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Alaska Communications Systems Reports First Quarter 2007 Results

Alaska Communications Systems Group, Inc. (ACS) (NASDAQ:ALSK) today reported financial results for its first quarter ended March 31, 2007.

Our market position, strong business fundamentals and track record of execution continue to contribute to superior financial performance, growing cash flows and a strengthened balance sheet, said Liane Pelletier, ACS president, chief executive officer and chair. First quarter performance delivered year-over-year revenue growth of 10 percent and EBITDA growth of 15 percent fueled by our wireless and data offerings. Given first quarter performance, we are increasing annual guidance today for revenue, EBITDA and wireless capital expenditures.

Financial Highlights: First Quarter 2007 Compared to First Quarter 2006

  • Revenues increased 9.6 percent to $90.6 million, compared to $82.6 million in the prior year quarter.
  • Operating income increased 63.7 percent to $14.6 million, compared to $8.9 million in the prior year quarter.
  • Net income was $7.6 million, or $0.17 per share (diluted). In the first quarter 2006, the Company incurred a net loss of $8.4 million, or $0.20 per share, of which $9.7 million was attributable to loss on extinguishment of debt.
  • Net cash provided by operations increased 82.7 percent to $27.8 million, compared to $15.2 million in the prior year quarter.
  • EBITDA increased 14.9 percent to $32.5 million, compared to $28.3 million in the prior year quarter. First quarter 2007 EBITDA benefited from the final out-of-period CETC receipt of $700,000.
  • Cash, restricted cash and short-term investments increased to $37.8 million, compared to $25.1 million in the prior year quarter.
  • Net leverage ratio declined to 3.2 times EBITDA, compared to 3.7 times in the prior year quarter.

David Wilson, ACS senior vice president and chief financial officer, said, Wireless continues to drive significant top and bottom line expansion; wireless revenue grew 29.5 percent over the prior year with subscribers and average revenue per user (ARPU) growing by 15.4 percent and 5.8 percent, respectively, and foreign roaming revenue increasing 74.7 percent to $3.2 million. In addition to strong wireless revenue performance, wireline revenue increased marginally to $58.8 million from $58.1 million in the prior year quarter.

The strength of our revenue performance, coupled with stringent cost containment driven by process improvement, delivered exceptional cash flow performance. Net cash provided by operating activities increased to $27.8 million from $15.2 million in the prior year quarter, which included $8.9 million in debt redemption charges and accrued interest settlements. After giving effect to these debt settlement cash outflows, cash from operations increased over 15 percent, added Wilson.

Metric Highlights: First Quarter 2007 Compared to Fourth Quarter 2006

  • Increased the total number of retail customer relationships across all product lines by approximately 4,300 to over 450,000.
  • Increased wireless subscribers by 2.6 percent, or over 3,500, bringing the total to approximately 137,500.
  • Improved overall average wireless monthly churn to 1.4 percent compared to 1.8 percent in the prior quarter. Prior period churn has been restated to negate the gross up of installs and disconnects that was caused by certain account changes.
  • Increased wireless ARPU, now $60.60, up from $60.01 in Q4, inclusive of CETC revenue of $10.26 and $9.85, respectively.
  • Increased long distance subscribers by over 1,000 to approximately 65,000 customers.
  • Retail local access lines declined by 0.5 percent to 194,000 while DSL lines increased 3.1 percent to 45,400 lines. DSL line gains were almost 1,400, exceeding retail local access line losses of less than 1,000.
  • Recorded approximately 245,900 total local access lines. Total local access lines decreased by approximately 6,800 or 2.7 percent, driven by wholesale access lines leaving the network.

2007 Business Outlook

For the full-year 2007 ACS is increasing its revenue, EBITDA and wireless growth capital expenditure guidance. Revenues are now expected to be in the range of $360 million to $370 million versus prior guidance of $350 million to $360 million; EBITDA to be in the range of $120 million to $124 million versus prior guidance of $118 million to $122 million; and capital expenditures are expected to be approximately $46 million versus prior guidance of approximately $42 million. ACS is reaffirming its maintenance capital expenditure guidance at approximately $37 million and the increase in guidance is solely attributable to wireless, primarily related to customer-driven wireless footprint expansion, and is funded by excess cash it expects to generate in 2007. ACS is reaffirming its cash interest expense guidance which is expected to be approximately $27 million. The guidance presented is exclusive of ACS strategic investment.

