Alaska Communications' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 6.12 | About: Alaska Communications (ALSK)

Alaska Communications Systems Group Inc. (NASDAQ:ALSK)

Q2 2012 Results Earnings Call

August 6, 2012 5:00 PM ET

Executives

Michael Allen – Vice President, Investor Relations

Anand Vadapalli – President and CEO

Wayne Graham – Chief Financial Officer

Leonard Steinberg – General Counsel

Analysts

Julia Senior – Bank of America

Alex Sklar – Raymond James

Barry Sine – Drexel Hamilton

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Alaska Communications Systems Second Quarter Earnings Conference 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, Monday, August 6, 2012. I would now like to turn the conference over, Mr. Michael Allen, Vice President of Investor Relations. Please go ahead sir.

Michael Allen

Thank you. Good afternoon. And welcome to Alaska Communications second quarter 2012 conference call. I’m Michael Allen, Vice President of Investor Relations and with me today are Anand Vadapalli, President and Chief Executive Officer of Alaska Communications; Wayne Graham, Chief Financial Officer; and Leonard Steinberg, General Counsel.

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, estimations of shareholder returns, and other descriptions of the company’s business plans, objectives, expectations, or intention.

You’re 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.

Important risk factors regarding our expected results such as Verizon’s entry into the Alaska market and FCC reforms and the Alaska Wireless Network transaction have substantial disclosures in our most recent SEC filings and in our Form 10-K and Form 10-Q. We would encourage investors to refer to these documents.

Any non-GAAP measurements referred to during the call have been reconciled to their nearest GAAP measure. You may find this reconciliation in today’s press release and on our investor’s website at www.alsk.com. 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, Michael, and welcome to everyone on the call today. This has been a pivotal quarter for Alaska Communications where we have moved our business significantly forward on several fronts.

One, this is our first full quarter of executing on our business plan and we have results to show for it.

Two, we launched the iPhone and created a growth spot in our wireless business not seen in a while.

Last but not least, we announced the unique and disruptive transaction with GCI to form the Alaska Wireless Network, securing predictable cash flows for us and the path to further delever our balance sheet.

Let me now address each of these three areas. First, for an update on our topline. We’ve arrested declines in our broadband connections and in fact, have grown connections on the consumer side.

Increasing retail relationship and broadband revenues across all segments with an emphasis on business customers is a co-tenant of our business plan and we are going after this.

On the consumer broadband side, we are selling to the network we have improving customer experience and driving process simplification. We are stabilizing the consumer broadband business and we intend to make it perform for us.

More importantly, broadband ARPU saw strong performance in both business and consumer segments. Our customers appreciate a quality product, responsive customer service and simple and fair pricing. We seek to gain share and increase revenue in a disciplined matter, always focusing on value to our customers not necessarily the lowest price.

On the business sales front, our brand new small and medium business sales team is in the market every single day and we are showing up in front of customers we have underserved for several years. Our customers are noticing this change. I’m very pleased with the results this young team has shown and we will increase our momentum in this area over the next several quarters.

We are pushing a disciplined business marketing campaign, much like what we did with wireless a year ago. Marketing impact on sales generation is increasing. In addition to the work of our outside sales team, with inbound calls going up, our business call centers is showing healthy sales performance.

We’ve had more product launches in the first half of this year than we’ve had in the last couple of years. We refreshed consumer Internet lineup. We fully refreshed and upgraded our business Internet lineup and associate and product. We launched the iPhone and we have more in store for the second half of this year.

The other part of our business plan is about improving operational efficiencies and long-term cost structures. While Wayne will provide details as part of his prepared remarks, I’ll note that the increase of about $2 million in SG&A spending is fully consistent with the plan we have in place.

We have invested and continue to invest in sales, customer service, product, marketing and process improvements. These reflect a commitment to our business plan to grow market share.

Talking about growth without requisite investment is not a credible story. These are initiatives that will bear fruit, some in the short-term, other’s in longer term.

