Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) Q3 2019 Results Conference Call November 7, 2019 2:00 PM ET
Tiffany Smith - Manager of Investor and Board Relations
Bill Bishop - President and Chief Executive Officer
Laurie Butcher - Chief Financial Officer
Leonard Steinberg - General Counsel
Good day, and welcome to the Alaska Communications Systems Third Quarter 2019 Earnings Call. Today's conference is being recorded. [Operator Instructions]
At this time, I would like to turn the conference over to Ms. Tiffany Smith, Manager, Investor Relations. Ma'am, please go ahead.
Thank you, and welcome to the Alaska Communications Third Quarter 2019 Conference Call. I'm Tiffany Smith, Manager of Investor and Board Relations. With me today are Bill Bishop, President and Chief Executive Officer; Laurie Butcher, Chief Financial Officer; and Leonard Steinberg, General Counsel.
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 displayed on your screen. For others, you will find it on our investor website, www.alsk.com.
Now 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. You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially 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. These reconciliations are in the appendix to our presentation. Following our remarks, we will open the line for questions.
With that, I would like to turn the call over to Bill. Bill?
Thanks, Tiffany. Hello, and thanks for joining. First, I would like to take a moment and congratulate, Laurie. As we recently announced, she has been named CFO. I am honored to have her as an accomplished partner and member of our executive team. Working together, this team produced strong positive results for the quarter, with our growth revenues outpacing our legacy declines.
Let's turn to Slide 5. For those of you who may be new to the Alaska Communications story, this slide provides an overview of our business. We have a state-of-the-art, robust and reliable network. We continue to expand our presence by developing and winning new opportunities in a growing market. We now have about 600 employees, serving customers in 11 states. Assets include 15 owned and managed cable landing stations, over 870 fiber-lit buildings and 29 PoPs in 6 states.
Slide 6. In the second quarter, we stated we expected to see the back half of the year to be stronger, and we are achieving those results. Business and Wholesale continues to drive growth with our unique fiber network capabilities, our technologies and our customer relationships. The market is primed for additional growth across a diverse set of key verticals. Increased bandwidth utilization and the migration to the cloud continue to be the natural progression for businesses. We are the only certified Microsoft ExpressRoute provider in Alaska, providing secure private connections to the Azure cloud. Additionally, our data center capabilities provide unique local edge cloud solutions to both capture new customers and to increase our share of wallet. We are always looking for opportunities to expand and augment our fiber network across the areas that we serve. Progress continues on our 5G wireless fiber backhaul build. As a reminder, this is a multi-year contract with hundreds of sites, and we expect this contract to underwrite much of the capital invested towards this program. As we expand the 5G network, the fiber can be leveraged in both the business and consumer markets. We expect to generate additional returns on this invested capital. As we mentioned last quarter, we signed an additional long-term contract with an existing carrier customer for yet another prefunded high-capacity fiber and secured network. This project includes 2 fiber routes within the state of Alaska. We expect this -- we expect to begin to recognize this revenue in the first quarter of 2020.
With our commitment to service, we continue to evaluate our customers' needs. We manage the life cycle and profitability of our legacy-based technologies and transition customers to new IP-based solutions as appropriate. Recognizing that many of our remote customers across Alaska cannot be served by fiber, we use satellite capacity to meet their business needs. We continue to migrate customers to our own transponder space. This provides us with both owner's economics and the ability to customize our solutions. Satellite technology is changing, and we continue to stay abreast of these advancements. We look forward to evaluating additional capabilities provided by the Low Earth Orbit, or LEO, satellite in the 2020 to 2021 time frame.
Slide 7. Diversifying our revenues and profitability for the company, we continue to develop our Consumer business. During the quarter, we made strong headway expanding into multi-dwelling units. We've lit an additional 2,000 MDUs on military bases. And in October, we enabled our largest commercial location, a 400-unit complex in Anchorage. This brings our total MDU locations to over 6,000, achieving our goal for the year. Also in the third quarter, we continued our fixed wireless efforts to accelerate growth in rural areas as part of the FCC's Connect America program. To date, we have established 26 towers in co-location sites. Also, we have a total of approximately 8,100 locations passed with Fi-Wi, of which about 4,600 are for CAF II. We expect to see continued progress with these efforts as well.
I am confident in our business plan and our team's ability to meet our plan.
With this, I'll hand the call to Laurie, who will cover our financial results. Laurie?
Thank you, Bill. Turning to Slide 9. Let's review our year-over-year revenue performance for the quarter ended September 30, 2019, compared to the same period in 2018.
As we stated on our last call, we expected and we're delivering stronger performance in the back half of the year. Total revenue was $59.1 million, up 1.5%, led by growth in broadband services. Total broadband across both our business and consumer markets now represents 56.9% of total revenue, growing 7.8% for the quarter. Business and Wholesale, representing 65.5% of our total revenues increased 6.5%. Consumer, representing 15.7% of our total revenues, remained steady. And regulatory, representing 18.8% of total revenues, declined as anticipated.
We continue to expect similar declines in regulatory revenue for the remainder of 2019. This is largely due to the replacement of the Alaska Carrier of Last Resort program in 2019, with a new program at roughly half the funding levels. We expect the declines in regulatory revenue to be less pronounced in future years.
Turning to Slide 10. You can see the annual trends in our business. Our Business and Wholesale revenue shows year-over-year growth and is expected to continue to drive overall performance. For the quarter, adjusted EBITDA was $15.8 million, increasing from $14.8 million in 2018, reflecting strong revenue performance.
