ALSK Alaska Communications Systems Group Inc

Increased Total Broadband Revenue 7.6 Percent, Again Delivering Industry-Leading Revenue Growth

Improved Adjusted EBITDA Remains on Track to Achieve 2015 Exit Run Rate Target

Alaska Communications Systems Group, Inc. (NASDAQ: ALSK) today reported financial results for the third quarter of 2015.

“Our focus on reliable broadband technologies, differentiated by customer service, resulted in strong sales and financial performance in the third quarter. Q3 Adjusted EBITDA, as expected, grew significantly, up 13.7% sequentially to $12.6 million. We expect Q4 performance will show continued strong sequential growth from revenue uplift and additional cost reductions. This supports our goal to achieve a 2015 Adjusted EBITDA exit run rate of $54 million to $56 million and strengthens our financial foundation going into 2016.

“Consistently performing to our plan over the last four years, we have transformed Alaska Communications into a pure play broadband and IT managed services provider. Our management team has strengthened our balance sheet, refinanced our debt, and achieved industry-leading growth. We are focused on our future, positioning Alaska Communications for further success in broadband and IT managed services and creating shareholder value. We are at a natural place in our evolution to provide leadership opportunities for our deeply experienced management team,” said President and CEO Anand Vadapalli.

Laurie Butcher, who has been a key financial leader at Alaska Communications for many years, has been promoted to senior vice president of finance and will lead the finance organization, succeeding CFO Wayne Graham. Butcher joined Alaska Communications in 1997 and served as vice president of finance for the past 10 years. The company has also aligned its core sales and operations functions in three key areas. Bill Bishop, who has led the company’s growth in business sales, has been promoted to senior vice president of business services and will lead the business and wholesale segment. Mike Todd, who has led Alaska Communications’ successful network expansion, has been named senior vice president of consumer services and will lead the consumer segment. Randy Ritter, named senior vice president of shared services, previously led the company’s successful entry into IT managed services.

“Collectively, our team has five decades’ experience at Alaska Communications and over 100 years in the telecom sector. This extensive knowledge of the telecommunications industry and the Alaska market, along with our focus on customer experience, will serve our investors, customers and employees well,” said Vadapalli.

Wayne Graham, chief financial officer, along with David Eisenberg, chief revenue officer, will be separating from Alaska Communications effective the end of November. “I thank Wayne and David for their leadership and service. Their dedication and stellar performance record helped create today’s Alaska Communications,” noted Vadapalli.

“I am proud of our rising executives and confident in their talent. We are in the right markets, at the right time, with the right team. We have built a platform to increase shareholder value by delivering top-line performance, growing Adjusted EBITDA and generating strong free cash flow while operating at some of the lowest leverage levels in our sector,” concluded Vadapalli.

Third Quarter 2015 Revenue Highlights Compared to Third Quarter 2014

• Total Service and Other:
  • Revenue was $54.7 million. Compared to $53.4 million, revenue grew 2.5 percent year over year.
  • Total broadband revenue reached $18.6 million, up 7.6 percent from $17.3 million.
• Business and Wholesale:
  • Comprised 54.3 percent of total service and other revenue and is expected to continue to generate an increasing percentage of our top line performance.
  • Revenue grew to $29.7 million, up 6.2 percent from $28.0 million, led by continued strong broadband performance.
  • Broadband revenue reached $12.5 million, up 14.1 percent from $11.0 million.
• Consumer:
  • Comprised 18.2 percent of total service and other revenue.
  • Revenue was $9.9 million, down 4.7 percent from $10.4 million, reflecting general industry trends.
  • Broadband revenue was $6.1 million, down 3.5 percent from $6.3 million.
• Access and Other:
  • Comprised 27.5 percent of total service and other revenue.
  • Revenue grew to $15.1 million, up 0.6 percent from $15.0 million, led by an increase in equipment sales and installations.

Financial Highlights from Third Quarter 2015

• Completed the refinancing of our senior loan facility on September 14, 2015, entering into $100 million of senior secured financing, including a $10 million undrawn revolving loan. The company has no debt maturities prior to 2018.
• Reported continued benefits from the wind down of the wireless business resulting in increased Adjusted EBITDA to $12.6 million, up from $11.1 million in Q2. The remaining wind down activities and the resulting benefits will be completed in Q4.
• Total debt was $188.7 million, and cash balances were $42.1 million at September 30, 2015.

