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Alaska Communications Systems Reports Third Quarter 2012 Results

ANCHORAGE, Alaska--()--Alaska Communications Systems Group, Inc. (“ACS”) (NASDAQ:ALSK) today reported financial results for its third quarter ended September 30, 2012.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”

“The fundamentals of our value proposition to the Alaskan customer remain strong. We are successfully executing against our business plan to grow retail revenue, with a focus on business customers and broadband services. Broadband revenues have increased across the board both sequentially and year over year. Broadband Data as a percentage of service revenue now stands at 46% for the quarter, up 10% from a year ago. Importantly, we have good momentum in winning new customer relationships in the small and medium business segment. Demand for our broadband products is strong and we are making important strides in accelerating our product roadmap which allows us to provide the most advanced broadband services to our customers in Alaska. We recently launched our statewide 4G LTE network, which further cements our leadership position in wireless communications.

“We have also made solid progress on the Alaska Wireless Network (“AWN”) joint-venture transaction, which positions us to provide the most expansive, fastest wireless services in the state. We now have two important agreements that were necessary for AWN. We have a new three-year contract with the International Brotherhood of Electrical Workers ('IBEW') which also provides the framework to improve our operating model and costs over time. Additionally, we have executed an amended credit agreement with our senior lenders that also puts in place a framework to accelerate debt reductions. We remain on track to close the AWN transaction sometime in the second quarter of 2013.

“While our business plan combined with AWN puts us on a path to grow and pay down debt, we believe further strengthening of our balance sheet is warranted. Making a decision now to accelerate deleveraging has also helped us secure the continued support from our senior lenders on favorable terms. To that end, our Board of Directors has elected to suspend our common dividend and accelerate our deleveraging plans, which we believe will position us to be one of the best capitalized telecom companies based in Alaska.

“The long-term sustainability of our plan comes from the trust our customers place in us. Our customers value us for our reliability, our customer service, our trustworthiness and our local community presence. This, combined with our accelerated debt pay downs will drive long-term value creation for our employees, customers and shareholders,” said Anand Vadapalli, president and CEO of Alaska Communications.

Financial Highlights: Third Quarter 2012 Compared to Third Quarter 2011

  • Revenue of $96.8 million grew by $6.5 million, or 7.2 percent, from $90.3 million in the prior year.
    • Business and Wholesale revenue increased by $1.2 million, or 4.6 percent, led by growth in wholesale revenue, which increased $1.0 million, or 9.3 percent.
    • Wireless revenue increased by $5.7 million, or 16.5 percent. Wireless broadband revenue grew $0.9 million, or 15.5 percent and roaming revenue grew $5.4 million, or 39.9 percent, both driven by higher data usage.
    • Access and CETC revenue decreased $0.4 million, or 2 percent.
    • Consumer broadband revenues increased $0.3 million, or 8.1 percent.
  • Adjusted EBITDA of $36.6 million increased $3.8 million, or 11.6%.
    • Costs of service and sales increased $1.8 million, resulting from higher levels of data and network usage which drove increases in our roaming, DSL and advanced network expenses.
    • Selling, general and administrative expenses increased by $1.3 million primarily driven by increases in labor expenses in our sales and service organization and administrative costs associated with the AWN transaction.

     

Metric Highlights: Third Quarter 2012 Compared to Second Quarter 2012

  • Business broadband connections remained relatively flat at 19,063, and ARPU grew 2.3 percent to $150.58.
  • Wireless connections grew by 925 to 120,975 from 120,050 and churn was unchanged at 2.0 percent.
  • Wireless retail ARPU grew 1.0 percent to $51.79.
  • Consumer broadband connections, exclusive of erosion in dial up connections, increased sequentially and stand at 38,491 while ARPU grew 2.3 percent to $39.90.

“We are pleased with our performance and the debt amendment we recently entered into with our senior lenders. The amendment dedicates $65 million of the up-front proceeds from the AWN transaction to debt pay downs, with modestly higher borrowing rates and additional covenant flexibility related to future preferred dividend payments from the AWN venture,” said Wayne Graham, chief financial officer of Alaska Communications.