Let me give you some examples. Operating metrics in our call centers have substantially improved over the last year. We have a much tighter control and improvement on service delivery intervals and quality metrics. Our performance in managing troubled tickets with first time resolution has dramatically improved.

We are now working on cutting down the time it takes to generate quotes for our business customers and streamlining that whole process. We are upgrading our call center technology over the next several quarters to drive up employee productivity and improve customer experience.

The increase in spending is a mix of non-recurring investments and some fixed increases. Our current spend level is a deliberate choice to split growth, knowing that there will be the right time to pull back. We know how to manage cost. We’ve always demonstrated that.

Let me now talk about the iPhone launch. I’m proud of how our employees prepared for and executed on launching the iPhone. We invested significant resources to prepare for this first wave of demand.

We launched in late April and demand was significant. While this was not without its short-term financial implications, not only did we add more new customers, but our existing customer base aggressively showed up to renew their contracts and buy an iPhone.

Our net subscriber adds of about 2900 was the highest subscriber growth we’ve had in four years. Device subsidies were high this quarter, due to the large number of devices sold and the higher average cost per device.

Going forward, we’ll have to balance a fine line between growing the business and managing near-term financial impact. That being said, the iPhone launch and consequent growth is beneficial on many fronts.

One, approximately 10% of our postpaid base is now on iPhone and we know this number will increase over the next several months. These customers have all signed new multi-year contracts. This helps to mute the impact of the Verizon’s entry into the Alaska market.

Two, a key reason why customers left us over the last few years no longer exist and churn has improved as a result. And three, we expect ARPU to improve.

Like it or not, to compete against national carriers without the iPhone required us to increasingly differentiate on price. Now, we are taking several steps to further improve overall ARPU.

This discussion on wireless is a good lead into an update on the AWN transaction. Our recent 8-K filings provide additional information including pro forma impact of the transaction.

Let me provide a brief refresher and update on this transaction. The deal placed to the strength of the Alaska Communications, NGCI combining high quality urban data network with extensive statewide coverage. This new network will cover 95% of Alaskans with the most advanced and extensive coverage unmatched by any national provider.

The $100 million of cash upfront from the sale of assets and $190 million in eligible preferred distributions provide us a means to accelerate de-levering our balance sheet, while providing predictability in our cash flow.

Over the last month, we’ve met with many customers, Alaska leaders and investors. The reaction has been consistently positive. Investors see the strategic benefit and Alaskans see the value in a constructive approach taken by two Alaskan companies to provide the best network in the state.

We made our filings with both the FCC and the DOJ and we are working the process. We are making progress on standing up the integrated 4G LTE HSPA plus network at the earliest opportunity and are aggressively chasing down device availability. We’ll share more on the launch date as we line up all the moving parts.

In addition to the regulators, we are working diligently with our lenders, towards amending the credit agreement and with the IBEW for relief necessary under our collective bargaining agreement. Our view is that the strong benefits from this transaction to a long-term future should align interest and motivate these important stake holders to help us get these consents in place.

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

Wayne Graham

Thanks, Anand. In discussing quarterly results, let’s first focus on schedule five to the recent press release. Total revenues for the quarter were $90 million in line with our expectations about $5.1 million or 6% on a year-over-year basis.

Our key areas of focus are strong performance. Total business and wholesale revenue was $25.7 million, compared to $24.6 million last year representing 4% year-over-year growth.

The retail service revenue categories were strong, led by growth in retail service broadband revenue, which was $8.4 million for the quarter, an increase of $0.9 million over last year. This represents a 12% year-over-year increase.

Wholesale revenue while higher year-over-year was impacted by a change in accounting in the second quarter for certain capacity exchanges with another carrier. We recently discontinued revenue and expense recognition for these exchanges, which reduced revenue $900,000 sequentially and $200,000 on a year-over-year basis.

Moving to wireless revenue, which was $34.3 million, up $3.5 million for 11% year-over-year. Roaming revenue as expected led the way increasing $3.4 million. Total retail service revenue was somewhat disappointing. Strengthened broadband service revenue which grew $0.8 million, which more than offset with erosion and voice revenue which declined $1.2 million.

