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Edited Transcript of ALSK earnings conference call or presentation 11-Mar-20 6:00pm GMT

·16 mins read

Q4 2019 Alaska Communications Systems Group Inc Earnings Call Anchorage Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Alaska Communications Systems Group Inc earnings conference call or presentation Wednesday, March 11, 2020 at 6:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Laurie M. Butcher Alaska Communications Systems Group, Inc. - CFO * Tiffany Smith Alaska Communications Systems Group, Inc. - Manager of Board & IR * William H. Bishop Alaska Communications Systems Group, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Barry Sine Spartan Capital Securities, LLC, Research Division - Director of Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Alaska Communications Systems Fourth Quarter and Year-End 2019 Earnings Call. Today's conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Tiffany Smith. Please go ahead. -------------------------------------------------------------------------------- Tiffany Smith, Alaska Communications Systems Group, Inc. - Manager of Board & IR [2] -------------------------------------------------------------------------------- Thank you. (technical difficulty) can include, among other things, the timing of our sales delivery and associated revenue recognition and (technical difficulty) 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? -------------------------------------------------------------------------------- William H. Bishop, Alaska Communications Systems Group, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Tiffany. Hello, and thanks for joining. Let's turn to Slide 5. 2019 was a year of transition, and management was tasked with meeting and exceeding our business plan. After a remarkable fourth quarter, I am pleased to report we closed the year strong while meeting or exceeding our guidance expectations. We are also excited to announce the Board has declared a onetime dividend of $0.09 per share or approximately $5 million. Slide 6. Due to the organic growth of capacity usage from factors such as cloud migration, 5G wireless backhaul and the overall need for more content streaming capacity, demand for our fiber infrastructure and high-performance broadband continued to grow. With our network capabilities, our technologies and our customer relationships, we continue to drive growth, most notably in the Business and Wholesale markets. In that regard, we have recently completed the construction and installation of 2 prefunded projects for high-capacity and secured network fibers in the state of Alaska. As we continue to expand our 5G wireless fiber backhaul build, we intend to leverage future opportunities in both the business and the consumer markets. That said, many of our remote business customers across Alaska cannot be served by fiber. To serve these customers, we use satellite capacity, and we continue the process of migrating customers to our transponder space. This provides us with owners' economics and the ability to customize our solutions. As satellite technology evolves, we continue to evaluate additional capabilities provided by the Low Earth Orbit for LEO satellites. We prioritize winning new customers and increasing our share of wallet. Our managed IT solutions, along with our data center capabilities, provide unique local cloud edge solutions. We also deliver secure private connections to the Azure cloud, as we are the only Microsoft ExpressRoute provider in the state of Alaska. With our customer-centric approach and our 5G buildout, we have accelerated our fiber footprint expansion by over 12% in 2019, increasing to over 146,000 fiber miles across Alaska and the Pacific Northwest. In 2020, we expect the strength of our fiber footprint and relationships to continue to improve our results and sustain our long-term growth for our shareholders. Additionally, we have long advocated modernizing telecom regulations, and we are acquired the Alaska state legislature passed Senate Bill 83. This eliminated tariff and other requirements for most intrastate services. This legislation simplifies our business. It gives us more flexibility with prices, terms and conditions. Turning to Slide 7. We continue to focus on our high-margin consumer business to diversify our revenues and our profitability. As previously announced, in October, we enabled our largest commercial multi-dwelling unit location, a 400-unit complex in Anchorage. This brings our year-end total MDUs to approximately 6,000 with count more than double the approximate 3,000 locations covered at the end of 2018. At year-end, our penetration rate was approximately 26%, and this continues to increase. Regarding fixed wireless. In 2019, much of our hardware came to fruition. In the fourth quarter, we added 10 towers and co-location sites, increasing the count to 36 at year-end. We continue our efforts to accelerate growth in rural areas as part of the FCC's Connect America program. In 2019, we increased Fi-Wi locations passed by 5,300 totaling approximately 13,500 at year-end, of which about 7,500 are CAF II. This more than doubles the locations passed on December 31, 2018. We expect to see continued progress with all these efforts. I am confident in our business plan and our team's ability to meet our plan. With this, let me now hand the call to Laurie, who will cover our financial results. Laurie? -------------------------------------------------------------------------------- Laurie M. Butcher, Alaska Communications Systems Group, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Bill. Turning to Slide 9. Let's review our revenue performance for the quarter ended December 31, 2019, compared to the same quarter in the prior year. Total revenue was $58.3 million compared to $58.7 million. Business and Wholesale revenue increased 3.5% and Consumer revenue remained steady. Total broadband revenue across both our Business and Consumer markets grew 6.4%. And as expected, regulatory revenues declined, primarily due to the updated Alaska carrier of last resort program. While Business and Wholesale revenue growth was more than offset by regulatory declines, we expect regulatory programs to have less of an impact in 2020 and in future years. Turning to Slide 10. You can see the annual trends in our business. We are pleased to report that we met or exceeded all areas of our guidance for 2019. Total revenue was $231.7 million, Business and Wholesale