2012 Business Outlook

Our guidance for the year is unchanged:

  • Revenue of between $355 and $365;
  • EBITDA of approximately $120 million;
  • Capex of $54 - $57 million; and
  • Free Cash Flow of $28 - $34 million.

All guidance excludes costs associated with the AWN transaction.

Conference Call

The Company will host a conference call and live webcast today at 5:00 p.m. Eastern Time. Parties in the United States and Canada can call 877-941-8609 to access the conference call. Parties outside the United States and Canada can access the call at 480-629-9645. The webcast will be archived for a period of 90 days. A telephonic replay of the conference call will also be available two hours after the call and will run until Thursday, November 8, 2012 at midnight Eastern Time. To hear the replay, parties in the United States and Canada can call 800-406-7325 and enter pass code 4568287. Parties outside the United States and Canada can call 303-590-3030 and enter pass code 4568287.

About Alaska Communications

Headquartered in Anchorage, Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) is a leading provider of high-speed wireless, mobile broadband, Internet, local, long-distance and advanced broadband solutions for businesses and consumers in Alaska. The Alaska Communications network includes advanced broadband and voice networks and the most diverse undersea fiber optic system connecting Alaska to the contiguous United States. For more information, visit www.alaskacommunications.com or www.alsk.com.

Forward-Looking Guidance

This press release includes information related to management's estimate of Adjusted EBITDA and Free Cash Flow (FCF) for the year ending December 31, 2012. EBITDA and FCF, as defined by the Company, may not be consistent with Adjusted EBITDA and FCF measures used by other companies are not measurements under generally accepted accounting principles (GAAP), and should not be a considered a substitute for other measures of financial performance recorded in accordance with GAAP. Management believes that Adjusted EBITDA provides useful information to investors about the Company's performance because it eliminates costs associated with, interest income and expense, stock-based compensation expense, losses and gains associated with the extinguishment of debt and disposal of assets, gift of services, earnings of equity investments in excess or less than cash distributions, AWN transaction related costs, income tax expense and depreciation and amortization that are not directly attributable to the underlying performance of the Company's business operations. Similarly, FCF provides useful information about the ability of the Company to reduce its outstanding indebtedness. Due to the difficulty in forecasting and quantifying the amounts that would be required to be included in the most comparable GAAP measure, “net cash provided by operating activities” the Company is not providing an estimate of the year-end 2012 amount for that measure.

Forward-Looking Statements

This press release includes certain "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's beliefs as well as on a number of assumptions concerning future events made using information currently available to management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside ACS' control. Such factors include, without limitation, Verizon’s entry into the Alaska market;, universal service fund) rule changes; problems with the formation, operation, or financial performance of AWN;; the outcome of on-going IRS audits, adverse national economic conditions, adverse conditions in the credit markets impacting the cost, including interest rates, and/or availability of financing, adverse local economic conditions, including an unexpected downturn in the Alaskan oil and gas or tourism markets, changes in capital expenditures, the effects of competition in our markets, the entry of one or more additional facilities-based carriers into the Alaska market, or other factors affecting the Company's ability to generate sufficient earnings and cash flows to maintain operations; the Company’s ability to complete, manage, integrate, market, maintain, and attract sufficient customers to the products and services it may derive, adverse changes in labor matters, including workforce levels, labor negotiations, and benefits costs; disruption of our suppliers' provisioning of critical products or services; the impact of natural or man-made disasters; changes in Company's relationships with large carrier or enterprise customers or its roaming partners; changes in revenue from universal service funds; unforeseen changes in public policies; changes in accounting policies, including the Company’s application of regulatory accounting rules, which could result in an impact on earnings; or disruptive technological developments in the telecommunications industry. For further information regarding risks and uncertainties associated with ACS' business, please refer to the Company's SEC filings, including, but not limited to, the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q. Copies of the Company's SEC filings may be obtained by contacting its investor relations department at (907) 564-7556 or by visiting its investor relations website at www.alsk.com.