“During Q3, we achieved several financial milestones. We refinanced our senior debt facility, lowered our cost structure and turned up record sales activities that are expected to result in a strong Q4. The management team is focused on building on this success with an increasing focus on not only top-line and Adjusted EBITDA performance, but driving free cash flow growth in 2016,” said CFO Wayne Graham.

2015 Guidance

The company reaffirmed 2015 guidance as follows:

• Total service and other revenue of approximately $220 million
• Run rate Adjusted EBITDA exiting 2015 of $54 million to $56 million
• Net capital expenditures range of $34 million to $36 million1
• Net debt at year end of approximately $159 million

1. The purchase of the North Slope Network is not included in capital spending guidance. Schedule 5 presents the impact of this investment on overall capital spending results for the year.

Conference Call

The company will host a conference call and live webcast on Thursday, November 5, 2015 at 3:00 p.m. Eastern Standard Time to discuss the results. The live webcast will include a slide presentation. Parties in the U.S. and Canada can access the call at 1-888-523-1208 and enter pass code 737999. All other parties can access the call at 1-719-955-1569.

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 90 days. A replay of the call will be available two hours after the call and will run until December 7, 2015, at 4:00 p.m. EST. To hear the replay, parties in the U.S. and Canada can call 1-888-203-1112 and enter pass code 1306436. All other parties can call 1-719-457-0820 and enter pass code 1306436.

About Alaska Communications

Alaska Communications (NASDAQ: ALSK) is the leading provider of advanced broadband and IT managed 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, in particular with regards to our liquidity and capital resources, we have disclosed certain non-GAAP financial information such as Adjusted EBITDA, Free Cash Flow and Net Debt, which management utilizes to assess performance and believes provides useful information to investors. The definition of these non-GAAP measures are on Schedules 4 and 5 to this press release. Adjusted EBITDA, 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. Reconciliations of our non-GAAP measures to our nearest GAAP measures can be found on our website at http://www.alsk.com in the investment data section. Other companies may not calculate non-GAAP measures in the same manner as ACS.

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, Universal Service Fund changes, 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, 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 customers, unforeseen changes in public policies, and changes in accounting policies, which could result in an impact on earnings. 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 1   ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. CONSOLIDATED SCHEDULE OF OPERATIONS (Unaudited, In Thousands Except Per Share Amounts)   Three Months Ended Nine Months Ended September 30,

September 30,

  2015     2014     2015     2014     Operating revenues: Operating revenues, non-affiliates $ 54,735 $ 76,683 $ 175,611 $ 232,031 Operating revenues, affiliates   -     1,782     575     5,323   Total operating revenues   54,735     78,465     176,186     237,354     Operating expenses: Cost of services and sales, non-affiliates 24,673 31,416 81,056 91,274 Cost of services and sales, affiliates - 13,534 4,961 43,295 Selling, general & administrative 20,387 25,017 70,982 74,926 Depreciation and amortization 8,475 8,585 25,491 25,850 (Gain) loss on disposal of assets, net (6,978 ) (199 ) (46,364 ) 612 Earnings from equity method investments   -     (11,556 )   (3,056 )   (29,247 )   Total operating expenses   46,557     66,797     133,070     206,710     Operating income 8,178 11,668 43,116 30,644   Other income and expense: Interest expense (4,077 ) (8,615 ) (18,381 ) (26,144 ) Loss on extinguishment of debt (2,250 ) - (2,250 ) - Interest income   14     28     56     42   Total other income and expense   (6,313 )   (8,587 )

 

  (20,575 )   (26,102 )   Income before income tax expense 1,865 3,081 22,541 4,542   Income tax expense   (663 )   (1,203 )   (9,982 )   (1,964 )   Net income 1,202 1,878 12,559 2,578  