Strategic Investment

Pelletier stated, Building on the companys track record of extracting profitable growth from the Alaska market, ACS is looking to extend and enhance its proven business model with a strategic investment in a fiber facility between Alaska and the Pacific Northwest, positioning ACS to more effectively compete for an estimated $200 million in existing carrier, enterprise and government demand; serve burgeoning broadband growth; and benefit from favorable macroeconomic trends in Alaska. We believe this investment would allow ACS to capture the full value of its wireline and wireless Alaska infrastructure and enable ACS to continue to deliver best-in-class growth. ACS is completing a very detailed feasibility study and project plan for the fiber and we look forward to providing additional insight on todays conference call including estimates of an up front investment cost of $75 million to $90 million; annual cash costs, inclusive of financing costs, of $10 million to $12 million; and a commercial launch date of early 2009.

Wilson added, We are well positioned from a liquidity standpoint, exiting the quarter with $37.8 million in cash and restricted cash. We also have adequate debt capacity to finance our strategic investment having reduced our net leverage ratio by over a turn since year-end 2004 to 3.2 times. ACS remains committed to its current dividend and management believes the strategic investment can further expand future cash flow per share.

Conference Call

The company will host a conference call and live webcast today at 5:00 p.m. Eastern Time to discuss first quarter results. For parties in the United States and Canada, call 800-257-6566 to access the earnings call. Parties outside the United States and Canada can access the call at 303-275-2170.

The live webcast of the conference call is accessible from the "Events Calendar" section of the company's website (www.alsk.com). The webcast will be archived on the ACS website. A telephonic replay of the conference call will also be available two hours after the call and will run until April 30, 2007 at midnight ET. To hear the replay, parties in the United States and Canada should call 800-405-2236 and enter pass code 11088068. Parties outside the United States and Canada should call 303-590-3000 and enter pass code 11088068.

About Alaska Communications Systems

ACS is the leading integrated communications provider in Alaska, offering local telephone service, wireless, long distance, data, and Internet services to business and residential customers throughout Alaska. More information can be found on the company's website at www.acsalaska.com or at its investor site at www.alsk.com.

Forward-Looking EBITDA Guidance

This press release includes information related to management's estimate of EBITDA for the year ending December 31, 2007. EBITDA, as defined by the company, may not be similar to EBITDA measures used by other companies and is not a measurement under generally accepted accounting principles (GAAP). Management believes that EBITDA provides useful information to investors about the company's performance because it eliminates the effects of period-to-period changes in costs associated with capital investments, interest and stock-based compensation expense that are not directly attributable to the underlying performance of the company's business operations. Management believes the most directly comparable GAAP measure would be "Net cash provided by operating activities." Due to the difficulty in forecasting and quantifying the amounts that would be required to be included in this comparable GAAP measure, the company is not providing an estimate of year-end net cash provided by operating activities at this time.

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 managements 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 are, without limitation, whether the company undertakes the strategic investment described above as well as the companys ability to complete, manage, integrate, market, maintain, and attract sufficient customers to the infrastructure subject to the investment, and the products and services it may derive therefrom. The company cannot assure you that the strategic investment, if made, will generate sufficient revenue at acceptable cost. Other factors are, without limitation, fluctuations in wireless revenue, including roaming revenue; changes in companys relationships with its roaming partners; increased competition, including wireline facilities-based competition; changes in capital expenditures, strategic investments, or other factors affecting the companys ability to generate sufficient earnings and cash flows to continue to make dividend payments to its stockholders; changes in revenue from Universal Service Funds; regulatory limitations on the companys ability to change its pricing or bundle its communications services or other public policy changes; the continued availability of financing necessary to support future business; changes in accounting policies or practices; changes in the demand for the companys products and services, retail and wholesale; rapid technological developments in the telecommunications industry; changes in interest rates or other general national, regional or local economic conditions, including changes in tourism in Alaska. For further information regarding risks and uncertainties associated with ACS business, please refer to the companys 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 for the year ended December 31, 2006. Copies of the companys 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.