                Schedule 1    
                     
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.    
CONSOLIDATED STATEMENTS OF OPERATIONS    
(Unaudited, In Thousands, Except Per Share Amounts)    
                     
                     
        Three Months Ended   Nine Months Ended    
        September 30,   September 30,    
          2012     2011       2012     2011      
                     
Operating revenues $ 96,795   $ 90,306     $ 272,754   $ 261,842      
                     
Operating expenses:              
  Cost of services and sales   36,346     34,505       111,602     100,880      
  Selling, general & administrative   25,437     24,121       80,374     68,385      
  Depreciation and amortization   12,932     14,392       38,452     43,510      
  Gain on disposal of assets, net   (2,559 )   (709 )     (2,140 )   (590 )    
Total operating expenses   72,156     72,309       228,288     212,185      
                     
Operating income   24,639     17,997       44,466     49,657      
                     
Other income and expense:              
  Interest expense   (10,268 )   (9,529 )     (29,203 )   (28,815 )    
  Loss on extinguishment of debt   -     -       (323 )   (13,445 )    
  Interest income   9     10       31     26      
  Other     -     174       -     174      
Total other income and expense   (10,259 )   (9,345 )     (29,495 )   (42,060 )    
                     
Income (loss) before income tax (expense) benefit   14,380     8,652       14,971     7,597      
                     
  Income tax (expense) benefit   (6,136 )   (9,468 )     (6,385 )   (9,369 )    
                     
Net income (loss) $ 8,244   $ (816 )   $ 8,586   $ (1,772 )    
                     
Net income (loss) per share:              
  Net income (loss) applicable to common shares $ 8,244   $ (816 )   $ 8,586   $ (1,772 )    
  Tax-effected expense attributable to convertible notes   1,808   $ -   # $ -   $ -    

 

  Net income (loss) assuming dilution $ 10,052   $ (816 ) # $ 8,586   $ (1,772 )    
                     
  Basic   $ 0.18   $ (0.02 )   $ 0.19   $ (0.04 )    
  Diluted   $ 0.17   $ (0.02 )   $ 0.19   $ (0.04 )  

 

                     
Weighted average shares outstanding:              
  Basic     45,664     45,202       45,511     45,061      
  Diluted     59,437     45,202       45,806     45,061      

 

          Schedule 2
           
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, In Thousands Except Per Share Amounts)
           
           
      September 30,   December 31,
Assets   2012       2011  
           
Current assets:      
  Cash and cash equivalents $ 19,039     $ 20,490  
  Restricted cash   6,027       4,956  
  Accounts receivable-trade, net of allowance of $6,008 and $5,788   40,157       36,986  
  Materials and supplies   9,355       5,412  
  Prepayments and other current assets   6,097       4,920  
  Deferred income taxes   8,681       6,596  
    Total current assets   89,356       79,360  
           
Property, plant and equipment   1,447,403       1,428,597  
Less: accumulated depreciation and amortization   (1,043,372 )     (1,023,360 )
  Property, plant and equipment, net   404,031       405,237  
           
Goodwill   8,850       8,850  
Intangible assets, net   24,123       24,118  
Debt issuance costs   8,022       9,515  
Deferred income taxes   66,622       72,814  
Equity method investment   2,073       2,060  
Other assets   4,803       3,154  
Total assets $ 607,880     $ 605,108  
           
Liabilities and Stockholders' Equity (Deficit)      
Current liabilities:      
  Current portion of long-term obligations $ 27,034     $ 30,930  
  Accounts payable, accrued and other current liabilities   51,931       48,919  
  Advance billings and customer deposits   8,797       9,218  
    Total current liabilities   87,762       89,067  
           
Long-term obligations, net of current portion   536,167       538,624  
Other long-term liabilities   30,006       28,340  
Total liabilities   653,935       656,031  
Commitments and contingencies      
Stockholders' equity (deficit):      
  Common stock, $.01 par value; 145,000 authorized   457       453  
  Additional paid in capital   141,892       144,631  
  Accumulated deficit   (179,102 )     (187,688 )
  Accumulated other comprehensive loss   (9,302 )     (8,319 )
    Total stockholders' equity (deficit)   (46,055 )     (50,923 )
           
