ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ANALYSTS’ REPORTS
This Form 10-Q and our future filings on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “seeks”, “should” and variations of these words and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Such forward-looking statements may be contained in this Form 10-Q under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include (without limitation):
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governmental and public policy changes and investigations, including on-going changes in our revenues, or obligations for current and prior periods related to these programs, resulting from regulatory actions affecting inter-carrier compensation, and on-going support for federal and state programs such as Carrier of Last Resort obligations and the rural health care universal service support mechanism such as ascertainment of the “urban rate” and “rural rate” used to determine federal support payments for services we provide to the majority of our rural health care customers for current and prior periods
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as well as our ability to comply with the regulatory requirements to contribute to the Universal Service Fund and receive support payments from that fund
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our size, because we are a smaller sized competitor in the markets we serve and we compete against large competitors with substantially greater resources
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our business and operations could be negatively affected as a result of the actions of activist stockholders, which could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price
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the Alaskan economy, which has been impacted by continued low crude oil prices which are creating a significant impact on both the level of spending by the State of Alaska and the level of investment in resource development projects by natural resource exploration and development companies in Alaska. That reduced spending may impact the economy in the markets we serve and impact our future financial performance
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our ability to meet the terms of the 2017 Senior Credit Facility and to draw down additional funds under the facility to meet our liquidity needs
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the success of our joint venture with Quintillion Holdings, LLC to provide broadband solutions to the North Slope of Alaska
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our ability to maintain our cost structure as a more focused broadband and managed information technology (“IT”) services company. Maintaining our cost structure is key to generating cash flow from operating activities. If we fail to maintain these reductions, our financial condition will be impacted
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our ability to repurchase shares of our Common Stock under our repurchase program
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the cost and availability of future financing, at the terms, and subject to the conditions necessary, to support our business and pursue growth opportunities; our debt could also have negative consequences for our business; for example, it could increase our vulnerability to general adverse economic and industry conditions, or limit our flexibility in planning for, or reacting to, changes in our business and the telecommunications industry; in addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities; if we are unable to satisfy the financial covenants contained in those agreements, or are unable to generate cash sufficient to make required debt payments, the lenders and other parties to those arrangements could accelerate the maturity of some or all of our outstanding indebtedness
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disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber-attacks or security breaches of the physical infrastructure, operating systems or devices that our customers use to access our products and services
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our ability to keep pace with rapid technological developments and changing standards in the telecommunications industry, including on-going capital expenditures needed to upgrade our network to industry competitive speeds, particularly in light of expected 5G deployments by mobile wireless carriers
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our ability to continue to develop attractive, integrated products and services to evolving industry standards, and meet the pressure from competition to offer these services at lower prices
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unforeseen challenges when entering new markets
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unanticipated damage to one or more of our undersea fiber optic cables resulting from construction or digging mishaps, fishing boats or other reasons
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structural declines for voice and other legacy services within the telecommunications industry
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a maintenance or other failure of our network or data centers
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a failure of information technology systems
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a third-party claim that the Company is infringing upon their intellectual property, resulting in litigation or licensing expenses, or the loss of our ability to sell or support certain products
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unanticipated costs required to fund our post-retirement benefit plans, or contingent liabilities associated with our participation in a multi-employer pension plan
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the success or failure of any future acquisitions or other major transactions
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geologic or other natural disturbances relevant to the location of our operations
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the ability to attract, recruit, retain and develop the workforce necessary for implementing our business plan
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the success of the Company’s expansion into managed IT services, including the execution of those services for customers
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our internal control over financial reporting may not be effective, which could cause our financial reporting to be unreliable
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the matters described under Item 1A. Risk Factors in Amendment No. 1 on Form 10-K/A for the year ended December 31, 2017.
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In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-Q or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-Q.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
OVERVIEW
We are a fiber broadband and managed IT services provider, offering technology and service enabled customer solutions to business and wholesale customers in and out of Alaska. We also provide telecommunication services to consumers in the most populated communities throughout the state. Our facilities based communications network extends through the economically significant portions of Alaska and connects to the contiguous states via our two diverse undersea fiber optic cable systems. Our network is among the most expansive in Alaska and forms the foundation of service to our customers.