All information in this release is as of April 26, 2007. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the companys expectations.

Schedule 1

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in Thousands, Except per Share Amounts)

Three Months Ended

March 31,

20072006
Operating revenues:
Wireline $ 58,831  $ 58,134 
Wireless 31,74224,508
Total operating revenues 90,573  82,642 
Operating expenses:
Wireline 43,849  42,105 
Wireless 15,860  13,814 
Depreciation and amortization 16,288  17,097 
Loss on disposal of assets 3722
Total operating expenses 76,000  73,738 
Operating income 14,573  8,904 
Other income and expense:
Interest expense (7,610) (7,974)
Loss on extinguishment of debt (9,650)
Interest income 529  392 
Other 80(44)
Total other income and expense (7,001)(17,276)
Net income (loss) before income tax expense 7,572  (8,372)
Income tax expense (7)-
Net income (loss) $7,565$(8,372)
Net income (loss) per share:
Basic $0.18$(0.20)
Diluted $0.17$(0.20)
Weighted average shares outstanding:
Basic 42,38441,790
Diluted 43,87641,790

Schedule 2

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, In Thousands Except Per Share Amounts)

March 31,

December 31,

Assets20072006
Current assets:
Cash and cash equivalents $ 35,686  $ 36,860 
Restricted cash 2,081  1,700 
Accounts receivable-trade, net of allowance of $7,507 and $7,434 36,071  39,801 
Materials and supplies 9,325  7,977 
Prepayments and other current assets 3,4563,514
Total current assets 86,619  89,852 
Property, plant and equipment 1,172,904  1,164,450 
Less: accumulated depreciation and amortization 782,163767,907
Property, plant and equipment, net 390,741  396,543 
Goodwill 38,403  38,403 
Intangible Assets 21,604  21,604 
Debt issuance costs 8,968  9,437 
Deferred charges and other assets 4,6986,482
Total assets $551,033$562,321
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term obligations $ 1,013  $ 1,025 
Accounts payable-affiliate 2,942 
Accounts payable, accrued and other current liabilities 56,656  62,307 
Advance billings and customer deposits 9,70310,667
Total current liabilities 67,372  76,941 
Long-term obligations, net of current portion 436,837  437,188 
Other deferred credits and long-term liabilities 75,77072,881
Total liabilities 579,979587,010
Stockholders' equity (deficit):
Common stock, $.01 par value; 145,000 authorized 427  423 
Paid in capital in excess of par value 278,514  288,055 
Accumulated deficit (307,168) (314,733)
Accumulated other comprehensive income (loss) (719)1,566
Total stockholders' equity (deficit) (28,946)(24,689)
Commitments and contingencies
Total liabilities and stockholders' equity (deficit) $551,033$562,321

Schedule 3

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in Thousands)

Three Months Ended

March 31,

20072006
Cash Flows from Operating Activities:
Net income (loss) $ 7,565  $ (8,372)
Adjustments to reconcile net income to net cash provided (used) by operating activities:

