Q2 2019 Earnings Call
Welcome to the Alaska Communications second quarter 2019 earnings call.
A question you May press Star one on your telephone keypad todays conference is being recorded.
I'd like to turn the call.
Stephanie Smith manager Investor Relations. Please go ahead.
Thank you.
Welcome to the Alaska Communications second quarter 2019 conference call.
Tiffany Smith managers Investor Inboard relations.
With me today are Bill Fisher interim President and Chief Executive Officer.
But your senior Vice President of finance and large scanner Deputy General counsel.
During this call we will 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 Dot <unk> dot com.
Now please review slide three 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. Thank you Tiffany Good day and thank you for joining us, let's turn to slide five.
I would like the opportunity to really introduce myself as a longtime customer facing member of the executive team. The board has entrusted me to achieve our business plan and create a company that is a more engaged partner with our customers.
Under my leadership, our success has been and will continue to be on the strength of our team and our customer centric philosophy.
As a technology leader in connectivity.
Broadband managed <unk> capabilities, we have been the first to market with many solutions.
We pride ourselves on having a state of the art robust and reliable network across the state of Alaska and in our strategic markets.
Wood fiber optic greens and extensions that span across Alaska and into the Pacific Northwest.
We.
Operate and manage over 130000 fiber miles insurance seamless network experience for all of our customers.
With approximately 580 full time employees across 19 states, we serve customers across 11 states with 15 owned and managed cable landing stations 870 fiber lit buildings and 29 points of presence across six states.
Many locations across Alaska cannot be served by fiber.
To ensure that we meet our customer needs, we have advanced our capabilities. He is our fixed wireless.
Our microwave and our satellite services.
Turning to slide six.
Evan let our revenue teams I am intimately familiar with our customer base and it is with laser focus that we continue to serve them.
Well lower he will speak to our financial results.
I will note that our performance for the quarter was within our expectations.
In the first half of the year, we won new large customer current contracts, which will translate to increased recurring revenue in the second half of 2019.
And our solid sales and delivery channels provide additional growth for the future.
Business and wholesale continues to be our main growth driver.
The true indication of a job well done is when your customers come back for more.
In July our team strength was exemplified with the signing of an additional long term contract with an existing carrier customer for another prefunded high capacity fibre and secured network.
The cell network services enables revenue growth for this carrier as it serves its customers in addition to providing opportunities for future growth.
This contract was a third phase assembler Prefunded Bill.
Additionally, progress continues on our multiyear fiveg wireless backhaul build out.
We continue to work closely with the customer and we are on track to meet the milestones there said.
We have also completed an upgrade on our eight corn fiber system earlier in 2019.
Continue to upgrade our Northstar fiber system and actually expect this to be completed Q1 of 2020.
These are just a few examples of our initiatives to strengthen the backbone of our network.
Efficiently using our capital and create a foundation for future growth.
We do recognize the Alaska economy is facing challenges.
Our legislature and governor or lock to budget process that has the potential to impact how Alaska businesses may spend their money.
We've long been known for providing solutions that enable customers to get the highest value for their ita span.
And now that is more important than ever.
We will continue to monitor the state's fiscal status and analyze both the risk and the opportunities associated with them.
Let's turn to slide seven.
We continue our targeted focus in our consumer business, we are progressing with our expansion into our multi dwelling units during the quarter, we signed a contract with the Army Air Force Exchange services, commonly known as a.
This is significant because it allows us access on multiple army and air force basis to provide our internet now product.
Since we last reported we are now.
We are initiating services into two additional basis in Alaska.
Okay penetration rate is approximately 32%.
We expect our target we expect to reach our target of 6000 locations enabled by the end of this year.
Also in the second quarter, we continued our fixed wireless deployments to accelerate our growth and future rural areas as part of the Fccs Connect America program.
We are enabling more locations each year and ramping up our sales efforts to increase the penetration.
We are pleased to report that those efforts are showing success and to date, we have over 500, new installations completed we expect to see continued progress with these efforts.
We recognize that in our industry there are areas of growth and areas of legacy declines we are actively choosing to focus our business on the areas of growth revenues.
Those revenues combined with our stable high cost support made up 70% of our revenues this quarter.
This is a trend that we expect to see increase in the future.
I look forward to working with our team and I'm confident in our business plan and our team's ability to meet our plan.
With this let me now handle Handbook hand, the call to Lori who will cover our financial results Lori.
Thank you Bill.
Turning to slide nine let me start with our year over year revenue performance for the quarter and year to date periods ended June Thirtyth 2019.
Total revenue was 57.4 million for the quarter and 114.3 million year to date.