Now, on to consumer revenue, which was $9.7 million, a decline of $300,000 on a year-over-year basis. As with business, broadband retail service revenue led the way and was up $200,000 year-over-year.

Voice revenue declined due to continued erosion of the voice business. Total access decline 9% annually. Access and CETC revenue was $20.3 million, up $900,000 year-over-year. While CETC and high cost support revenue experienced erosion as expected, higher intrastate access revenue associated with reform that was completed in 2011 drove performance.

Turning to schedule six of the press release, let’s review our operating metric. Wireless connection growth was our highest level in over four years with a sequential increase in connections of 2,894 or 2.5% increase.

We experienced elevated levels of device sales in the quarter with 22,900 devices sold in the quarter, compared to 15,900 in Q1. 47% of second quarter device sales were iPhones. Approximately 20% of the iPhone sales were from new customers and 80% for existing customers.

Wireless Broadband ARPU was strong at $18.74 growing 17% and 8% year-over-year and sequentially. However, erosion in voice revenue more than offset these increases and overall retail wireless ARPU decreased $2.13 year-over-year. As Anand indicated, we are taking steps to improve ARPU performance in the second half of the year.

Broadband connection did well, compared to historical trends. On a sequential basis, business broadband connections remained relatively unchanged while consumer broadband connections grew by 134. Growth in consumer connections is a first time -- is a first for us in some time.

Importantly, broadband ARPU, whether from a consumer or a business saw strength with business broadband ARPU growing 11% year-over-year and 4% sequentially and consumer broadband ARPU growing at the same rate for 11% year-over-year and 4% sequentially.

Now, moving to schedule four in the press release. EBITDA for the quarter excludes $4.1 million of expenses associated with the AWN transaction and stood at $25.6 million or $5.1 million lower on a year-over-year basis.

EBITDA was impacted by a higher subsidies which increased $3.4 million year-over-year and $5.5 million sequentially. As on an indicated, we were working to manage subsidies from these elevated levels by balancing promotional activity and taking other steps and expect to see lower subsidies in the next two quarters from the level experienced in the second quarter.

Our spending was higher both year-over-year and sequentially and was anticipated because of the business plan that we launched at the beginning of the year. After excluding the AWN cost, selling, general and administrative expense increased $4.4 million.

Last year, we benefited from a favorable contract settlement of $1.4 million. So on a normalized basis, we view SG&A as increasing by $3 million or 13%. $0.9 million of the increase was due to non-cash stock compensation expense due to timing of termed and forfeited un-invested options last year compared to this year, leaving $2.1 million of spending increases which reflects a commitment of higher levels of investment and customer service, sales and profit improvement.

Cost of services and sales excluding $3.7 million in equipment cost, increased $3 million or 10%. The increase was due in part to $1.9 million of higher expense associated with intrastate access reform and $0.9 million of higher roaming COGS.

Turning to our cash position, we ended the quarter with $17 million in cash and cash equivalents. At the end of the quarter, we had access to $30 million under our revolving credit facility representing 100% of available capacity.

Now, let’s review our updated guidance for 2012. Although we are pleased with our top line performance because of the higher subsidies, we are adjusting guidance for the rest of the year. Revenue guidance is unchanged and we expect revenues of between $355 million and $365 million.

Our guidance for 2012 EBITDA changes from modestly above 2011 levels of $125 million to around $120 million. Our guidance for CapEx is lower changing from $55 million to $60 million to $54 million to $57 million.

Free cash flow, which is EBITDA minus capital spending and cash interest expense moves from $32 million to $36 million to $28 million to $34 million. We continue to target free cash flow to delever. Please note that all guidance excludes cost associated with AWN transaction.

Before I hand the call back to Anand, Anand and I will be at the Oppenheimer conference in Boston on August 15th and our presentation will be provided via webcast with the link available on our website.

We will also be on the East and West Coast during that week and would be available for any meetings during that time. If you like to meet with us, please send us an e-mail at investors@acsalaska.com and let me hand the call back to Anand.