Total liabilities and stockholders' equity (deficit) $ 607,880     $ 605,108  

 

                  Schedule 3
                   
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, In Thousands)
                   
          Three Months Ended   Nine Months Ended
          September 30,   September 30,
            2012     2011       2012     2011  
Cash Flows from Operating Activities:          
  Net income (loss) $ 8,244   $ (816 )   $ 8,586   $ (1,772 )
  Adjustments to reconcile net income (loss) to net cash provided by      
  operating activities:          
    Depreciation and amortization   12,932     14,392       38,452     43,510  
    Amortization of debt issuance costs and debt discount   1,380     1,421       4,382     11,507  
    Stock-based compensation   969     1,188       2,662     2,620  
    Deferred income taxes   6,136     8,834       6,385     8,735  
    Provision for uncollectible accounts   307     409       1,836     1,468  
    Earnings is excess of distributions from equity method investment   (13 )   -       (13 )   -  
    Other non-cash income, net   (2,585 )   (726 )     (2,042 )   (292 )
    Changes in operating assets and liabilities   (8,198 )   1,131       (4,038 )   (8,225 )
  Net cash provided by operating activities   19,172     25,833       56,210     57,551  
                   
Cash Flows from Investing Activities:          
    Capital expenditures   (14,443 )   (15,191 )     (37,715 )   (33,463 )
    Change in unsettled capital expenditures   (1,279 )   394       (5,648 )   (943 )
    Proceeds on sale of assets   2,923     2,665       2,923     2,665  
    Net change in non-current investments   -     529       -     529  
    Net change in restricted accounts   (527 )   (127 )     (1,071 )   (129 )
  Net cash used by investing activities   (13,326 )   (11,730 )     (41,511 )   (31,341 )
                   
Cash Flows from Financing Activities:          
    Repayments of long-term debt   (1,330 )   (1,490 )     (9,255 )   (102,738 )
    Proceeds from the issuance of long-term debt   -     -       -     120,000  
    Debt issuance costs   -     336       -     (4,448 )
    Payment of cash dividend on common stock   (2,285 )   (9,733 )     (6,831 )   (29,082 )
    Payment of withholding taxes on stock-based compensation   (4 )   (8 )     (243 )   (2,030 )
    Proceeds from issuance of common stock   (1 )   -       179     199  
  Net cash used by financing activities   (3,620 )   (10,895 )     (16,150 )   (18,099 )
                   
Change in cash and cash equivalents   2,226     3,208       (1,451 )   8,111  
                   
Cash and cash equivalents, beginning of period   16,813     20,219       20,490     15,316  
                   
Cash and cash equivalents, end of period $ 19,039   $ 23,427     $ 19,039   $ 23,427  
                   
Supplemental Cash Flow Data:          
  Interest paid $ 7,796   $ 7,193     $ 24,799   $ 24,415  
  Income tax refunds $ -   $ -     $ 24   $ -  
                   
Supplemental Non-cash Transactions:          
  Property acquired under capital leases $ -   $ 679     $ (24 ) $ 1,841  
  Dividend declared, but not paid $ 2,286   $ 9,736     $ 2,286   $ 9,736  
  Additions to ARO asset $ 24   $ 104     $ 78   $ 118  
                   
           

 

       

 

   

 

                Schedule 4    
                       
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
EBITDA AND FREE CASH FLOW
(Unaudited, In Thousands)
                       
        Three Months Ended   Nine Months Ended      
        September 30,   September 30,      
          2012     2011       2012     2011        
                       
                       
Net cash provided by operating activities $ 19,172   $ 25,833     $ 56,210   $ 57,551        
 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