Decreasing 3.7% and 1.1% respectively from prior year comparable period.
The decline year over year is primarily attributable to lower regulatory revenue in 2019 related to the restructuring of the Alaska Universal Service program.
Offset by modest growth of 3.2% in business and wholesale revenue.
Our typical growth in business and wholesale was negatively impacted in the quarter by a $2.1 million favorable adjustments to business broadband for the effect of rural healthcare increases approved by the FCC and recorded in June of 2018.
And lower equipment sales, which we know can be variable during the year.
Business and wholesale representing 64.5% of our total revenue declined 1.2% for the quarter and grew 3.2% for the six months ended June Thirtyth 2019 compared to the prior year.
Consumer revenue, representing 16.3% of our total revenues decreased in the second quarter, 1.2% and 1.5% year to date.
As Bill noted in his remarks, we're taking a focused approach with our consumer market targeting the use of new technology and go to market strategies with fixed wireless and multi dwelling unit.
Regulatory revenue, representing 19.2% of our total revenue declined 12.9% for the second quarter and 12.8% year to date.
As a reminder, this decline was anticipated and reflects changes I noted earlier to the program under which we received state Universal Service Fund.
We continue to expect similar declines in regulatory revenue for the remainder of the year, yet we expect these declines to be less pronounced in the future.
Turning to slide 10.
We shared this slide with you on our year end earnings call. We've provided here again as a reminder of revenue trends over the years and the anticipated shift in our growth and legacy revenues.
Looking to the future. It's this trajectory of growth revenues and its increasing percentage of our overall revenues that will create the basis for top line growth and EBITDA expansion.
Turning to slide 11, you can see the annual trends in our business.
Our business and wholesale revenues shows year over year growth and is expected to continue to drive overall performance.
Adjusted EBITDA was 13.9 million for the quarter and $29.1 million for the six months ended June Thirtyth 2019, compared to 16.9 million and $31.3 million in the prior year period.
The decrease in the quarter year over year reflects the impact of 2.4 million in labor increases in 2019.
Which are primarily the result of the reinstatement of both the furloughs and temporary wage reductions we imposed in the first quarter of 2018 in response to revenue pressures from the rural Health care program.
As Bill noted our employees are the foundation of our business and we believed it was imperative to restore wages and retain our talent.
Even with those labor increases in 2019, we are on track with our adjusted EBITDA expectation.
Adjusted free cash flow was negatively was negative $3.1 million for the quarter and negative.
100000 for the six months ended June Thirtyth 2019, reflecting the impacts noted in EBITDA above.
Increases in capital spending for our Fiveg wireless backhaul build and 1.6 million of severance costs for the departure of our former CEO .
Although the severance expense was unanticipated and puts pressure on our free cash flow this quarter with stronger EBITDA performance in the back half of the year and anticipated AMC tax credits, we remain comfortable with our guidance.
Turning to the balance sheet.
With a net debt balance of 159 million and net leverage of 2.97 times at June Thirtyth 2019, we're a leader among our peers.
This is a direct result of hard decisions, we made several years ago, such as reducing and then eliminating our dividends and focusing on bringing debt levels down.
This is something that many of our peers are focusing on now.
Also as we mentioned on our last call in the first quarter of this year, we renegotiated our debt instrument for more flexibility and more favorable terms.
As a follow up to that.
In June the company entered into an interest rate swap with our lenders effectively fixing the interest payments on 75% of our debt at 6.17 per cent for three years, providing protection from interest rate fluctuations.
Today, we're sitting with a strong balance sheet with 25.6 million in cash on June Thirtyth 2019.
And an undrawn capacity on both a 25 million dollar delayed draw instrument and a 20 million dollar revolver.
That translates to over 70 million in liquidity.
Additionally, in the second quarter, the board directed management to repurchase up to a million shares of the company's outstanding stock thrilled program trading plan.
Under the share repurchase authorization in place through December 31st 2019.
To date, the company has repurchased over 500000 shares.
Net capital spending for the quarter was 11.9 million and $20.4 million for the six months ended June Thirtyth 2019, compared to 8.4 million and $17.1 million in the prior year comparable period.
This is in line with our expectations and the additional capital we spoke of that has been allocated to our fiveg wireless build.
As Bill noted in his remarks in July we signed an agreement with a carrier customer to build a fiber network in Alaska.
This project is yet another exciting opportunity for us to expand our fiber footprint without the typical impacts to free cash flow.
This project is being entirely pre funded by the customer as the fiber is constructed and the milestones are complete.
Capital spending for this project is not included in our guidance and well would be reported separately in our adjusted free cash flow to clearly show the inflows and corresponding capital outlays.