revenue of $150.6 million, grew 4.1% compared to 2018, again, substantially offsetting the decreases in regulatory revenue. We are successfully continuing the shift in our revenue contributions. Due to strong carrier performance, our Business and Wholesale contribution as a percentage of revenue increased from 62% in 2018 to 65% in 2019 despite a 3% decrease in the rural health care contribution as a percentage of total revenue in that same period. Consumer revenue was $37 million in 2019 and contributed 16% of our total revenue in both years. Total broadband across both our Business and Consumer markets as a percentage of total revenue grew to 57% in 2019. Regulatory revenue was $44.1 million, representing 19% of total revenue, down from 22% in 2018. Adjusted EBITDA for the fourth quarter was strong at $17.9 million, increasing from $14.1 million in Q4 2018. Full year 2019 adjusted EBITDA was $62.7 million, up 4.3%, reflecting steady revenues and our focus on cost management initiatives during the year. For the fourth quarter and full year 2019, adjusted free cash flow was $9.7 million and $16 million, respectively, increasing from net cash outflows of $3 million and inflows of $7.2 million in the same periods of 2018. Both quarterly and annual increases reflect the improved adjusted EBITDA performance, the Q4 receipt of a $5 million AMT tax refund and $4.2 million of annual net cash inflows associated with prefunded projects over the prior year. Compared to guidance, which was net of CEO severance and prefunded projects, we achieved $12.1 million in adjusted free cash flow. Once again, strong performance fortified our balance sheet, and we continue to be a leader among our peers. In 2019, we achieved a net debt balance of $153.8 million and net leverage of 2.9x at December 31, 2019. We used $1.8 million to buy back shares of our common stock and completed our share repurchase program of 1 million shares with a total average purchase price of $1.81 per share. We invested $41.4 million in net capital spending, excluding our prefunded projects, compared to $38 million in 2018. In line with expectations, CapEx includes our 5G wireless fiber backhaul and CAF II network builds. At December 31, 2019, cash was $28.3 million compared to $15 million at December 31, 2018. And our $20 million revolver and $25 million delayed draw instruments remain undrawn. Turning to Slide 11. As we've noted, we continue to expect growth in our business. And in 2020, we are setting guidance as follows. Total revenue of $232 million to $237 million compared to $231.7 million in 2019. Adjusted EBITDA of $63 million to $65 million, up from $62.7 million in 2019. Capital expenditures, excluding prefunded projects, to be between $39 million and $43 million compared to $41.4 million in 2019. And adjusted free cash flow, excluding prefunded projects, to be between $8 million and $10 million compared to $12.1 million in 2019. I'd like to remind you that operating results can vary by quarter as a result of many factors. These can include, among other things, the timing of our sales delivery and associated revenue recognition as well as higher capital spending due to seasonal work. We have confidence in our business plan, and we look forward to reporting our performance in future quarters. With that, let me hand the call back to Bill. -------------------------------------------------------------------------------- William H. Bishop, Alaska Communications Systems Group, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Laurie. Let's turn to Slide 12. I am proud of our employees and of our leadership team. We continue to drive ahead to achieve our mission of serving customers with our superior network solutions, business process transformation and strong customer relationships. Our business is keeping people connected. In today's environment, as our customers negotiate increasing amount of remote work, our solutions are even more critical. Management and the Board are committed to maximizing shareholder value. In 2019, we completed our 1 million share buyback program, and we just announced a onetime $0.09 per share or approximately $5 million dividend. We are excited about our progress and look forward to speaking to you in the months and quarters ahead. Thanks again for joining. With that, I'll open the call for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We will now take our first question from Barry Sine of Spartan Capital Securities. -------------------------------------------------------------------------------- Barry Sine, Spartan Capital Securities, LLC, Research Division - Director of Research [2] -------------------------------------------------------------------------------- First question, I guess, Bill, where you just left off, which is on the $5 million onetime dividend. As you know, onetime dividends can be a bit controversial. The share price tends to go down by the amount of the dividend payment and then the shareholders have to pay taxes on receiving that. So if you could explain the thought process behind a onetime dividend why the Board thinks that enhances shareholder value and why not just increase share buybacks or why not pay debt down further with that $5 million. -------------------------------------------------------------------------------- William H. Bishop, Alaska Communications Systems Group, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Great. Barry, thanks, and good to hear from you again. So very good question. And like we have talked on previous calls, the -- our Board really balances doing shareholder-friendly activities versus investing back in the company, and we have these conversations continuously. Well, from our 2019 results, the Board was very comfortable with our -- and as you heard from the operational point of view, very comfortable with these results and wanted to share some of that success within our long time and our shareholders across our entire base. So we did talk about it. We do understand kind of the controversial magnitude behind the onetime dividend, as you point out. But as a Board, holistically, we felt that this was the right time and the right thing to do for our shareholders in general. -------------------------------------------------------------------------------- Barry Sine, Spartan Capital Securities, LLC, Research Division - Director of Research [4] -------------------------------------------------------------------------------- But why onetime dividend versus some of the