Depreciation and amortization

16,288  17,097 
Loss on disposal of assets, net 722 
Gain on sale of long-term investment (152)
Amortization of debt issuance costs and original issue discount 473  3,734 
Stock based compensation 1,682  1,576 
Changes in components of assets and liabilities:
Accounts receivable and other current assets 2,440  4,415 
Accounts payable and other current liabilities (2,505) (538)
Deferred charges and other assets 146  (526)
Other deferred credits 1,814(2,917)
Net cash provided by operating activities 27,754  15,191 
Cash Flows from Investing Activities:
Investment in construction and capital expenditures (10,020) (8,415)
Change in unsettled construction and capital expenditures (7,142) (7,319)
Purchase of short-term investments (17,225) (7,500)
Proceeds from the sale of short-term investments 17,225  16,025 
Liquidation of long-term investments 162 
Placement of funds in restricted account (1,982)
Release of funds from escrow 1,601-
Net cash used by investing activities (17,381) (7,209)
Cash Flows from Financing Activities:
Payments of long-term debt (418) (61,270)
Proceeds from the issuance of long-term debt 52,900 
Debt issuance costs (1,349)
Payment of dividend on common stock (9,099) (8,336)
Issuance of common stock (2,030)(125)
Net cash used by financing activities (11,547) (18,180)
Decrease in cash and cash equivalents (1,174) (10,198)
Cash and cash equivalents, beginning of period 36,86028,877
Cash and cash equivalents, end of period $35,686$18,679
Supplemental Cash Flow Data:
Interest paid $ 7,268  $ 9,992 
Income taxes paid, net of refund 134 
Supplemental Noncash Transactions:

Property acquired under capital leases and mortgages

$ 51  $
Dividend declared, but not paid 9,189  9,032 

Schedule 4

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
SCHEDULE OF WIRELINE REVENUES AND EXPENSES
(Unaudited, in Thousands)

Three Months Ended

March 31,

20072006
Local network service and other $ 25,593  $ 24,249 
Network access 21,73724,026
Local telephone 47,330  48,275 
Internet 7,072  5,986 
Interexchange 4,4293,873
Total wireline revenue $58,831$58,134
Local telephone $ 32,710  $ 32,109 
Internet 7,933  7,892 
Interexchange 3,2062,104
Total wireline expense $43,849$42,105

Schedule 5

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
SCHEDULE OF EBITDA CALCULATION
(Unaudited, in Thousands)

Three Months Ended

March 31,

2007

2006
Net cash provided by operating activities $ 27,754  $ 15,191 
Adjustments to reconcile net income to net cash (provided) used by operating activities:
Depreciation and amortization (16,288) (17,097)
Loss on disposal of assets, net (3) (722)
Gain on sale of long-term investment 152 
Amortization of debt issuance costs and original issue discount (473) (3,734)
Stock based compensation (1,682) (1,576)
Changes in components of assets and liabilities:
Accounts receivable and other current assets (2,440) (4,415)
Accounts payable and other current liabilities 2,505  538 
Deferred charges and other assets (146) 526 
Other deferred credits (1,814)2,917
Net income (loss) $ 7,565  $ (8,372)
Add (subtract):
Interest expense 7,610  7,974 
Loss on extinguishment of debt 9,650 
Interest income (529) (392)
Depreciation and amortization 16,288  17,097 
Loss on disposal of assets, net 722 
Gain on sale of equity investment in directory business (152)
Income tax expense -
Stock based compensation 1,6821,576
EBITDA $32,474$28,255
Note: In an effort to provide investors with additional information regarding the Company's results as determined by generally accepted accounting principles (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 its net gain before interest, provisions for taxes, depreciation expense, gain or loss on asset purchases or disposals, amortization of intangibles and stock based compensation expense (EBITDA) because the Company believes it is an important indicator as it provides information about our ability to service debt, pay dividends and fund capital expenditures. EBITDA is not a GAAP measure 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 6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ALLOCATION OF STOCK BASED COMPENSATION
(Unaudited, in Thousands)
Three Months EndedThree Months Ended
March 31, 2007March 31, 2006

As

reported

on

Schedule 1

Stock

Based

Compen-

sation

Adjusted

As

reported

on

Schedule 1

Stock

Based

Compen-

sation

Adjusted
Operating expenses:
Wireline $ 43,849  $ (1,507) $ 42,342  $ 42,105  $ (1,426) $ 40,679 
Wireless 15,860  (175) 15,685  13,814  (150) 13,664 