Our Market
. Management estimates the Alaska wireline telecom and IT services market to be approximately $1.6 billion. This market is comprised of the IT services market of approximately $840 million, the broadband market of approximately $680 million and the voice market of approximately $130 million. Management estimates that over 85% of this market opportunity is from the business and wholesale customer segment.
Competition
. We operate in a largely two-player terrestrial wireline market and we estimate our market share to be less than 25% statewide. However, our revenue performance relative to our largest competitor suggests that we are gaining market share in the markets we are serving.
The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources.
The Alaska Economy
We operate in a geographically diverse state with unique characteristics. We monitor the state of the economy and, in doing so, we compare Alaska economic activity with broader economic conditions. In general, we believe that the Alaska telecommunications market, as well as general economic activity in Alaska, is affected by certain economic factors, which include:
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investment activity in the oil and gas markets and the price of crude oil
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governmental spending and activity of military personnel
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the price and price trends of bandwidth
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the growth in demand for bandwidth
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decline in demand for voice and other legacy services
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local customer preferences
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housing activity and development patterns
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The population of Alaska, which declined marginally in 2017, is approximately 740,000 with Anchorage, Fairbanks and Juneau serving as the primary population and economic centers in the state.
We have observed variances in the factors affecting the Alaska economy as compared to the United States overall. Some factors, particularly the price of oil and gas, have a greater direct impact on the Alaska economy compared to other macro-economic trends impacting the U.S. economy as a whole.
It is estimated that one-third of Alaska’s economy is dependent on federal spending, one-third on natural resources, in particular the production of crude oil, and the remaining one-third on drivers such as tourism, mining, timber, seafood, international air cargo and miscellaneous support services.
Alaska’s economy is dependent on investment by oil companies, and state tax revenues correlate with the price of oil as the State assesses a tax based on the retail price of oil that transits the pipeline from the North Slope. The price of crude oil dropped substantially during 2014 through 2016, and began to rebound in 2017. Economists currently expect oil prices to increase in 2018 and trend up in the near term. The decline in the price of crude oil has impacted the state in two ways:
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Resource-based companies reduced their level of spending in the state, and in particular the North Slope, through the reduction of operating costs.
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The State of Alaska budget, which represents approximately 15% of the state’s total economy, is incurring deficits, but has budgetary reserves available through 2018. Proposals to address these deficits include spending reductions, utilization of earnings from the state’s permanent fund and additional revenues, including new fees and taxes. Reduced spending by the State has had a dampening effect on overall economic activity in the state.
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Economists anticipate that slowly increasing oil prices and growing industry optimism bode well for continued new development and increased activity on the North Slope in 2018, supporting an increase in the volume of oil moving through the pipeline and the generation of revenue for the state government.
Economists believe the Alaskan economy entered a moderate recession beginning in the second half of 2015. They are currently projecting that this recession will continue through 2018 but that some positive trends are beginning to emerge. Employment levels in the state declined approximately 1.3% in 2017 (compared with a 2.3% decline in 2016) driven by declines in the oil and gas industry, construction, and Federal and state government, offset by increases in health care and local government. The negative effects of the recession have been mitigated by diversity in the Alaskan economy, including growth in the health care and tourism industries. However, economists believe that, without a long-term solution to the state budget deficit, a full economic recovery may remain elusive.
Our objective is to continue generating sector-leading revenue growth in the broadband market through investments in sales, service, marketing and product development while expanding our broadband network capabilities through higher efficiencies, automation, new technology and expanded service areas. We also intend to continue our growth in the managed IT services market by providing these services to our broadband customers, and leveraging our position as the premier Cloud Enabler for business in the state of Alaska. We also seek to continuously improve our customer service, and utilize the Net Promoter Score (“NPS”) framework to track the feedback of our customers for virtually all customer interactions. We believe that higher NPS scores will allow us to increasingly provide a differentiated service experience for our customers, which will support our growth. We are focused on expanding our margins, and we utilize the LEAN framework to eliminate waste and simplify how we do business.