Anand Vadapalli

Thanks, Wayne. Over the last several months, we’ve talked about our business plan. The basis of our plan is simple. We take care of our people and equip them to take care of our customers. We offer a quality product at a fair price, and we will relentlessly simplify how we do business.

We operate in the stable economic environment of Alaska. And have about 20% market share in a $1.1 billion market that’s growing 5% to 6% a year. This is less than our fair share of the market. We do not take this as an entitlement.

We will go after securing market share and driving top line growth. We will secure this growth in a disciplined manner, not by buying market share but by creating value for our customers. Our results for this quarter show we can succeed.

We are very conscious of the bottom line. We know we need to invest in the near-term and we are. While this is the right thing to do for now, we also know that we need to reduce and make more competitive our long-term cost structures. This has our fullest attention.

We were also aware that the business plan in and of itself did not fully address questions on cash flow risk and delevering. This is where AWN comes into play.

The AWN transaction combined with our business plan for wireline growth makes us a stronger company. We see momentum and we’ll push hard to maintain and increase the pace of growth.

Thank you for taking the time today. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of [Julia Senior] with Bank of America. Please go ahead.

Julia Senior – Bank of America

Hey, guys. Thank you for taking the question. I guess a couple if I could. Just on the wireline side, it sounds like it has less to do with sort of macro softness and more to do with just getting your sales to up to speed. I mean, what gives you confidence that the second half is going to look different than the first?

And then I guess just on guidance, sort of, similar, along the same vein, it implies sort of a pretty substantial pick up in margins and just kind of what are the key drivers there? Thanks.

Anand Vadapalli

Hey, Julia. This is Anand. Let me take the first part of the question and Wayne can address the guidance question. So, with regard to wireline and our ability to grow share, a couple of things to think about.

First of all, our results for the quarter certainly an early indicator that we are able to arrest declines and grow retail broadband revenue. And we’ve have seen retail broadband revenues grow strongly year-over-year across all segments wireline and wireless.

Second, we know that our customers are consuming more data every single day and we have a lower than our fair share in this market. So clearly there is opportunity for us. And if you think about our share of 20%, that low share is reflective of the choices we made. We believe there is profitable growth to be had. And frankly the first step is paying attention to these segments and showing up and we are doing exactly that.

Now, we’d certainly be opportunistic about the growth on the consumer side and while we realize, we remain at a disadvantage without video triple-play, we certainly see an opportunity to grow on the business side.

Keep in mind, we now have a fully staffed SMB sales teams and our investment in TekMate also gives us our business IT products that allows us to differentiate the bundles. So our business plan and our growth objectives are solid, but not overly ambitious.

Wayne Graham

So, Julia, let me answer the question on the second half of the year because you’re right. We do expect to see a pick up in margins. And it’s really three areas. One is like we said in the call, our subsidies were elevated in this quarter and we don’t expect to see that same level of spending in that area.

Second is the stand-up of the SMB sales team. They’re fully stood up. They took -- it took us sometime to get that stood up in the first half of the year. But we’ll get the full benefit of all their sales activities through the second half of the year.

And then the third thing that helps us in the second half is roaming. So we’re in the summer roaming season. Margins typically pick up on the second half of the year related to roaming than what we typically experience in the first half of the year.

Julia Senior – Bank of America

Okay. Great. Thanks, guys.

Anand Vadapalli

You bet.

Wayne Graham

You bet.

Operator

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

Alex Sklar – Raymond James

Hi, guys. This is Alex Sklar here for Frank. You mentioned in the prepared remarks that you’ve having a lot of success selling broadband to your existing base. I guess I’m curious where you are with building out to more broadband subs. And if you’ve made any decision of how much money you are going to accept of the -- if any of the $4.2 million CAF money? Thanks.

Anand Vadapalli

Hey, Alex. So let me answer the question and then we will see if Leonard has anything else to add to that. If you think about -- first of all think about our network. We think in terms of the core and the access or the Edge network and our core long-haul network is absolutely rock solid and has been for a while.

