Market Overview

Alaska Communications Reports First Quarter 2018 Results

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Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) today reported
financial results for the first quarter of 2018.

"Our first quarter performance met our expectations and creates the
foundation to achieve our annual goals. Our revenue decline for the
quarter is attributable to compression in our health care vertical. The
cost control measures we proactively put in place mitigated the impacts
of this revenue compression resulting in stable Adjusted EBITDA
performance for the quarter.

Demand drivers like small cell backhaul, opening up of Arctic markets
with the recent fiber turn up by one of our partners and increased
investments by companies in the energy sector will create opportunities
powering our Enterprise & Carrier segment and driving growth for the
next couple of years.

Additionally, we continue to make progress in Mass Market with our
investments in fiber fed WiFi and fiber fed fixed wireless technologies.
We are tracking to our CAF II deliverables, which will add to our
performance in this segment over the next several years as well.

We look forward to reporting progress over the upcoming quarters," said
Anand Vadapalli, president and CEO of Alaska Communications.

Revenue Highlights: First Quarter 2018 Compared to First Quarter 2017

  • Total revenue:
    • Revenue was $56.0 million, compared to $56.7 million.
    • Total broadband revenue was $29.7 million, compared to $31.0
      million.
  • Business and wholesale:
    • Comprised 60.3 percent of total revenue.
    • Revenue was $33.8 million, compared to $34.5 million.
    • Broadband revenue was $23.2 million, compared to $24.6 million.
  • Consumer:
    • Comprised 16.7 percent of total revenue.
    • Revenue was $9.4 million, compared to $9.3 million.
    • Broadband revenue was $6.5 million, compared to $6.4 million.
  • Regulatory:
    • Comprised 23.0 percent of total revenue.
    • Revenue was $12.8 million, compared to $12.9 million.

Financial Metrics: First Quarter 2018 compared to First Quarter 2017

  • Operating income was $5.3 million, compared to $4.7 million.
  • Net income was $2.1 million compared to a net loss of $0.7 million.
  • Net cash provided by operating activities was $13.4 million, compared
    to $5.3 million.
  • Capital expenditures were $8.7 million, compared to $5.1 million.

Balance Sheet Metrics: March 31, 2018 compared to December 31, 2017

  • Cash was $17.0 million, compared to $16.2 million.
  • Net debt was $174.5 million, compared to $177.2 million.
  • On May 1, 2018 the company repurchased the remaining $10 million of
    its convertible debt.

Non-GAAP Metrics: First Quarter 2018 compared to First Quarter 2017

  • Adjusted EBITDA was $14.4 million, compared to $14.3 million.
  • Adjusted free cash flow was $1.8 million, compared to $7.7 million.

Reconciliations of non-GAAP financial measures to GAAP financial
measures can be found in tables at the end of this release and on the
company's website at http://www.alsk.com
in the investment data section.

2018 Guidance

Laurie Butcher, Alaska Communications senior vice-president of finance,
said, "Our guidance for 2018 reflects our expectations of stability
across all our financial metrics as compared to the prior year. We
remain in compliance with our debt covenants despite delays in rural
health care cash receipts, and retain the ability to create additional
headroom through rigorous cash management and, if needed, by working
with our lenders. Subsequent to quarter end, we retired our convertible
debt on schedule and are pleased to have further simplified our balance
sheet. We see great opportunity in the market and continue to invest for
long term growth."

The company provides guidance as follows:

  • Total Revenue between $225 million and $230 million
  • Adjusted EBITDA between $55 million and $58 million
  • Capital Expenditures between $33 million and $35 million
  • Adjusted Free Cash Flow between $5 million and $8 million

Conference Call

The Company will host a conference call and live webcast on Thursday,
May 10, 2018 at 2:00 p.m. Eastern Time to discuss the results. Parties
in the United States and Canada can access the call at 1-800-289-0459
and enter pass code 210819. All other parties can access the call at
1-323-794-2558 and use the same code. On the call, the management team
will answer questions submitted in advance.

The live webcast of the conference call will be accessible from the
"Events Calendar" section of the Company's website (www.alsk.com).
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 June 9, 2018 at 5:00 p.m. Eastern Time. To hear
the replay, parties in the U.S. and Canada can call 1-888-203-1112 and
enter pass code 7561788. All other parties can call 1-719-457-0820 and
enter pass code 7561788.