             
    Depreciation and amortization   (12,932 )   (14,392 )     (38,452 )   (43,510 )      
    Amortization of debt issuance costs and debt discount   (1,380 )   (1,421 )     (4,382 )   (11,507 )      
    Stock-based compensation   (969 )   (1,188 )     (2,662 )   (2,620 )      
    Deferred income taxes   (6,136 )   (8,834 )     (6,385 )   (8,735 )      
    Provision for uncollectible accounts   (307 )   (409 )     (1,836 )   (1,468 )      
    Earnings in excess of distributions from equity method investment   13     -       13     -        
    Other non-cash income, net   2,585     726       2,042     292        
    Changes in operating assets and liabilities   8,198     (1,131 )     4,038     8,225        
Net income (loss) $ 8,244   $ (816 )   $ 8,586   $ (1,772 )      
  Add (subtract):                
    Interest expense   10,268     9,529       29,203     28,815        
    Loss on extinguishment of debt   -     -       323     13,445        
    Interest income   (9 )   (10 )     (31 )   (26 )      
    Depreciation and amortization   12,932     14,392       38,452     43,510        
    Gain on sale of long-term investments   -     (174 )     -     (174 )      
    Gain on disposal of assets   (2,559 )   (709 )     (2,140 )   (590 )      
    Gain on extraordinary items, net of tax   -     -       -     -        
    Income tax expense   6,136     9,468       6,385     9,369        
    Stock-based compensation   969     1,188       2,662     2,620        
    Gift of services   -     (118 )     -     (51 )      
    Earnings in excess of distributions from equity method investment   (13 )   -       (13 )   -        
    AWN transaction related costs   587     -       5,046     -        
                       
Adjusted EBITDA $ 36,555   $ 32,750     $ 88,473   $ 95,146        
                       
  Less:                
    Cash capital expenditures   (15,722 )   (14,797 )     (43,363 )   (34,406 )    

 

    Cash interest expense   (7,796 )   (7,193 )     (24,799 )   (24,415 )      
  Free cash flow $ 13,037   $ 10,760     $ 20,311   $ 36,325        
                       
Revenue $ 96,795   $ 90,306     $ 272,754   $ 261,842        
                       
Adjusted EBITDA Margin   37.8 %   36.3 %     32.4 %   36.3 %      
                       
                       
                       
Note: In an effort to provide investors with additional information regarding the Company's results as determined by GAAP, the Company also discloses certain non-GAAP information which management utilizes to assess performance and believes provides useful information to investors. The Company has disclosed Adjusted EBITDA as net income before interest, provisions for taxes, depreciation expense, gain or loss on asset purchases or disposals, gift of services, earnings of equity investments in excess of or less than cash distributions, AWN Transaction related costs, amortization of intangibles and stock-based compensation expense, and Adjusted EBITDA Margin, defined as Adjusted EBITDA divided by Operating Revenues, and Free Cash Flow as reconciled above, because the Company believes they are important indicators providing information about our ability to service debt and fund capital expenditures. Adjusted EBITDA, Adjusted EBITDA Margin and Free cash flow are not GAAP measures and should not be considered a substitute for net cash provided by operating activities and other measures of financial performance recorded in accordance with GAAP.

 

                  Schedule 5  
                       
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Revenue Mix
(Unaudited, In Thousands Except Per Share Amounts)
                       
          Three Months Ended   Nine Months Ended    
          September 30,   September 30,    
  Operating revenues:   2012     2011       2012     2011      
    Business and wholesale              
      Retail service revenue              
      Voice $ 5,967   $ 6,440     $ 18,046   $ 19,576      
      Broadband   8,613     8,046       25,156     22,616      
      Equipment sales   311     224       927     763      
      Wholesale and other   11,587     10,597       34,446     31,248    

 

        Total business and wholesale revenue   26,478     25,307       78,575     74,203      
                       
    Consumer              
      Retail service revenue              
      Voice   4,676     5,173       14,460     15,978      
      Broadband   4,613     4,266       13,469     12,720      
      Equipment sales   42     48       126     149      
      Other   413     268       971     795    

 

