Alaska Communications Systems Reports Third Quarter 2013 Results

Alaska Communications Systems Group, Inc. (“ACS”) (NASDAQ: ALSK) today reported financial results for its third quarter ended September 30, 2013.

“We are pleased to report steady performance to our business plan. Another quarter of solid broadband revenue performance has driven total wireline revenue growth, representing an important way we create value. Consistent with the other mechanism in our plan to create value by strengthening our balance sheet, we achieved meaningful de-leveraging and strong cash flows in this quarter. Closing the AWN transaction allows us to direct our capital more efficiently to further broadband growth,” said Anand Vadapalli, President and Chief Executive Officer of ACS.

Year-Over-Year Financial Highlights for the Quarter:

The third quarter represents the first reporting period following the Alaska Wireless Network, LLC (“AWN”) close and we encourage readers to review our press release schedules for description of changes in mapping of certain revenue categories. Further, we are providing additional supplemental information for readers to understand the AWN preferred distribution structure and its impact to our results.

• Wireline revenues include business and wholesale, consumer and access revenues. We are focused on achieving growth in wireline revenues by driving broadband revenue performance. Wireline revenues were $50.1 million which increased by $0.6 million, or 1.2%.
  • Business and wholesale revenue increased $0.9 million, or 3.7%, which was driven by broadband revenue growth of 17.0%.
  • Consumer revenue increased $0.5 million, or 5.3%, with broadband revenue growth of 21.3%.
  • Access revenue declined, as expected, $0.9 million, or 5.7%, due to lower switched, special and other access revenue.
• Wireless and backhaul revenue was $33.8 million and, as expected, declined year-over-year.
  • Retail service revenue declined $1.0 million, or 5.5%.
  • As expected, foreign roaming revenue declined $13.3 million, as roaming revenue moved to AWN.
  • CETC revenue increased 3.2%. CETC is now a pass-through under the AWN structure and has no impact on Adjusted EBITDA.
• Adjusted EBITDA was $24.8 million and free cash flow was $3.5 million. The decline in Adjusted EBITDA compared to last year was anticipated following the close of AWN.
  • The AWN preferred distribution contributed $9.6 million to Adjusted EBITDA.
  • Free cash flow was impacted by higher levels of capital spending associated with the summer build season.
• Net debt, which represents total debt less cash and cash equivalents, stands at $404.4 million. This represents a decrease of $134.2 million, or 24.9%, since December 31, 2012, evidencing commitment to deleveraging.

Sequential Metric Highlights: Third Quarter 2013 Compared to Second Quarter 2013

• Business broadband connections increased by 112, or 0.6%, to 19,216 and business broadband ARPU remained relatively flat at $175.00.
• Consumer broadband connections increased by 506, or 1.3%, to 38,117 and consumer broadband ARPU declined slightly by 1.2% to $48.63.
• Consumer access lines declined by 1,716, or 3.3%, to 50,722 and business access lines decreased by 446, or 0.6%, to 80,071.
• Wireless connections declined by 2,305, or 2.0%, to 112,114. Connections were impacted by 782 fewer lifeline customers associated with continued compliance with new certification rules, and 2,453 fewer post-pay connections of which 714 were non-revenue-generating-internal-use connections that were disconnected as part of the AWN transaction, partially offset by an increase of 930 in prepaid connections.
• Wireless broadband ARPU increased 7.5%. Retail wireless ARPU declined slightly to $52.08.

“This is the first quarter of results following the close of the AWN transaction, and we have provided additional information in this press release to enable readers to evaluate our performance under this new operating structure. During our upcoming conference call we will walk the readers through this information. Our path to deliver shareholder value is growing wireline and total broadband revenue, while strengthening the business through debt reductions. Our financial results are in-line with our expectations, with solid free cash flow generation for the year,” said Wayne Graham, Chief Financial Officer of ACS.

Guidance for the year is as follows:

Total revenue guidance is unchanged and expected to be $340 - $350 million.

Adjusted EBITDA guidance is unchanged and expected to be $105 - $110 million.

Capital spending, previously targeted to be around $50 million, is now expected to be moderately lower.

Previous Free Cash Flow guidance of $20 - $25 million is unchanged and we are comfortable with the high end of the range.

Guidance for 2014, with a full-year without the transition period of pre- and post-AWN ownership, will be provided when we report fourth quarter 2013 results.

Conference Call

The company will host a conference call and live webcast today at 5:00 p.m. Eastern time to discuss these results. Parties in the United States and Canada can access the call at 1-877-941-0843. Parties outside the United States and Canada can access the call at 1-480-629-9722. 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 December 31, 2013, at midnight Eastern time. To hear the replay, parties in the United States and Canada can call 1-800-406-7325 and enter pass code 4645116. Parties outside the United States and Canada can call 1-303-590-3030 and enter pass code 4645116.

About Alaska Communications

Alaska Communications is a leading provider of advanced broadband solutions for businesses and consumers in Alaska. We operate a highly reliable, advanced statewide data and voice network with the latest technology and the most diverse undersea fiber optic system connecting Alaska to the contiguous United States. For more information, visit www.alaskacommunications.com or www.alsk.com.

Non-GAAP Measures

In an effort to provide investors with additional information regarding the Company's results as determined by GAAP, the Company also discloses certain non-GAAP information which management utilizes to assess performance and believes provides useful information to investors. The Company has disclosed Adjusted EBITDA as net income before interest, loss on extinguishment of debt, depreciation and amortization, loss on sale of short-term investments, gain or loss on asset purchases or disposals, earnings on equity method investments, gains and distributions related to AWN, amortization of deferred AWN service revenue, provisions for taxes, stock-based compensation, and AWN transaction-related costs, and Adjusted EBITDA Margin, defined as Adjusted EBITDA divided by Operating Revenues. Additionally, the Company has disclosed Free cash flow as Adjusted EBITDA, less capital expenditures that create an obligation to pay (“incurred capital expenditures”), less amortization of deferred AWN capacity revenue, less AWN transaction-related capital costs, less cash interest expense. These measures are provided because the Company believes they are important indicators regarding our ability to make principal payments on debt and fund working capital. Adjusted EBITDA, Adjusted EBITDA Margin and Free cash flow are non-GAAP measures and should not be considered a substitute for net cash provided by operating activities and other measures of financial performance recorded in accordance with GAAP.

Forward-Looking Statements

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

Schedule 7

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Summary AWN information
(Unaudited, In Thousands)

The above information reflects summary unaudited financial performance of AWN, which Alaska Communication owns a 33.3% ownership interest. Certain additional summary information is included in our Form 10-Q filings.

Investment in AWN represents the value of ACS's 1/3 ownership interest in AWN. Deferred revenue represents capacity contributions and the operations and maintenance support of these capacity contributions for AWN's network. The benefit of this deferred revenue is recognized over 20 years.

Key AWN Results included in the ACS Consolidated Income Statement:

"Adjusted for step-up"(B) reflects the step up on basis on the GCI contributed assets to AWN and associated higher depreciation expense that ACS is required to incorporate in its consolidated financial statements.

AWN's stepped up net income is used to calculate the equity in earnings at ACS' 1/3 ownership percentage or $8,064. Additionally, an AWN excess distribution, or $2,867, is recognized in the quarter to reflect the disproportionate nature of the AWN preferred distributions.

In our non-GAAP reporting of Adjusted EBITDA, ACS is using our Senior Credit Agreement definition, as amended, for the AWN distribution, which is distributions received or eligible to be received within 14 business days.