About Alaska Communications

Alaska Communications (NASDAQ:ALSK) is the leading provider of advanced
broadband and managed IT services for businesses and consumers in
Alaska. The company operates a highly reliable, advanced statewide data
network with the latest technology and the most diverse undersea fiber
optic system connecting Alaska to the contiguous U.S. For more
information, visit www.alaskacommunications.com
or www.alsk.com.

Non-GAAP Measures

In an effort to provide investors with additional information regarding
our financial results, we have provided certain non-GAAP financial
information, including Adjusted EBITDA, Adjusted Free Cash Flow and Net
Debt. Adjusted EBITDA eliminates the effects of period to period changes
in costs that are not directly attributable to the underlying
performance of the Company's business operations and is used by
Management and the Company's Board of Directors to evaluate current
operating financial performance, analyze and evaluate strategic and
operational decisions and better evaluate comparability between periods.
Adjusted Free Cash Flow is a non-GAAP liquidity measured used by
Management and the Company's Board of Directors to assess the Company's
ability to generate cash and plan for future operating and capital
actions. Adjusted EBITDA and Adjusted Free Cash Flow are common measures
utilized by our peers (other telecommunications companies) and we
believe they provide useful information to investors and analysts about
the Company's operating results, financial condition and cash flows. Net
Debt provides Management and the Company's Board of Directors with a
measure of the Company's current leverage position. The definition of
these non-GAAP measures is provided on Schedules 4, 6 and 9 to this
press release. Adjusted EBITDA and Adjusted Free Cash Flow should not be
considered a substitute for Net Income, Net Cash Provided by Operating
Activities and other measures of financial performance recorded in
accordance with GAAP. Reconciliations of our non-GAAP measures to our
nearest GAAP measures can be found in the tables in this release and on
our website in the investment data section. Other companies may not
calculate non-GAAP measures in the same manner as Alaska Communications.
The Company does not provide reconciliations of guidance for Adjusted
EBITDA to Net Income, and Adjusted Free Cash Flow to Net Cash from
Operating Activities, in reliance on the unreasonable efforts exception
provided under Item 10(e)(1)(i)(B) of Regulation S-K. The Company does
not forecast certain items required to develop the comparable GAAP
financial measures. These items are charges and benefits for
uncollectible accounts, certain other non-cash expenses, unusual items
typically excluded from Adjusted EBITDA and Adjusted Free Cash Flow, and
changes in operating assets and liabilities (generally the most
significant of these items, representing cash outflows of $2.4 million
in the three-month period of 2018).

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 the Company's
control. Such factors include, without limitation, Federal and Alaska
Universal Service Fund changes, funding through the rural health care
universal service support mechanism and our ability to comply with the
regulatory requirements to receive those support payments, adverse
economic conditions, the effects of competition in our markets, our
relatively small size compared with our competitors, the Company's
ability to compete, manage, integrate, market, maintain, and attract
sufficient customers for its products and services, adverse changes in
labor matters, including workforce levels, our ability to service our
debt and refinance as required, labor negotiations, employee benefit
costs, our ability to control other operating costs, disruption of our
supplier's provisioning of critical products or services, the actions of
activist shareholders, the impact of natural or man-made disasters,
changes in Company's relationships with large customers, unforeseen
changes in public policies, regulatory changes, changes in technology
and standards, our internal control over financial reporting, and
changes in accounting standards or policies, which could
affect
reported financial results. For further information regarding risks and
uncertainties associated with the Company's 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 SCHEDULE OF OPERATIONS
(Unaudited, In Thousands Except Per Share Amounts)
 
Three Months Ended
March 31,
2018 2017
 
 
Operating revenues $ 55,972 $ 56,731
 
Operating expenses:
Cost of services and sales (excluding depreciation and amortization) 25,833 25,142
Selling, general & administrative 16,012 17,939
Depreciation and amortization 8,787 8,903
(Gain) loss on disposal of assets, net   (3 )   19  
 
Total operating expenses   50,629     52,003  
 
Operating income 5,343 4,728
 
Other income and (expense):
Interest expense (3,504 ) (3,845 )
Loss on extinguishment of debt - (2,276 )
Interest income 14 7
Other income (expense), net   104     (154 )
Total other income and (expense)   (3,386 )   (6,268 )
 
Income (loss) before income tax expense 1,957 (1,540 )
 