Depre-

ciation and amor-

tization

16,288  16,288  17,097  17,097 
Loss on disposal of assets, net 3-3722-722
Total operating expenses $76,000$(1,682)$74,318$73,738$(1,576)$72,162
The balances reported on Schedule 1 - Statement of Operations, include the company's adoption of FAS 123R Accounting for Stock-Based Compensation. This schedule shows the company's operating performance prior to that expense being recorded to allow analysis of the operating segments without these non-cash charges.
Schedule 7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
INVESTMENT IN CONSTRUCTION AND CAPITAL
(Unaudited, in Thousands)

Three Months Ended

March 31,

20072006
Cash outlay for construction and capital expenditures $ 10,020  $ 8,415 
Non-cash capital lease 51-
Investment in construction and capital $10,071$8,415
Prefunded growth 1,860  4,066 
Maintenance and other 8,2114,349
Investment in construction and capital $10,071$8,415

Schedule 8A

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
KEY OPERATING STATISTICS
(Unaudited)

March 31,

December 31,

March 31,

200720062006
Local telephone:
Retail access lines 193,851  194,815  197,415 
Resale access lines 10,573  11,226  13,030 
UNE lines 41,45346,62655,036
Total local telephone access lines 245,877252,667265,481
Average local telephone access lines for the quarter 249,272  255,899  268,183 
Average monthly local telephone revenue per line for the quarter $ 63.29  $ 63.09  $ 60.00 
Quarterly growth rate in local telephone access lines -2.7% -2.5% -2.0%
Wireless:
Covered population 542,193  541,940  527,509 
Post-paid wireless subscribers 128,247  125,064  111,178 
Average post-paid wireless subscribers 126,656  123,065  109,161 

Average monthly churn for the quarter (a)

1.3% 1.5% 1.5%

Average monthly revenue per subscriber for the quarter (b)

$ 63.11  $ 62.16  $ 60.36 
Prepaid wireless subscribers 6,452  5,907  4,103 
Resale wireless subscribers 2,812  3,017  3,859 
Total wireless subscribers 137,511  133,988  119,140 
Average subscribers for the quarter 135,750  131,779  118,339 

Average monthly churn for the quarter (a)

1.4% 1.8% 2.0%
Penetration 25.4% 24.7% 22.6%

Average monthly revenue per subscriber for the quarter (b)

$ 60.60  $ 60.01  $ 57.30 
Long Distance:
Long distance subscribers 65,043  63,995  58,552 
Average subscribers for the quarter 64,519  62,990  57,435 
Average monthly revenue per subscriber for the quarter $ 22.88  $ 21.18  $ 22.48 
Internet:
DSL subscribers 45,448  44,066  38,179 
Dial-up subscribers 11,72812,59115,846
Total Internet subscribers 57,17656,65754,025
Average subscribers for the quarter 56,917  55,978  53,635 
Average monthly DSL & dial-up revenue per subscriber for the quarter $ 29.01  $ 28.88  $ 29.23 

(a)

Prior period churn has been restated to negate the gross up of installs and disconnects that were caused by certain account changes. In prior periods, December 31, 2006 churn was reported at 1.8% and 2.1% and March 31, 2006 churn was reported at 1.9% and 2.4%, for post-paid and total subscribers, respectively.

(b)

CETC added $10.76 and $10.29 to postpaid wireless ARPU in the first quarter of 2007 and fourth quarter of 2006, respectively and $9.33 in the first quarter of 2006. CETC added $10.26 and $9.85 to total wireless ARPU in the first quarter of 2007 and fourth quarter of 2006, respectively and $8.93 in the first quarter of 2006. Out of period CETC revenue is excluded from ARPU.
Schedule 8B
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
KEY OPERATING STATISTICS
(Unaudited)
March 31,

December 31,

20072006Net Movement
Wireline retail relationships
Local telephone retail access lines 193,851  194,815  (964)
Interexchange subscribers 65,043  63,995  1,048 
Internet subscribers 57,17656,657519
316,070  315,467  603 
Wireless retail relationships
Post-paid wireless subscribers 128,247  125,064  3,183 
Prepaid wireless subscribers 6,4525,907545
134,699130,9713,728
Total retail relationships 450,769446,4384,331
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