Less net loss attributable to non-controlling interest

  (37 )   -     (56 )   -    

Net income attributable to ACS

$ 1,239   $ 1,878   $ 12,615   $ 2,578     Net income per share: Basic and Diluted $ 0.02   $ 0.04   $ 0.25   $ 0.05     Weighted average shares outstanding: Basic   50,399     49,498     50,191     49,265   Diluted   51,588     50,155     51,246     49,730           Schedule 2   ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited, In Thousands Except Per Share Amounts)   September 30, December 31, Assets   2015     2014     Current assets: Cash and cash equivalents $ 42,104 $ 31,709 Restricted cash 2,052 467 Accounts receivable, net of allowance of $2,022 and $2,338 24,506 30,900 Materials and supplies 4,927 4,321 Prepayments and other current assets 7,846 6,575 Deferred income taxes 12,943 104,245 Current assets held-for-sale   -     9,565   Total current assets 94,378 187,782   Property, plant and equipment 1,332,184 1,333,134 Less: accumulated depreciation and amortization   (967,140 )   (976,401 ) Property, plant and equipment, net 365,044 356,733   Deferred income taxes 5,047 - Equity method investments - 252,067 Non-current assets held-for-sale - 14,664 Other assets   1,843     301   Total assets $ 466,312   $ 811,547     Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of long-term obligations $ 3,249 $ 15,521 Accounts payable, accrued and other current liabilities, non-affiliates 58,030 54,373 Accounts payable, accrued and other current liabilities, affiliates, net * - 4,853 Advance billings and customer deposits 4,603 4,490 Current liabilities held-for-sale   -     18,728   Total current liabilities 65,882 97,965   Long-term obligations, net of current portion 185,403 413,978 Deferred income taxes - 81,267 Other long-term liabilities, net of current portion 61,776 24,370 Non-current liabilities held-for-sale - 2,107 Deferred AWN capacity revenue, net of current portion   -     56,734   Total liabilities   313,061     676,421   Commitments and contingencies Stockholders' equity (deficit): Common stock, $.01 par value; 145,000 authorized 504 497 Additional paid in capital 156,724 154,368 Accumulated deficit (1,973 ) (14,588 ) Accumulated other comprehensive loss   (3,120 )   (5,151 ) Total ACS stockholders' equity   152,135     135,126  

Non-controlling interest

  1,116     -   Total stockholders' equity   153,251     135,126     Total liabilities and stockholders' equity $ 466,312   $ 811,547     * Affiliate balances are related to activity with our equity method investment in AWN. On February 2, 2015 we sold our interest in AWN.             Schedule 3   ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, In Thousands)   Three Months Ended Nine Months Ended September 30, September 30,   2015     2014     2015     2014   Cash Flows from Operating Activities: Net income $ 1,202 $ 1,878 $ 12,559 $ 2,578

Adjustments to reconcile net income to net cash provided by operating activities:

  Depreciation and amortization 8,475 8,585 25,491 25,850 Gain on wireless sale (7,092 ) - (48,232 ) - Loss (gain) on the disposal of assets, net 114 (199 ) 1,868 612 Unrealized gain on ineffective hedge (278 ) - (820 ) - Amortization of debt issuance costs and debt discount 1,019 1,260 5,690 3,926 Amortization of ineffective hedge - 362 1,970 1,276 Loss on extinguishment of debt 2,250 - 2,250 - Cash paid for debt extinguishment (391 ) - (391 ) - Amortization of deferred capacity revenue (693 ) (809 ) (2,162 ) (2,819 ) Stock-based compensation 619 684 1,898 1,877 Deferred income tax expense 6,965 961 3,571 1,708 Provision for uncollectible accounts 66 1,467 1,385 2,942 Cash distribution from equity method investments - 11,556 3,056 29,247 Earnings from equity method investments - (11,556 ) (3,056 ) (29,247 ) Other non-cash expense, net 274 111 817 318 Income taxes payable (6,302 ) - 1,736 - Changes in operating assets and liabilities   7,127     5,538     (2,521 )   1,623   Net cash provided by operating activities   13,355     19,838     5,109     39,891     Cash Flows from Investing Activities: Capital expenditures (12,083 ) (16,042 ) (38,216 ) (33,916 ) Capitalized interest (444 ) (720 ) (1,232 ) (2,082 ) Change in unsettled capital expenditures 2,713 3,114 3,387 (1,300 ) Cash received in acquisition of business - - - 68 Proceeds on wireless sale 7,092 - 285,160 - Proceeds on sale of assets 3 136 3,129 136 Return of capital from equity investment - 944 1,875 8,286 Net change in restricted accounts   (1,357 )   -     (1,357 )   -   Net cash (used) provided by investing activities   (4,076 )   (12,568 )   252,746     (28,808 )   Cash Flows from Financing Activities: Repayments of long-term debt (90,553 ) (5,280 ) (333,390 ) (24,022 ) Proceeds from the issuance of long-term debt 90,061 - 90,061 - Debt issuance costs (3,513 ) - (4,555 ) - Cash paid in acquisition of business - (795 ) (291 ) (795 ) Cash proceeds from non-controlling interest - - 250 - Payment of withholding taxes on stock-based compensation - (3 ) (402 ) (586 ) Excess tax benefit from share-based payments - - 733 - Proceeds from issuance of common stock   (1 )   -     134     132   Net cash used by financing activities   (4,006 )   (6,078 )   (247,460 )   (25,271 )   Change in cash and cash equivalents 5,273 1,192 10,395 (14,188 )   Cash and cash equivalents, beginning of period   36,831     27,659     31,709     43,039     Cash and cash equivalents, end of period $ 42,104   $ 28,851   $ 42,104   $ 28,851     Supplemental Cash Flow Data: Interest paid $ 2,179 $ 6,008 $ 11,120 $ 22,036 Income taxes paid, net $ - $ 206 $ 3,942 $ 220             Schedule 4 ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. ADJUSTED EBITDA (Unaudited, In Thousands)   Three Months Ended Nine Months Ended September 30, September 30,   2015     2014     2015     2014     Net income $ 1,202 $ 1,878 $ 12,559 $ 2,578 Add (subtract): Interest expense 4,077 8,615 18,381 26,144 Loss on extinguishment of debt 2,250 - 2,250 - Interest income (14 ) (28 ) (56 ) (42 ) Depreciation and amortization 8,475 8,585 25,491 25,850 Loss (gain) on disposal of assets, net 114 (199 ) 1,868 612 Earnings from equity method investment in TekMate - - - (12 ) Earnings from equity method investment in AWN - (11,556 ) (3,056 ) (29,235 ) Gain on sale of assets (7,092 ) - (48,232 ) - AWN distributions received/receivable, net - 12,500 765 37,500 AWN distributions received for the prior period - (4,167 ) - (4,167 ) AWN distributions receivable within 12 days - 4,167 - 4,167 Income tax expense 663 1,203 9,982 1,964 Stock-based compensation 619 684 1,898 1,877 Long-term cash incentives 714 587 1,356 1,572 Pension adjustment 210 - 210 -