Income tax benefit   112     832  
 
Net income (loss) 2,069 (708 )
 
Less net loss attributable to noncontrolling interest   (32 )   (32 )
 
Net income (loss) attributable to Alaska Communications $ 2,101   $ (676 )
 
Net income (loss) per share attributable to Alaska Communications:
Basic and Diluted $ 0.04   $ (0.01 )
 
Weighted average shares outstanding:
Basic   52,681     52,011  
Diluted   53,857     52,011  
 

         
Schedule 2
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, In Thousands Except Per Share Amounts)
 
March 31, December 31,
Assets 2018 2017
 
Current assets:
Cash and cash equivalents $ 5,226 $ 4,354
Restricted cash 11,814 11,814
Accounts receivable, net of allowance of $2,842 and $2,729 30,084 32,535
Materials and supplies 5,681 7,046
Prepayments and other current assets   13,286     6,115  
Total current assets 66,091 61,864
 
Property, plant and equipment 1,365,845 1,357,929
Less: accumulated depreciation and amortization   (999,367 )   (991,816 )
Property, plant and equipment, net 366,478 366,113
 
Deferred income taxes 2,308 3,394
Other assets   11,675     11,415  
Total assets $ 446,552   $ 442,786  
 
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term obligations $ 16,882 $ 17,030
Accounts payable, accrued and other current liabilities 33,752 36,148
Advance billings and customer deposits   4,523     4,213  
Total current liabilities 55,157 57,391
 
Long-term obligations, net of current portion 167,656 168,959
Deferred income taxes 1,479 596
Other long-term liabilities, net of current portion   60,565     61,330  
Total liabilities   284,857     288,276  
Commitments and contingencies
Alaska Communications stockholders' equity:
Common stock, $.01 par value; 145,000 authorized 531 525
Additional paid in capital 158,795 158,969
Retained earnings (accumulated deficit) 3,460 (3,579 )
Accumulated other comprehensive loss   (2,090 )   (2,396 )
Total Alaska Communications stockholders' equity 160,696 153,519
Noncontrolling interest   999     991  
Total stockholders' equity   161,695     154,510  
 
Total liabilities and stockholders' equity $ 446,552   $ 442,786  
 

         
Schedule 3
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, In Thousands)
 
Three Months Ended
March 31,
2018 2017
Cash Flows from Operating Activities:
Net income (loss) $ 2,069 $ (708 )

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

Depreciation and amortization 8,787 8,903
(Gain) loss on the disposal of assets, net (3 ) 19
Amortization of debt issuance costs and debt discount 356 1,025
Loss on extinguishment of debt - 2,276
Amortization of deferred capacity revenue (947 ) (847 )
Stock-based compensation 242 610
Income tax benefit (112 ) (832 )
Charge for uncollectible accounts 537 89
Other non-cash expense, net 90 145
Change in income tax payable or receivable - 574
Changes in operating assets and liabilities   2,402     (5,956 )
Net cash provided by operating activities   13,421     5,298  
 
Cash Flows from Investing Activities:
Capital expenditures (8,680 ) (5,148 )
Capitalized interest (420 ) (243 )
Change in unsettled capital expenditures (1,272 ) (1,225 )
Proceeds on sale of assets   -     3  
Net cash used by investing activities   (10,372 )   (6,613 )
 
Cash Flows from Financing Activities:
Repayments of long-term debt (8,807 ) (86,806 )
Proceeds from the issuance of long-term debt 7,000 180,000
Debt issuance costs and discounts - (5,217 )
Cash paid for debt extinguishment - (1,313 )
Cash proceeds from noncontrolling interest 40 -
Payment of withholding taxes on stock-based compensation   (410 )   (599 )
Net cash (used) provided by financing activities   (2,177 )   86,065  
 
Change in cash, cash equivalents and restricted cash 872 84,750
 
Cash, cash equivalents and restricted cash, beginning of period   16,168     23,145  
 
Cash, cash equivalents and restricted cash, end of period $ 17,040   $ 107,895  
 
Supplemental Cash Flow Data:
Interest paid $ 3,441 $ 1,536
Income taxes refunded, net $ - $ (574 )
 

         
Schedule 4
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ADJUSTED EBITDA
(Unaudited, In Thousands)
 