For the 9 months ended September 30, 2019, adjusted EBITDA was $44.9 million compared to $46.1 million in the prior year period. This decline reflects the impact of 2019 labor increases, which are primarily the result of the reversal of both the furloughs and the temporary wage reductions that we imposed in the first quarter of 2018.
As a reminder, we restored wages and canceled furloughs in the fourth quarter of 2018, so the fourth quarter results will be more comparable. With that, we continue to be on track with our adjusted EBITDA expectations.
Adjusted free cash flow was $6.3 million for the quarter, up $2 million from the third quarter 2018. This is primarily driven by an increase of $3.3 million in the net impact from pre-funded customer contracts. These are projects for which the company is receiving milestone payments upfront for construction, while revenue will be recognized over the term of the contract. We anticipate completing 1 of these routes by the end of this year and beginning to recognize revenue by the first quarter of 2020. For the 9 months ended September 30, 2019, adjusted free cash flow was $6.2 million compared to $10.2 million in the prior year period. This reflects the labor impact I previously noted, $1.6 million of CEO severance costs and increased capital spending for our 5G wireless fiber backhaul build.
Subsequent to quarter end, in October, the company received a federal AMT tax refund of $4.3 million, and we remain comfortable with our free cash flow guidance.
Our balance sheet remains very strong, and we continue to be a leader among our peers. At September 30, we had a net debt balance of $156.6 million, and net leverage of 2.9x.
During the quarter, we used $1.7 million to buy back shares of the company's common stock. With those purchases, we completed the board-directed share repurchase, buying back 1 million shares with a total average purchase price of $1.81 per share. Net capital spending for the quarter was $11.1 million and $31.6 million for the 9 months ended September 30, 2019. This compares to $8.4 million and $25.4 million in the prior year period. This is in line with our expectations and includes the additional capital allocated to the 5G fiber build.
Cash at September 30 was $26.7 million, while our $20 million revolver and $25 million delayed draw instrument remain undrawn.
As I mentioned earlier, in October, we received a tax refund of $4.3 million, further increasing our cash balances. Also, in October, the board terminated the Section 382 tax preservation plan, originally implemented in January of 2018 to protect the company's net operating loss balances. The termination of the plan reflects a detailed analysis of the company's stock ownership over the past 3 years and the determination that the risk of NOL loss was minimal.
In summary, turning to Slide 11. I'd like to remind you that operating results can vary by quarter as a result of many factors. This can include, among other things, the timing of our sales delivery and associated revenue recognition and higher capital spending due to seasonal work. We have confidence in our business plan, and we are reaffirming our guidance for 2019.
We look forward to reporting our performance for the year on our next call.
With that, let me hand the call back to Bill. Bill?
Thanks, Laurie. Let's turn to Slide 12. I appreciate the board's vote of confidence by providing me the opportunity to serve as the permanent President and CEO. I stand beside a strong leadership team. Laurie Butcher as CFO; Leonard Steinberg as the SVP of Legal and Regulatory; and Diedre Williams as the SVP of Operations and People Matters. It is this team, along with the dedication of all Alaska Communication employees, that gives me confidence we will achieve or exceed our operational and financial goals. The board working with this management team, remains committed to our shareholders and maximizing shareholder value. This has been evident by several initiatives in recent quarters. Actions have included completing the share repurchases as well as recently terminating the Section 382 tax preservation plan. The board continues to evaluate all options before it to maximize our shareholder value.
Again, our performance for the quarter was strong, and I look forward to sharing similar updates in the months and quarters ahead. Thanks again for joining. With that, I'll open the call for questions. Operator?
[Operator Instructions] Our first question comes from Chris [indiscernible] with [indiscernible].
Yes. This question is directed to Mr. Bishop. This is concerning the $10 million set aside for share buyback and potential dividend payment. You've used only $1.7 million of this. The question I have here is you have a balance of $8.3 million, why not offer a $0.04 dividend to enhance shareholder value, potentially increase institutional ownership? This will only cost the company approximately $2.1 million and give the stock an effective yield of 2% based on the current price?
Chris, thanks for the question. I'll ask Laurie to help me answer some of this question as well. But before I turn it over to Laurie, I do want to make a couple of comments. I appreciate the question, first of all. And it is management's position and management's responsibility to drive and run the business, operate the business to produce the returns and give our board options to do such as exactly what you're saying here. I think indicative of our results that we just covered, I think the management team has taken a strong stride in that direction. But at the end of the day, it is the board's decision to make those calls that you're asking us about. But I guess that it's our position, it's our job to give them options. And I know the board continues to evaluate all options and all the considerations that you talked about and more, frankly, on a continuous basis.
Laurie, any other thoughts?
Yes. I would just probably clarify that it's really not a $10 million basket. We have along -- in the terms of our debt agreement, which is actually publicly available out there, an initial $5 million basket. I think the $10 million was really related to a time frame by which we consider -- could consider share buyback. And within that particular share buyback plan, the board did authorize a 1 million share repurchase, and that's what we just spoke to that we have recently committed -- or completed.
But we look forward to reviewing all of our options with the board in the upcoming board meeting we're about to have and really further which path we take. Because you're correct, we do have options and we are performing well right now. So now it's a chance for us to review the options again, and with the board, make some determination of what to do with this cash whether it's returning it to shareholders or investing in the company itself.
[Operator Instructions] And at this time, I'm showing no further questions in the queue. So I would like to turn the call back over to the company for closing remarks.
Thank you, and thank you all for joining us on the call today. We always welcome the opportunity to talk with our shareholders. If you're interested in meeting with us, whether by phone or in person on future roadshows, please reach out to myself, Tiffany Smith, in Investor Relations. Thank you, and good day.
Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your afternoon.