. Operator?

Question-and-Answer Session

Well, thank you. [Operator Instructions] We’ll go ahead and take the first caller.

Q - Barry Sine

Good afternoon, it’s Barry Sine from Drexel Hamilton.

Anand Vadapalli

Hey, Barry, how are you?

Barry Sine

Hey, Anand, I wanted to touch on one of your comments. So in business and wholesale, you just reported 8.6% revenue growth. And you are now saying that you can accelerate growth in the coming quarters beyond that. Is that correct? And then, if you can give us any more visibility, is that going to be much higher, little bit higher, what kind of size would you look for?

Anand Vadapalli

Barry, thank for the question. Yes, we do expect that the rate of growth will be higher than what we’ve reported in this quarter in the back-half of the year. While I cannot size that for you, but the color that I would provide is that this is really driven off of the sales that we’ve already made in the first-half of the year. Sales that are there in the delivery funnel. And as we are converting those sales into revenue, that’s where we expect the pickup to happen in the second-half of the year.

Barry Sine

Okay. And then, there obviously is a pretty significant macroeconomic backdrop, where in increasing importance in state of Alaska we have the impact of the state fiscal situation with the legislature not coming through a long-term plan for financing the state going forward, and then the related impact from oil and that on the economy.

On yesterday’s call over at GCI, Ron was pretty pessimistic and concerned that you might even see a reduction in population that might impact consumer segment. Could you give us Alaska Communications’ take on the state fiscal situation, the economic situation and how that may impact Alaska Communications’ results going forward?

Anand Vadapalli

Yes. Thank you for the question, Barry. So I think as I have said on previous calls, first of all, our exposure to the two sectors that are most directly impacted by the price of oil, which is the energy sector and the state government remains somewhat limited. More importantly, our wallet share of the spend from those sectors is also pretty low.

From our perspective, businesses are really thinking hard and thinking out of the box and getting creative as to how they can navigate this path over the next quarters to years as the case maybe. And frankly, as I like to say, when oil is $100 a barrel there is no incentive for people to think differently. When oil is $40, $45 a barrel, people are thinking differently and getting creative. And frankly for us, as a challenger, I believe that creates more opportunity in the market than one may expect for an incumbent.

So I really cannot comment on someone else’s perspective. But, again, as I said last year and as I’ve said earlier this year, we are not going to hold the price of oil or the actions that the state may or may not take as a reason for not making our numbers this year. We are confident about what we see in the marketplace. We actually continue to see opportunity.

And in fact, Barry, a reflection of that confidence is the very recent investment we made in our Business Technology Center. It’s a very modern and advanced facility. It showcases all of the partnerships that we are bringing to the table, the value that we are adding. In fact, we’ve had many business leaders cycle through that facility in the two months since we had it open.

And the investments we’ve made in developing our capabilities for business and wholesale, the growth that we are seeing, I view that as a long-term trend and I continue to be confident about the opportunities in front of us.

Barry Sine

Okay, that’s very helpful. Next question Laurie, I think, in your script you talked about your confidence in high cost support revenue remaining relatively consistent over the next 10 years. And I believe that’s somewhat related to your ability to secure cap funding for the state. And I know that was up in the air last time we spoke. If you could kind of clarify your financial comments, Laurie, and then what your outlook is or whether we’ve seen any movement from the FCC on Alaska cap funding.

Laurie Butcher

Yes. Thanks very much for the question, Barry. I actually have my expert on that topic, Leonard here in the room with us. So I will let him give you the update on where we are from a regulatory perspective.

Leonard Steinberg

Yes, hi, Barry.

Barry Sine

Hi, Leonard.

Leonard Steinberg

We do understand that an order has been drafted, that has been drafted in a manner that is largely consistent with the proposal that ACS made to the FCC roughly a year-and-a-half ago. And that, that order is currently being reviewed by the commissioners at the FCC. We do not know the precise timing of the release of the order, but we do not expect any changes to cap revenue, as a result of the order that is pending right now.

Barry Sine

Okay. That’s very helpful. Last question and this might be again for you, Laurie. You talked about the seasonality of cash flow and that’s very helpful. And you have a schedule, Schedule 5, that details it every quarter on the puts and takes in free cash flow. I wanted to zero in on the section on the purchase of North Slope fiber. And if you could just update us and remind us what to look for in that section for the free cash flow for the second-half of this year and if there is anything due in 2017.

Laurie Butcher

Actually, Barry, thank you for the question. No, this cash flow trade-off that we have seen in Schedule 5 is done now. So you should not expect any further payments going back and forth. We have completed our obligation with them regarding the network purchase. So there are no further hits to the schedule that you should see regarding the North Slope.

Now, that’s [Multiple Speakers] purchase something in the future, but this one is done.

Barry Sine

Okay. That’s great. That’s very helpful. And those are my questions. Thank you.

Anand Vadapalli

Thank you, Barry.

Laurie Butcher

Thank you, Barry.

Operator

[Operator Instructions] We’ll pause for a moment. And that does conclude the question-and-answer session. I will now turn the conference back over to you for any additional remarks.

Anand Vadapalli

Thank you. We appreciate all of you joining the call. We expect to be at the Drexel event in New York in the second week of September. And we look forward to meeting some of you out there. Thank you again for joining us.

Operator

Well, thank you. And that does conclude today’s conference call. We do thank you for your participation today.

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