Regulatory Update
The items reported under Part I, Item 1. Business – Regulation in our Annual Report on Form 10-K for the year ended December 31, 2017, are updated as follows. This section should be read in conjunction with the corresponding items previously disclosed in our Annual Report.
US Federal Regulatory Matters
Rural Health Care Support Program
As described in our most recent Form 10-K, USAC had determined that, for Funding Year 2017, which began July 1, 2017, demand for support from the Rural Health Care support mechanism exceeded the $400 million cap that had been in place for the past two decades, for the second year in a row. As a result, USAC had announced that successful non-consortium applicants would receive approximately 84.4% of the support for which they would otherwise be eligible. On June 25, 2018, the FCC issued an Order increasing that cap to $571 million for Funding Year 2017. The increase is expected to permit full funding of all Funding Year 2017 requests. In addition, we expect that these actions will reduce or eliminate the need for such reductions in support payments, at least in the near term.
Separately, USAC determined that it was unable to approve the vast majority of our rural healthcare customers’ Funding Year 2017 funding requests until the FCC approved “rural rates” for use in computing support amounts. On March 22, 2018, we filed a Petition with the FCC asking the FCC to direct USAC to issue funding commitments to our customers based on rates we proposed in the Petition. On July 18, 2018, we announced that the FCC had approved those rates for use in determining rural health care support levels for our rural health care customers for Funding Year 2017. USAC has now completed the vast majority of the remaining administrative processes associated with our rural health care provider customers’ requests for support, and we have received the associated support payments for services delivered to our rural health care customers during Funding Year 2017.
The FCC’s June 25, 2018 Order also directed that the rural health care funding cap be indexed for inflation, so that, for Funding Year 2018, which began July 1, 2018, the cap will be $581 million. In addition, beginning with Funding Year 2018, any unused funds from one Funding Year may be carried forward for use in subsequent Funding Years. We have again requested that the FCC approve rural rates for the services we provide to our rural healthcare customers that are seeking subsidies from the Rural Health Care support mechanism. We expect to receive such approval during the fourth calendar quarter 2018, which we expect would reduce our carrying costs of this receivable from 2017 levels.
We are also working to reduce the level of regulatory and business uncertainty associated with our rural healthcare business in two additional ways. First, we expect soon to seek FCC approval for rural rates for Funding Year 2019, which will begin July 1, 2019, in order to shorten the USAC funding request approval process and bring greater certainty to the competitive bidding process for rural healthcare provider services that will begin in January 2019. Second, we continue to advocate for the FCC expeditiously to adopt rules to reform and modernize the Rural Health Care Telecommunications Program, on which the majority of healthcare providers in Alaska rely, in the proceeding that began in December 2017.
CAF Phase II
As described in our most recent Form 10-K, in an October 31, 2016 Order, the FCC set our CAF Phase II support at approximately $19.7 million annually through December 31, 2025, and requires us to provide voice and broadband Internet access service to approximately 31,500 locations in unserved and partially served census blocks. On December 28, 2017, Alaska Communications filed a notice with the FCC proposing to serve 4,762 unique geocoded locations (encompassing 6,056 unserved customer locations because some are in multi-unit buildings) in partially-served census blocks to partially fulfill this requirement. On March 27, 2018, General Communication, Inc. (“GCI”), filed a challenge at the FCC, asserting that it serves 3,099 of these locations, and we filed a response, disputing that assertion. On September 28, 2018, the FCC granted our request with respect to 1,713 unique geocoded locations, which will assist us in meeting our CAF Phase II deployment obligation.
In addition, on June 21, 2018, we filed a supplemental notice with the FCC proposing to serve an additional 3,253 unique geocoded locations (encompassing 4,691 unserved customer locations) in partially-served census blocks, again to partially fulfill our CAF Phase II deployment obligation. On September 4, 2018, GCI filed a challenge at the FCC, asserting that it serves 2,604 of those 3,253 locations. The FCC has not yet ruled on this challenge. As with the initial list, if the FCC ultimately determines that we are not able to satisfy our CAF Phase II deployment obligation by serving some or all of those locations, it may be more difficult and costly to meet our CAF Phase II deployment requirements at other locations.