other options that you would have had for the cash, which presumably would have returned more value to shareholders? -------------------------------------------------------------------------------- William H. Bishop, Alaska Communications Systems Group, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. So we -- as you know, Barry, we've had a 1 million share buyback purchase program earlier back in 2019. And really, the thought process was we had that in '19. And we're going to try the dividend route at this point. And that was really the thought process. I'm happy, as we've done, Barry, in the past, to put you in touch with our Board chair or any other of our board members as well, if there's additional information you like on this. -------------------------------------------------------------------------------- Barry Sine, Spartan Capital Securities, LLC, Research Division - Director of Research [6] -------------------------------------------------------------------------------- Okay. And my next question, over the last several years, you've had activist investors, some of whom, I think, are now represented on the Board. One of the issues that they brought up would be a process to sell the company, which you've not publicly at least announced. I don't know if you could talk about has there been a change of heart now that they're represented around the Board? Or is the environment just not right? And then same question on the capital spending levels. Over the years, you've had criticism from investors about the level of capital spending activity. You've largely continued capital spending at prior levels. So has there been a change of heart as these investors are now on the Board and can see the ROI on these capital expenditures? -------------------------------------------------------------------------------- William H. Bishop, Alaska Communications Systems Group, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Great question, Barry. A lot to it. Let me take a step back and try to start with the first of your questions and work my way through. As far as the activism comment, my only comment back to that is we value our relationship that we have with all of our shareholders, right? And it is our job, that involves the management team, to operate this company to an extent that gives our Board options on what to do with the free cash flow that we -- cash flow that we spin off from a company. And obviously, we try as a Board and management team to do the best we can at that area. From selling the company and mindset of shareholders from that perspective, I -- obviously, I can't speak for our shareholders and will not speak for our shareholders. All I can say and will say is our board continues to look at all options on how to create larger shareholder value for the company. And if that would be mainly being part of a bigger platform, either through selling the company, buying companies, all options are always on the table. I think the third and final part of your comment or question was around capital spend. Yes, we continue to operate about, I think, in '19 for going into 2020, we -- our guidance really keeps our capital spend about flat. And we came out in '19 with really a slight increase in capital from years past, but that was really due to C-RAN and our CAF II projects. And as you know, those projects are both long time 10-year projects. So we still have commitments on both of those projects to spend at a capital level that we've seen in '19. And we'll likely see that in 2021 as well. -------------------------------------------------------------------------------- Barry Sine, Spartan Capital Securities, LLC, Research Division - Director of Research [8] -------------------------------------------------------------------------------- Okay. My last question is a macro question. As you're aware, oil prices have taken quite a tumble this week, I think, around $33 a barrel. If you could kind of educate us and remind us what the direct and indirect impacts of lower oil prices are on your business and by indirect, I'm guessing that flows through the state budget, so we may see lower state expenditures and some impact on the permanent fund dividend if oil revenues remain low? -------------------------------------------------------------------------------- William H. Bishop, Alaska Communications Systems Group, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Yes. Good point. So oil, I think on Monday hit right around like you said the $30 a barrel price point. And obviously, that's concerning to all of us in the state, as the state is heavily paid with oil and oil revenues, oil-related revenues and taxes across the entire state. What does that mean for our company? We entered really in the oil and gas vertical in 2015. And because of that, we still have very little market share directly with oil companies. What we have found in the last couple of years with the pressure on the oil prices is it forces oil companies to do things differently from an operational point of view. And in many cases, that something different is relying on technology. So we've actually seen a lot of opportunities with oil companies when the oil -- price of oil goes down. Now saying that, it does have a critical impact throughout the economy. And some of those are down at the consumer level, and some of those are throughout the, what we call the mass market and mass market business area. And it's really a day-to-day with what's happening now. It's really a real-time event and something that we're managing on a day-to-day basis. I will tell you our guidance that we set for 2020 includes this risk in it. And we still see a path to meeting and exceeding guidance in 2020, even with the oil prices where they were earlier in the week. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) It appears we have no further questions at this time. I would now like to turn the conference back to Tiffany Smith for any additional remarks. -------------------------------------------------------------------------------- Tiffany Smith, Alaska Communications Systems Group, Inc. - Manager of Board & IR [11] -------------------------------------------------------------------------------- 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 are interested in meeting with us, whether by phone or in person as we travel in the future, please reach out to Tiffany Smith and Investor Relations. Thank you, and good day. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.