        Total consumer revenue   9,744     9,755       29,026     29,642      
    Wireless              
      Retail service revenue              
      Voice   12,355     12,973       37,231     40,296      
      Broadband   6,340     5,490       17,892     15,375      
      Equipment sales   1,737     1,541       4,594     4,322      
      Foreign roaming   18,919     13,525       40,996     29,592      
      Other   1,132     1,223       3,227     3,372    

 

        Total wireless revenue   40,483     34,752       103,940     92,957      
                       
    Access and CETC              
      CETC   4,979     6,022       15,669     21,218      
      High cost support   5,087     4,480       15,041     16,009      
      Switched, special and other access   10,024     9,990       30,503     27,813    

 

        Total access and CETC   20,090     20,492       61,213     65,040      
                       
    Total revenues $ 96,795   $ 90,306     $ 272,754   $ 261,842      
                       
  Revenue Mix:              
      Business and wholesale   27 %   28 %     29 %   28 %    
      Consumer   10 %   11 %     11 %   11 %    
      Wireless   42 %   38 %     38 %   36 %    
      Access and CETC   21 %   23 %     22 %   25 %    
                       
                       
      Retail Service Revenue % of Total Revenues   44 %   47 %     46 %   48 %    
      Data % of Total Service Revenue   46 %   42 %     45 %   40 %    
                       
                       
Note: Broadband contains the following dial-up revenue:          
    Three months ended September 30, 2012: $94 Consumer and $25 Business.    
    Three months ended September 30, 2011: $126 Consumer and $30 Business.    
    Nine months ended September 30, 2012: $297 Consumer and $78 Business.    
    Nine months ended September 30, 2011: $398 Consumer and $93 Business.    
                       
In 2012, our financial presentation has been remapped to focus expanded customer groups. Significant changes in presentation include:
                       
- Retail, Enterprise and Wholesale revenue in our prior presentation are now included in the categories of Business and Wholesale, Consumer, and Access and CETC.
- Access and CETC revenue has been combined into one group with CETC and Access broken out into Switched, Special, Other Access, and High Cost Support line items.
- Wireless revenue included CETC in our prior presentation and is now included in the category Access and CETC.
                       

 

            Schedule 6
             
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
KEY OPERATING STATISTICS
(Unaudited)
             
        Three Months Ended
        September 30, June 30, September 30,
        2012   2012     2011  
             
Voice:          
  Consumer access lines   57,483     59,480     63,775  
  Business access lines   81,330     82,083     84,185  
             
  Voice ARPU consumer $ 26.65   $ 26.73   $ 26.70  
  Voice ARPU business $ 24.34   $ 24.49   $ 25.39  
             
Broadband:        
  Consumer connections   38,491     38,583     39,602  
  Business connections   19,063     19,069     19,051  
             
  ARPU consumer $ 39.90   $ 39.01   $ 35.52  
  ARPU business $ 150.58   $ 147.25   $ 140.77  
             
Wholesale lines   20,782     21,278     23,749  
             
Wireless:        
  Postpaid connections   107,220     107,704     108,664  
  Prepaid connections   13,755     12,346     8,832  
  Total     120,975     120,050     117,496  
             
  Retail wireless ARPU $ 51.79   $ 51.26   $ 52.81  
  Wireless broadband ARPU $ 19.70   $ 18.74   $ 16.82  
             
Churn:          
             
  Voice access lines   1.4 %   1.4 %   1.7 %
  Broadband connections   2.2 %   2.5 %   2.3 %
  Wireless connections   2.0 %   2.0 %   2.4 %
             
             
Wireless equipment subsidy $ 2,608   $ 7,318   $ 2,731  
             
             
Note: Broadband contains the following dial-up connections:  
    September 30, 2012: 2,339 Consumer and 458 Business.  
    June 30, 2012: 2,482 Consumer and 499 Business.  
    September 30, 2011: 3,080 Consumer and 553 Business.  

 

Contacts

Alaska Communications Systems Group, Inc.
Wayne Graham, Chief Financial Officer, 907-564-7756
investors@acsalaska.com

 

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