On April 26, 2018, the FCC released an Order denying our request to modify the conditions on our use of CAF Phase II high cost support. The CAF locations may include up to 2,714 unserved locations in census blocks deemed “low-cost” by the FCC, so long as we certify that the capital expenditure to serve each such location was at least $5,000.00. The FCC denied our request to reduce that minimum capital expenditure requirement to $2,577.79. As a result of this denial, we may find it more difficult to identify eligible service locations to meet our CAF Phase II deployment requirement.
Satellite Services
We recently began using C-band satellite earth stations to provide services via satellite to our customers, using the Eutelsat E115WB satellite, and intend to expand our use of C-band satellite services to serve customers in 2018. Our C-band satellite earth stations use the 3.7 - 4.2 GHz band to receive downlink transmissions from geostationary satellites. On April 19, 2018, the Wireless Telecommunications, International, and Public Safety Bureaus of the FCC announced an immediate, temporary freeze on the filing of new or modification applications for fixed-satellite service earth station licenses, receive-only earth station registrations, and fixed microwave licenses in the 3.7 - 4.2 GHz portion of the C-band spectrum, in order to preserve the current landscape of authorized operations in that band while the Commission continues to examine opportunities to permit expanded terrestrial use of that band for mobile broadband and additional fixed services. On July 13, 2018, the FCC issued a Notice of Proposed Rulemaking seeking comment on options for expanding terrestrial use of the 3.7 - 4.2 GHz band for “5G” services. We filed comments in response on October 29, 2018, advocating for continued access to this spectrum for satellite downlink operations in Alaska. We are unable to predict the outcome of this proceeding. Nevertheless, if the FCC adopts rules that limit our ability to register additional satellite earth stations in this band, or expands terrestrial transmissions in the 3.7 - 4.2 GHz band, it may become more difficult or costly for us to use this band, or necessitate relocation of our services to alternative spectrum bands.
State of Alaska Regulatory Matters
Alaska Universal Service Fund
The Alaska Universal Service Fund (“AUSF”) complements the federal Universal Service Fund, but is focused on obligations to meet intrastate service obligations. The Regulatory Commission of Alaska (“RCA”) has opened an “information docket” to evaluate and scope a comprehensive AUSF reform rulemaking that might include consideration of the Fund’s continued need. The RCA also opened a rulemaking to review the regulations specific to AUSF shortfalls. A final decision in that matter was issued in late December, 2017. These rules were transmitted to the Lt. Governor for signature and became effective April, 2018. They eliminate the hierarchy of shortfall payments except for Lifeline and administrative operating expenses.
In January, 2018, the RCA opened a rulemaking to repeal the AUSF effective July 31, 2019, and sought comments and reply comments. The Alaska Telephone Association and its members filed a plan to cap the fund and distributions. AT&T, GCI, and Alaska Communications also filed comments and reply comments. A hearing was scheduled in April. A final order was issued by the RCA on October 24, 2018 with changes to the distribution to be effective January 1, 2019.
Other State Regulatory Matters
The RCA opened three dockets on July 27, 2016 to investigate the continued need for COLR funding in competitive areas. Two of the dockets investigating the continued need for COLR funding affect the Fairbanks and Juneau markets. On May 24, 2017, the RCA issued an order approving the 2016 COLR filing for ACSF but denying the 2016 COLR filing for ACSAK and terminating its COLR status and related support. ACSAK petitioned for reconsideration which was denied, and on July 14, 2017 ACSAK filed a notice of appeal in the Anchorage Superior Court. ACSAK filed its appellant brief on March 1, 2018 simultaneously with MTA. Due to requests for extensions for extraordinary and compelling reasons, the RCA appellee brief was due on June 19, 2018 and ACSAK has an extension for its reply brief due on August 10, 2018. Oral arguments were originally scheduled for November 8, 2018 but were recently rescheduled for January 10, 2019.
The RCA denied ACSAK’s request for 2017 COLR filing and reinstatement of COLR status. The Company filed for 2017 COLR funding for ACSN and ACSF. The RCA suspended these filings on July 31, 2017. Adjudication of these matters was dismissed when the RCA opened the docket to repeal AUSF. AUSF COLR support for these two markets will continue subject to the RCA’s final decision. ACSF, ACSN, and ACSAK filed for 2018 COLR funding on June 18, 2018 and received notification of approval from the RCA on July 27, 2018.