Earthquake-related expense

- 1,228 - 1,228

Net loss attributable to non-controlling interest

37 - 56 - Wireless sale transaction-related and wind down costs   1,321     28     12,629     240     Adjusted EBITDA $ 12,576   $ 23,525   $ 36,101   $ 70,276    

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 recurring performance and believes provides useful information to investors regarding baseline operating results.

 

The Company has disclosed Adjusted EBITDA as net income before interest, loss on extinguishment of debt, depreciation and amortization, gain or loss on asset purchases or disposals, earnings on equity method investments, gain on the sale of our wireless operations, provisions for taxes, wireless transaction-related costs, loss attributable to non-controlling interest, stock-based compensation, pension adjustments, earthquake-related expenses and expenses under the company’s long-term cash incentive plan (“LTCI”). LTCI expenses are considered part of an interim compensation structure to mitigate the dilutive impact of additional share issuances for executive compensation. Distributions from AWN are included in Adjusted EBITDA.

            Schedule 5 ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. FREE CASH FLOW (Unaudited, In Thousands)   Three Months Ended Nine Months Ended September 30, September 30,   2015     2014     2015     2014     Adjusted EBITDA $ 12,576   $ 23,525   $ 36,101   $ 70,276     Less:

Capital expenditures

(12,083 ) (16,042 ) (27,216 ) (33,916 ) Milestone billings for fiber build project for a carrier customer   -     2,000     2,500     2,000  

Net capital expenditures

  (12,083 )   (14,042 )   (24,716 )   (31,916 )   Purchase of North Slope fiber network Acquisition price - - (11,000 ) - Less: 50% due in 2016 - - 5,500 - Less: proceeds on sale of fiber to JV partner - - 2,650 - Less: other cash proceeds   -     -     400     -   Net North Slope purchase   -     -     (2,450 )   -     Amortization of GCI/AWN capacity revenue (520 ) (647 ) (1,649 ) (2,337 )

Earthquake-related expense

- (1,228 ) - (1,228 ) Cash interest expense   (2,179 )   (6,008 )   (11,120 )   (22,036 )   Free cash flow $ (2,206 ) $ 1,600   $ (3,834 ) $ 12,759    

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 recurring performance and believes provides useful information to investors regarding baseline operating results.

 

Free cash flow ("FCF") is defined as Adjusted EBITDA, less recurring operating cash requirements which include capital expenditures, net of cash received for a fiber build for carrier customer, less cash interest expense, earthquake-related expenses, significant non-cash revenue associated with our interconnection agreement with AWN and GCI, and in Q2 2015 the purchase of the North Slope fiber network.