Like the project currently underway in Oregon. This project will result in a revenue stream from a long term anchor tenant well additional capacity will be available for us to sell.
Turning to slide 12.
In summary, I'd like to remind you that operating results can vary by quarter. As a result of many factors, which can include the timing of our sales delivery and associated revenue recognition and higher capital spending due to seasonal work among other things.
The first half of the year is not necessarily indicative of annual performance and we anticipate a strong back half of the year as we get the benefit from a variety of sales and installation initiatives.
We have confidence in our business plan and we reaffirm our guidance for 2019.
We look forward to reporting our progress to guidance in future quarters.
And with that let me hand, the call back to Bill.
Bill.
Thank you Laurie turning to slide 13.
Our top priority is performing to our business plan as I am committed to meeting our 2019 guidance.
Our market and technology dynamics combined with our internal competencies will enable our continued growth.
We do this by leveraging our reliable network.
Our strategic customer relationships and our notable customer service.
We continue to efficiently tractor growth capital in areas that will grow the business today.
And we will sustain us in the future.
Our management team is focused on superior economic condition, with an emphasis on achieving or exceeding our operational and financial goals.
We are working closely with the board to drive the most value creative capital allocation strategy.
The board and this management team remains committed to maximizing shareholder value and have taken several steps to do so.
Including Rightsizing, the board and management team as well as implementing the your authorized stock buyback plan.
In closing, we would like to thank gone and bought a poly for his dedicated service to our company company over the last 13 years.
I look forward to providing updates on all fronts in the months and quarters ahead.
Thank you for joining us today and with this let me open the call for questions.
Operator.
Thank you as a reminder, if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off tomorrow. So much recharge equipment again press star one to ask a question.
And we'll take our first question today from Barry Sine with Spartan capital Securities.
Hey, good afternoon, I guess good morning in Anchorage there.
Hi, there good morning Barry.
The script was very helpful. If you look at the reported results for the first half of the year and compare that to the guidance is not quite clear how you get there, but it but you've cleared up a lot of that talking about some of these projects I wanted to talk about the guidance you've given you've reiterated the guidance.
Implies roughly stable revenue, which is quite a good accomplishment compared to some of your peers in the industry. If we look at the business side of that and how that May drive Ah you. The guidance numbers that you're talking about you've talked about a number of major initiatives you have the prefunded.
Capex you have the fiveg build on the other side we have.
Continued difficult Alaskan economy, if you could update us a bit on that what are we seeing I've read externally from far away a bit about the budget process and Alaska. If you could give us a little color on that and then secondly, the competitive environment I know versus a lot of your peers you have limited competition, but it is still a fairly a large competitor on the market.
Yeah. Thanks, Barry for the question, let me start with the.
What the state budget part of your question and then I'll go on to that.
To the competition base.
Like I said in my opening remarks that the legislature and the state and the governor and the process action.
Hopefully in the process of finalizing what a what the new budget will look like.
If they read any anything you do know that that's important to the governor our governor existing governor to balance the budget based on budgets hats, and ER and because of some of those costs and what we think our new budget will look like for the state It may and pay impact some of some of the Alaska businesses.
To invest and to spend money.
Now.
We havent seen any impact or much impact at this point.
But what I would.
I would be comfortable saying is.
Yes, the I think the uncertainty as grier the uncertainty is driving a little bit of hesitation in the market and when we say that when we see that hesitation, it's usually from a project based.
Point of view, so our customers if they are.
If they could put off a project that they were willing to invest in this year and they get put it off to next year. They may do so so that may impact some of our and Rcs or nonrecurring revenues.
On the flip side when we have had.
Challenging budget times like this we've had very little or minimal impact on our MRC side of the business, which is good for us.
So that's.
That's from the state budget point of view from that.
Head of the.
Point of view.
You know we have.
One large competitor appear that we competed in the marketplace against for a very very long time.
Multiple other smaller competitors and the rural areas.
No I I.
I would say a lot has changed on the competitive landscape.
Either from how our competitive competitors are responding to us or how we are responding to our competitors.
I think our results for the last five and five or six years, especially in the business and wholesale side.
Shows, where we we continue to steal market share and continue to win as the market market growth and I would expect that in the future.
Thanks for the question.
In a similar question on the consumer part of revenue expectations again, there you've got a drivers with the Caf II broadband to expand market expansion MD you activity on the economic and competitive environment.
On the economy I believe correct me, if I'm wrong that one of the goals of the Governor is too.
Perhaps grow.
The annual dividend that alaskans receive so that May I would think has positive implications for the consumer a part of the.