Business Plan Core Principles
Our results of operations, financial position and sources and uses of cash in the current and future periods reflect our focus on being the most successful broadband solutions company in Alaska by delivering the best customer experience in the markets we choose to serve. To do this we will continue to:
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Create a Workplace That Develops Ou
r People and Celebrates Success
We believe an engaged workforce is critical to our success. We are deeply committed to the development of our people and creating opportunities for them.
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Create a Consistent
Customer Experience Every Time
We strive to deliver service as promised to our customers, and make it right if our customers are not satisfied with what we delivered. We track virtually every customer interaction and we utilize the Net Promoter Score framework for assessing the satisfaction of our customers.
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Develop Our Network Focusing on Efficient Delivery and Management
We are moving toward higher efficiencies and improved customer experience through automation, new technology and expanded geographic service areas. Our future network architecture is a simpler mix of fiber, WiFi, Satellite, and fixed wireless (“FiWi”), focused on efficient delivery and management.
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Relentlessly Simplify How We Do Business
We believe we must reduce waste, which is defined as any activity that does not add value to its intended customer. Doing so improves the experience we deliver to our customers. We make investments in technology and process improvement, utilize the LEAN framework, and expect these efforts to meaningfully impact our financial performance in the long-term.
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Offer Broadband
and Managed IT
Solutions
that Create Market Differentiation
We are building on strength in designing and providing new products and solutions to our customers.
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We believe we can create value for our shareholders by:
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Driving revenue growth through increasing business broadband and managed IT service revenues,
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Generating Adjusted EBITDA and Adjusted Free Cash Flow growth through cost management, and
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Careful allocation of capital, including selectively investing success based capital into opportunities that generate appropriate returns on investments.
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2018
Operating Initiatives
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Bring greater focus to our larger Enterprise and Carrier customer segment, which has been the primary driver of our Business and Wholesale revenue growth, including those utilizing the North Slope Fiber network, and expanded product offerings.
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Build on our 2017 network initiatives in fiber fed wifi and fixed wireless to offer competitive broadband speeds for the mass market base of customers consisting primarily of our residential and small business customers, including fulfilling our obligations under the CAF II program.
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Bring greater attention to our cost structures in serving the residential and small business customers by investing in self service capabilities and changes in our product design and operating model to improve profitability.
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Leverage the market opportunity and fragmented competitive environment to accelerate profitable MIT growth through product, sales, delivery, and support and by leveraging relationships with our business partners such as Microsoft, Dell, Cisco and Avaya, among others.
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Effectively manage capital spending, focusing on customer opportunities, strategic initiatives, new product offerings, maintenance and utilization of funding received through CAF II support.
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Continued emphasis on employee engagement and effective communication.
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Evaluate strategic opportunities in and out of Alaska that address scale and geographic diversification and reduce the risk of investments made in our company.
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Revenue Sources by Customer Group
We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below. Revenue in the following management’s discussion and analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
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Business and Wholesale (broadband, voice and managed IT services)
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Consumer (broadband and voice services)
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Regulatory
(access services
,
high cost support
and carrier termination
)
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Business and Wholesale
Providing services to Business and Wholesale customers provides the majority of our revenues and is expected to continue being the primary driver of our growth over the next few years. Our business customers include large enterprises in the oil and gas, healthcare, education and financial industries, Federal, state and local governments, and small and medium business. We were the first Alaska-based carrier to be Carrier Ethernet 2.0 Certified and are currently the only Alaska-based carrier certified for multipoint-to-multipoint services. This certification means that we meet international standards for the quality of our broadband services. We also offer IP based voice including the largest SIP implementations in the state of Alaska, and are the first Microsoft Express Route provider in the state. We believe our network differentiates us in the markets we serve, because we prefer not to compete on price; but on the quality, reliability and the overall value of our solutions. Accordingly, we have significant capacity to “sell into” the network we operate and do so at what we believe are attractive incremental gross margins.