  ACS continues to have net operating losses and is not a significant taxpayer on ordinary income. Income taxes paid in 2015 are related to the Wireless retail sale and are not included in free cash flow.             Schedule 6     ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. REVENUE GROWTH (Unaudited, In Thousands)   Three Months Ended Nine Months Ended September 30, September 30, Service revenue:   2015     2014   2015     2014   Business and wholesale customers Voice $ 5,562 $ 5,666 $ 16,544 $ 16,948 Broadband 12,506 10,962 36,569 32,658 Managed IT services 708 1,007 2,247 2,540 Other 2,108 1,800 5,708 5,256 Wholesale   8,816     8,544   26,932     24,723   Business and wholesale service revenue   29,700     27,979   88,000     82,125     Consumer customers Voice 3,487 3,686 10,257 11,399 Broadband 6,114 6,336 19,136 18,441 Other   337     409   873     1,191   Consumer service revenue 9,938 10,431 30,266 31,031   Total service revenue   39,638     38,410   118,266     113,156   Growth in service revenue 3.2 % 4.5 % Growth in broadband service revenue 7.6 % 9.0 %   Other revenue: Equipment sales and installations 1,757 1,310 4,667 3,421 Access 8,420 8,771 25,477 26,732 High cost support   4,920     4,922   14,761     18,271   Total service and other revenue   54,735     53,413   163,171     161,580   Growth in service and other revenue 2.5 % 1.0 % Growth excluding equipment sales 1.7 % 0.2 %   Wireless and AWN related revenue: Service revenue, equipment sales and other

-

19,685 6,300 58,856 Transition services - - 4,769 - CETC - 4,720 1,654 14,581 Amortization of deferred AWN capacity revenue   -     647   292     2,337     Total wireless & AWN related revenue   -     25,052   13,015     75,774     Total revenue $ 54,735   $ 78,465 $ 176,186   $ 237,354       Adjusted for prior year access reserve releases: Total service and other revenue 54,735 53,413 163,171 161,580 Prior year access reserve releases   -     -   -     (3,502 ) Adjusted total service and other revenue   54,735     53,413   163,171     158,078   Growth in service and other revenue 2.5 % 3.2 %             Schedule 7   ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. KEY OPERATING STATISTICS (Unaudited)   Three Months Ended September 30, June 30, September 30, 2015 2015 2014   Voice: Consumer access lines 39,016 40,888 45,177 Business access lines 78,164 78,544 79,563   Voice ARPU consumer $ 29.09 $ 26.73 $ 26.73 Voice ARPU business $ 23.66 $ 23.53 $ 23.65   Broadband: Consumer connections 33,488 34,895 38,257 Business connections (2) 19,125 18,976 18,765   ARPU consumer $ 59.16 $ 60.37 $ 54.18 ARPU business (1) (2) $ 218.54 $ 218.90 $ 195.04   (1)  

Business broadband ARPU was restated to reflect the movement of Managed IT services revenue into a separate category.

(2) How we calculate broadband connections has changed to exclude certain internal use circuits. Historical amounts have been restated to reflect appropriate comparisons period over period.         Schedule 8   ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Long-Term Debt and Net Debt

(Unaudited, In Thousands)   September 30, December 31,   2015     2014   2015 senior secured credit facilities due 2018 $ 90,000 $ - Debt issuance costs - 2015 senior secured credit facilities due 2018 (3,824 ) - 2010 senior credit facility term loan due 2016 - 322,700 Debt discount - 2010 senior credit facility term loan due 2016 - (1,014 ) Debt issuance costs - 2010 senior credit facility term loan due 2016 - (2,810 ) 6.25% convertible notes due 2018 104,000 114,000 Debt discount - 6.25% convertible notes due 2018 (5,141 ) (7,242 ) Debt issuance costs - 6.25% convertible notes due 2018 (1,132 ) (1,659 ) Capital leases and other long-term obligations   4,749     5,524   Total debt 188,652 429,499 Less current portion   (3,249 )   (15,521 ) Long-term obligations, net of current portion $ 185,403   $ 413,978     Total debt $ 188,652 $ 429,499 Plus debt discounts and debt issuance costs   10,097     12,725   Gross debt 198,749 442,224 Cash and cash equivalents   (42,104 )   (31,709 ) Net debt $ 156,645   $ 410,515     Midpoint of 2015 run rate Adjusted EBITDA guidance 55,000   Net debt year end guidance 159,000   Net leverage at 2015 year end guidance 2.9x

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Alaska Communications Systems Group, Inc.Investor Contact:Tiffany Dunn, 907-297-3103Manager, Board and Investor Relationsinvestors@acsalaska.comorMedia Contact:Hannah Blankenship, 907-564-1326Associate Manager, Corporate CommunicationsHannah.Blankenship@acsalaska.com