Three Months Ended
March 31,
2018 2017
 
Net income (loss) $ 2,069 $ (708 )
Add (subtract):
Interest expense 3,504 3,845
Loss on extinguishment of debt - 2,276
Interest income (14 ) (7 )
Depreciation and amortization 8,787 8,903
Other (income) expense, net (104 ) 154
(Gain) loss on the disposal of assets, net (3 ) 19
Income tax benefit (112 ) (832 )
Stock-based compensation 242 610
Net loss attributable to noncontrolling interest   32     32  
 
Adjusted EBITDA $ 14,401   $ 14,292  
 

NonGAAP Measures:

The Company provides certain non-GAAP financial information, including
Adjusted EBITDA, Adjusted Free Cash Flow and Net Debt. Adjusted EBITDA
eliminates the effects of period to period changes in costs that are not
directly attributable to the underlying performance of the Company's
business operations and is used by Management and the Company's Board of
Directors to evaluate current operating financial performance, analyze
and evaluate strategic and operational decisions and better evaluate
comparability between periods. Adjusted Free Cash Flow is a non-GAAP
liquidity measure used by Management to assess the Company's ability to
generate cash and plan for future operating and capital actions.
Adjusted EBITDA and Adjusted Free Cash Flow are common measures utilized
by our peers (other telecommunications companies) and we believe they
provide useful information to investors and analysts about the Company's
operating results, financial condition and cash flows. Net Debt provides
Management and the Board of Directors with a measure of the Company's
current leverage position.

The Company does not provide reconciliations of guidance for Adjusted
EBITDA to Net Income, and Adjusted Free Cash Flow to Net Cash Provided
by Operating Activities, in reliance on the unreasonable efforts
exception provided under Item 10(e)(1)(i)(B) of Regulation S-K. The
Company does not forecast certain items required to develop the
comparable GAAP financial measures. These items are charges and benefits
for uncollectible accounts, certain other non-cash expenses, unusual
items typically excluded from Adjusted EBITDA and Adjusted Free Cash
Flow, and changes in operating assets and liabilities (generally the
most significant of these items, representing cash outflows of $2.4
million in the three-month period ended March 31, 2018).

Adjusted EBITDA and Adjusted Free Cash Flow are not GAAP measures and
should not be considered a substitute for net income, net cash provided
by operating activities, or net cash provided or used. Adjusted EBITDA
as computed above is not consistent with the definition of Consolidated
EBITDA referenced in our 2017 Senior Credit Agreement and 2015 Senior
Credit Agreements, and other companies may not calculate Non-GAAP
measures in the same manner we do.

Adjusted EBITDA is defined as net income (loss) before interest, loss on
extinguishment of debt, depreciation and amortization, other (income)
expense, gain or loss on asset purchases or disposals, income taxes,
stock-based compensation, and net loss attributable to noncontrolling
interest.

         
Schedule 5
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO
ADJUSTED FREE CASH FLOW

(Unaudited, In Thousands)
 
Three Months Ended
March 31,
2018 2017
 
Net cash provided by operating activities $ 13,421 $ 5,298

Adjustments to reconcile net cash provided by operating activities
to adjusted free cash flow:

Capital expenditures (8,680 ) (5,148 )
Amortization of deferred capacity revenue 947 847
Amortization of GCI capacity revenue (511 ) (511 )
Amortization of debt issuance costs and debt discount (356 ) (1,025 )
Interest expense 3,504 3,845
Interest paid (3,441 ) (1,536 )
Interest income (14 ) (7 )
Income taxes (payable) receivable - (574 )
Income taxes refunded, net - 574
Charge for uncollectible accounts (537 ) (89 )
Other (income) expense, net (104 ) 154
Net loss attributable to noncontrolling interest 32 32
Other non-cash expense, net (90 ) (145 )
Changes in operating assets and liabilities   (2,402 )   5,956  
Adjusted free cash flow $ 1,769   $ 7,671  
 

         
Schedule 6
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ADJUSTED FREE CASH FLOW
(Unaudited, In Thousands)
 
Three Months Ended
March 31,
2018 2017
 
Adjusted EBITDA $ 14,401 $ 14,292
 
Less:
Capital expenditures (8,680 ) (5,148 )
Amortization of GCI capacity revenue (511 ) (511 )
Income taxes refunded, net - 574
Interest paid   (3,441 )   (1,536 )
 
Adjusted free cash flow* $ 1,769   $ 7,671  
 

* Quarterly Adjusted Free Cash Flow fluctuates and should not be viewed
as an indicator of annual performance. Onetime events, seasonality of
capital spend and the timing of interest payments may result in negative
Adjusted Free Cash Flow in one or more quarters.