Business services have experienced significant growth and we believe the incremental economics of business services are attractive. Given the demand from our customers for more bandwidth and services, we expect revenue growth from these customers to continue for the foreseeable future. We provide services such as voice and broadband, managed IT services including remote network monitoring and support, managed IT security and IT professional services, and long distance services primarily over our own terrestrial network. We are continuing our efforts to position the Company as the premier Cloud Enabler for business in the state of Alaska.
Our wholesale customers are primarily national and international telecommunications carriers who rely on us to provide connectivity for broadband and other needs to access their customers over our Alaskan network. The wholesale market is characterized by larger transactions that can create variability in our operating performance. We have a dedicated sales team that sells into this customer segment, and we expect wholesale revenue to grow for the foreseeable future.
Consumer
We also provide broadband, voice and IT services to residential customers, including residential homes and multi-dwelling units. Given that our primary competitor has extensive quad play capabilities (video, voice, wireless and broadband) we target how and where we offer products and services to this customer group in order to maintain our returns. Our focus is to leverage the capabilities of our existing network and sell customers our highest available bandwidth. Our primary competitive advantage is that we offer reliable internet service without data caps, while our competitor, with certain exceptions, charges customers or throttles customers’ speeds for exceeding given levels of data usage. We experienced consistent growth in consumer broadband revenues in 2017. More recently, we have implemented fiber fed wifi solutions for providing broadband and are also field testing and implementing certain fixed wireless technologies, which have provided a basis for continued growth in this market in 2018.
Regulatory
Regulatory revenue is generated from three primary sources: (i) Access charges, which include interstate and intrastate switched access and special access charges, and cellular access; (ii) Surcharges billed to the end user (pass-through and non-pass-through); and (iii) federal and state support. We provide voice and broadband origination and termination services to interstate and intrastate carriers. While we are compensated for these services, these revenue streams have been in decline and we expect them to continue to decline, although at a relatively predictable rate. In addition, as regulators have reformed traditional access charges, they have simultaneously implemented new end user surcharges that contribute to our revenue. The following table summarizes our primary sources of regulatory revenue and their contribution to total revenue in 2017.
Source
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Description
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2017
Revenue
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As a % of
Regulatory
Revenue
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As a % of
Total
Revenue
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Access Charges
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Interstate and intrastate switched access are services based primarily on originating and terminating access minutes from other carriers. Special access is primarily access to dedicated circuits sold to wholesale customers, substantially all of which is generated from interstate services. Cellular access is the transport of local network services between switches for cellular companies based on individually negotiated contracts. Access revenue has declined at an average of approximately 5% annually over the past five years.
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$
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4,916
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9.7
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%
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2.2
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%
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Total Access Charges
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$
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4,916
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9.7
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%
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2.2
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%
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Surcharges
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Pass-Through
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We assess our customers for surcharges, typically on a monthly basis, as required by various state and federal regulatory agencies, and remit these surcharges to these agencies. These pass-through surcharges include Federal Universal Access and State Universal Access. These surcharges vary from year to year, and are primarily recognized as revenue, and the subsequent remittance to the state or federal agency as a cost of sale and service. The rates imposed by the regulators continue to increase. However, because the charges are only assessed on a portion of our services, and that portion continues to decline, we expect these revenue streams to decline over time as the revenue base declines.
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$
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6,587
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13.0
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%
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2.9
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%
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Other
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Other non-pass-through surcharges are collected from our customers as authorized by the regulatory body. The amount charged is based on the type of line: single line business, multi-line business, consumer or lifeline. The rates are established based on federal or state orders. These charges are recorded as revenue and do not have a direct associated cost. Rather, they represent a revenue recovery mechanism established by the FCC or the Regulatory Commission of Alaska.
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$
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12,922
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25.5
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%
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5.7
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%
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Total Surcharges
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$
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19,509
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38.5
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%
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8.6
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%
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Federal and State Support
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CAF II
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In 2016, the FCC released the CAF Phase II order specific to Alaska Communications which transitioned from CAF Phase I frozen support to CAF Phase II. Funding under the new program generally requires the Company to provide broadband service to unserved locations throughout the designated coverage area by the end of a specified build-out period, and meet interim milestone build-out obligations. CAF II revenues are expected to be relatively stable through 2026.