And if you think about our access network as we’ve noted before, more than 50% of our network is today enabled for 4 meg and higher broadband speeds. And in several areas, it’s 10 and 15 megs and the product launches that we’ve done in the last few months, the top speeds we are offering on the consumer side is about, just 10 meg and on the business side is up to 15.

So, we will continue to improve the quality of our access network and certainly as we are building out our 4G LTE, we see fungible investments that allows us to do that in a cost effective way.

With respect to the CAF I incremental funding, you are correct. We did decide to accept the $4.2 million in funding that was available to us. We had a one-time opportunity to do so. That being said, we do intend to file a waiver with the FCC on the requirement of $775 per broadband connection. And should that waiver be declined, then we will have to think about how much of that funding we use versus we return back to the FCC.

Alex Sklar – Raymond James

Great. That’s very helpful. And just a follow-up real quick, did the return of the troops to Fort, Wayne, right I think there was 3000 or 4000 coming back in the quarter, they have a meaningful impact in the broadband adds this quarter or do you think this a new trend going forward? Thanks.

Anand Vadapalli

No. The troop movement did not have a material impact. I’m sure there would have been some small impact. But this is really as I noted in my prepared remarks, as simple as showing up and letting our customers know that we have a product that we are really willing and able to sell.

Alex Sklar – Raymond James

All right. Great. Thank you.

Anand Vadapalli

You bet.

Operator

Thank you. Our next question is from the line of Barry Sine with Drexel Hamilton. Please go ahead.

Barry Sine – Drexel Hamilton

Good afternoon, gentlemen. Couple of questions. First of all, one of the things you talked about was perhaps lower subsidy losses on handsets in the second half of the year. What’s behind that? Does that imply fewer subscriber additions, some change in pricing on the iPhone? Could you elaborate?

Wayne Graham

Yeah. So, it will be too main reasons. So, in the initial stage of the launch, we offered a three year contract. As part of the first couple of few weeks of activities and that resulted in some elevated subsidies. We’re back in kind of a normal two year, sort of, product or contracts for our customers. So that will have an impact on our subsidies.

And then the second is just demand will slack in. We’ve seen some slackening on demand. We had a big wave of our existing customers come in and want phones and we opened the doors to them and signed them up to long-term contract. There is still coming through but not at the same rate we experienced in the first few week.

Barry Sine – Drexel Hamilton

Why does a longer contract imply a higher subsidy? Did you offer them a lower price on the handset?

Wayne Graham

Yeah.

Barry Sine – Drexel Hamilton

Got it. And my second and last question, on the GCI call they gave some interesting comments on what they were seeing in the market in terms of Verizon Wireless’s build out where their opinion they stated that Verizon is perhaps not on track to get service launched by year-end, which obviously would be a positive for you. Could you share your thoughts and comment on what you’re seeing in the market in terms of Verizon Wireless launch?

Anand Vadapalli

Yeah, Barry this is Anand. Let me take that question. Really, we have no further or definitive information about the Verizon’s plans. We see similar activities in terms of preparation for a launch, but there is nothing definite out yet.

If you recall on past calls, we’ve noted that the acquisition of the spectrum by Verizon had requirement for them to cover about 45% of the POPs by June of 2013. And internally, we use that as one book-end in terms of planning and preparing for a competitive entry. But beyond that information there is nothing that we know that we’ll be able to share with you.

Barry Sine – Drexel Hamilton

So, you wouldn’t either disagree or agree that it doesn’t look like they’re going to be in the market on a retail basis by year end?

Anand Vadapalli

Yeah. I don’t have a basis to share any further information, Barry, than what we’ve already have so far.

Barry Sine – Drexel Hamilton

Okay. Thank you.

Anand Vadapalli

You bet.

Operator

Thank you. And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Anand Vadapalli

Thank you all for joining us and we look forward to speaking with you again next week.

Operator

Ladies and gentlemen, this concludes the Alaska Communications Systems’ second quarter earnings conference call. If you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 455-2863. ACT would like to thank you for your participation. You may now disconnect.

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