Of your spending and then also if you're seeing any changes on the competitive environment you face the same large competitor in consumer as well.
Yeah, So no nothing nothing on the competitive landscape is really different than the past.
We.
On our consumer line of business, we have expected and we continue to expect our voice revenue and a consumer line of business to decline we've seen a decline in years past, we will continue to decline.
Where we focus our attention on the consumer is really where we see strategic growth areas and as I identified in my.
My remarks at the Envios, especially on the military bases and also our market expansion.
Through our fixed wireless technology.
Now to your point on the dividend as certainly as a longtime Alaska resident.
We serve so certainly I would love to see our dividends to continue to grow I'm not sure how that would impact.
Additional voice services or additional revenue services Hoarse voice channel certainly we will like I said, we'll continue to analyze that and if we see opportunities we will be ready to ready to move forward with it.
But I appreciate the questions.
You mentioned two additional military bases have you launched in those bases, yet and can you tell us what those bases are.
So we have lives and to wine and when they were in the process.
Turning the second military base and again these are additional to the military base as we've reported.
On earlier.
AFFO basis or in the interior of Alaska.
I don't want to name the basis until we get on both launched in.
All services out at this point, but we are on track and actually ahead of track ahead of schedule to have both of these bases launched.
Okay, and then turning to Capex you talk about the Prefunded contract. There was a press release on that and then also a fiveg wireless backhaul I just want to confirm those are set to separate.
Contract two separate initiatives and then on the pre funded.
Laura you talked about how you would report that in the free cash flow table. So I'm, assuming that there should be no. There was no action.
In the first half of the year, because I don't see anything indicated in the free cash flow table on that Prefunded contract.
Barry that's absolutely correct and just to give you kind of a visual if you go back to our year end cash flow statement free cash flow statement, you will see an example, and that wasn't a project that we had started earlier in Oregon last year. So you will see an example of exactly how those projects will be broken out and you will see that up here actually here next quarter for this one that we just signed in July .
And just to kind of linking that for you, yes, the what we our Fiveg backhaul, we're calling it C ran project. Our C ran project is actually incorporated into our guidance numbers, which is why you see our guidance this year being well above our typical $35 million a year span, we did announced earlier that we expected to spend $7 million to $8 million on DRAM. This year, hence our guidance bumped up to 40 to 42 million.
And we'll be reporting out against that as we get later in the year, but the special projects.
Our very different this.
This pre funded project is not included in guidance and as I said will be broken out separately for you in that free cash flow and the reason we did that is really the the the guidance for.
Capital and free cash flow shouldnt be impacted by those because again the customer gives us.
All of the money upfront.
And my last question revolves around schedule seven your earnings release, the last section there is on the regulatory revenue.
Correct me, if I'm wrong I believe the high cost support relates to the Caf two funding and that number has been pretty stable that should be locked in.
For several years on the access revenue, that's where we saw a pretty significant decline and you cited the Alaska unit versus service program on that portion of revenue.
Typically companies will have pretty good forward visibility on that because the regulations will be announced in advance what do we know in terms of the regulatory picture in Alaska and the impact on that revenue line item and how that May change not just in 2019, but do we have any visibility you know from the regulators in the state or the federal level going forward.
Another great question Barry.
First of all to answer your question, Yes, the high cost support line item is entirely Caf two and you will see that number remain constant through 2025 that program actually sun sets at the end of that year, but as we have seen going from Caf one to caf two additional programs.
Our our typically spot on and I know in the lower 48, they are already working on.
The equivalent of Caf three.
From an access perspective, you're also absolutely right the regulatory wheel I think.
For better or worse turn slowly so we typically have a lot of visibility into the future.
As I mentioned in my prepared remarks. This is 12.8% decline that we saw this year was absolutely anticipated and it has been built into our budget and it was really the direct result of one programs then sensing and another taking its place that is actually funding at about half the amount.
As we said we expect some of these programs to continue to decline, but at a much slower pace than we're seeing this year. So if you look at a linear line of these revenues we've had a gradual decline 2019, we expect this fairly steep one and then we expect that to level out to a slower decline out into the future.
Thank you very much.
Thanks for your questions Barry Thanks, Barry.
As a reminder press star one if we have a question we'll pause for a moment.
And that will conclude today's question and answer session I will now turn the conference over to management for any additional closing remarks.
Thank you all for joining us on the call today, we always welcome the opportunity to talk with our shareholders and if you are interested in meeting with us whether by phone or in person on future Road shows please reach out to Tiffany Smith and Investor Relations Good day.
That does conclude today's conference call. Thank you for your participation you may now disconnect.