NonGAAP Measures:

Adjusted Free Cash Flow is a non-GAAP liquidity measure and is defined
as Adjusted EBITDA, less recurring operating cash requirements which
include capital expenditures, cash income taxes refunded or paid, cash
interest paid, and amortization of GCI capacity revenue. Amortization of
deferred revenue associated with our interconnection agreement with GCI
is excluded from Adjusted Free Cash Flow because no cash was received by
the Company in connection with this agreement. Amortization of all other
deferred revenue, including that associated with other IRU capacity
arrangements, is included in Adjusted Free Cash Flow because cash was
received by the Company, typically at contract inception, and is being
amortized to revenue over the term of the relevant agreement.

See Schedule 3 for Net cash provided by operating activities, Net cash
used by investing activities, and Net cash (used) provided by financing
activities.

See Schedule 5 for the reconciliation of net cash provided by operating
activities to Adjusted Free Cash Flow.

         
Schedule 7
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
REVENUE BY CUSTOMER GROUP
(Unaudited, In Thousands)
 
Three Months Ended
March 31,
2018 2017
Business and wholesale revenue
Business broadband $ 13,659 $ 16,281
Business voice and other 6,851 6,631
Managed IT services 1,265 907
Equipment sales and installations 922 774
Wholesale broadband 9,578 8,317
Wholesale voice and other   1,488     1,629
 
Total business and wholesale revenue   33,763     34,539
Growth in business and wholesale -2.2 %
Consumer revenue
Broadband 6,492 6,418
Voice and other   2,877     2,910
 
Total consumer revenue   9,369     9,328
 
Total business, wholesale, and consumer revenue   43,132     43,867
Growth in business, wholesale and consumer revenue -1.7 %
Growth in broadband revenue -4.1 %
 
Regulatory revenue
Access 7,917 7,941
High cost support   4,923     4,923
 
Total regulatory revenue   12,840     12,864
 
Total revenue $ 55,972   $ 56,731
Growth in total revenue -1.3 %
 

             
Schedule 8
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
KEY OPERATING STATISTICS
(Unaudited)
 
Three Months Ended
March 31, December 31, March 31,
2018 2017 2017
 
Voice:
Business access lines 71,002 71,699 73,313
Consumer access lines 28,221 29,262 32,519
 
Voice ARPU business $ 24.76 $ 23.29 $ 23.21
Voice ARPU consumer $ 31.57 $ 31.65 $ 27.66
 
Broadband:
Business connections 15,306 15,293 15,223
Consumer connections 33,675 33,904 34,917
 
Broadband ARPU business $ 297.38 $ 267.44 $ 356.06
Broadband ARPU consumer $ 63.77 $ 60.72 $ 61.22
 
Monthly Average Churn:
Business voice 1.0 % 0.9 % 0.8 %
Consumer broadband 2.4 % 2.7 % 2.1 %
Consumer voice 1.5 % 1.6 % 1.3 %
 

         
Schedule 9
 
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
LONG TERM DEBT AND NET DEBT
(Unaudited, In Thousands)
 
March 31, December 31,
2018 2017
2017 senior secured credit facility due 2023 $ 176,700 $ 178,350
Debt discount - 2017 senior secured credit facilities due 2023 (2,507 ) (2,668 )
Debt issuance costs - 2017 senior secured credit facilities due 2023 (2,697 ) (2,869 )
6.25% convertible notes due 2018 10,044 10,044
Debt discount - 6.25% convertible notes due 2018 - (18 )
Debt issuance costs - 6.25% convertible notes due 2018 - (4 )
Capital leases and other long-term obligations   2,998     3,154  
Total debt 184,538 185,989
Less current portion   (16,882 )   (17,030 )
Long-term obligations, net of current portion $ 167,656   $ 168,959  
 
Total debt $ 184,538 $ 185,989
Plus debt discounts and debt issuance costs   5,204     5,559  
Gross debt 189,742 191,548
Cash and cash equivalents (5,226 ) (4,354 )
Restricted cash held for 6.25% convertible notes due 2018   (10,044 )   (10,044 )
Net debt $ 174,472   $ 177,150  
 

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