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$
|
19,694
|
|
|
|
38.9
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLR and CCL
|
The Company is designated by the State of Alaska as a COLR in five of the six study areas. In addition to COLR, the Company receives CCL support. We do not receive COLR or CCL funding for the ACS of Anchorage study area. As a COLR we are required to provide services essential for retail and carrier-to-carrier telecommunication throughout the applicable coverage area.
|
|
$
|
6,549
|
|
|
|
12.9
|
%
|
|
|
2.9
|
%
|
Total Federal and State Support
|
|
$
|
26,243
|
|
|
|
51.8
|
%
|
|
|
11.6
|
%
|
Total Regulatory Revenue
|
|
$
|
50,668
|
|
|
|
|
|
|
|
22.3
|
%
|
Total Revenue
|
|
$
|
226,905
|
|
|
|
|
|
|
|
|
|
Executive Summary
The following summary should be read in conjunction with “Non-GAAP Financial Measures” included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Operating Revenues
Total revenue of $58.2 million increased $1.5 million, or 2.7%, in the third quarter of 2018 compared with the third quarter of 2017. This growth reflects a $1.3 million increase in Managed IT services and equipment installations, a $0.5 million increase in Voice and other revenue and a $0.3 million increase in Wholesale broadband revenue. These increases were partially offset by a $0.7 decline in Business broadband revenue due primarily to price compression in the rural health care program. In June 2018, the FCC announced that it had raised the rural health care program’s annual funding cap for Funding Year 2017 (July 1, 2017 through June 30, 2018) to $571 million from its previous cap of $400 million to fully fund eligible funding requests for that year. During the third quarter of 2018, the applications associated with Funding Year 2017 for essentially all of the Company’s rural health care customers were approved or denied. Rates and applications associated with Funding Year 2018 (July 1, 2018 through June 30, 2019) have not been approved.
Operating Income
Operating income of $5.8 million in the third quarter of 2018 increased $2.1 million, or 56.9%, compared with the third quarter of 2017 due to revenue growth and lower operating expenses. These items are discussed in more detail below.
Adjusted EBITDA
Adjusted EBITDA of $14.8 million in the third quarter of 2018 increased $1.6 million, or 12.0%, from $13.2 million in the third quarter of 2017 due to the revenue increase and lower operating expenses. See “Non-GAAP Financial Measures” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to Net Income (Loss). As discussed in “Non-GAAP Financial Measures,” the Company does not provide a reconciliation of guidance for Adjusted EBITDA to Net Income (Loss).
Operatin
g Metrics
Business broadband average monthly revenue per user (“ARPU”) of $332.33 in the third quarter of 2018 decreased from $345.78 in the third quarter of 2017 due primarily to price compression in the rural health care program. Business broadband connections of 15,372 at September 30, 2018, increased marginally from connections of 15,334 at September 30, 2017. We count connections on a unitary basis regardless of the size of the bandwidth. For example, a customer that has a 10MB connection is counted as one connection as is a customer with a 1MB connection. While we present metrics related to Business connections, we note that we manage Business and wholesale in terms of new Monthly Recurring Charges (“MRC”) sold. Achievement of sales performance in terms of MRC is the primary operating metric used by management to measure market performance. For competitive reasons, we do not disclose our sales or performance in MRC.
Consumer broadband connections of 32,741 at September 30, 2018 declined from 34,295 at September 30, 2017, and consumer broadband ARPU of $65.61 in the third quarter of 2018 increased from $60.80 in the third quarter of 2017.
The table below provides certain key operating metrics as of or for the periods indicated.
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Voice:
|
|
|
|
|
|
|
|
|
At quarter end:
|
|
|
|
|
|
|
|
|
Business access lines
|
|
|
70,110
|
|
|
|
72,068
|
|
Consumer access lines
|
|
|
26,497
|
|
|
|
30,361
|
|
Quarter:
|
|
|
|
|
|
|
|
|
ARPU - business
|
|
$
|
25.35
|
|
|
$
|
23.51
|
|
ARPU - consumer
|
|
$
|
32.05
|
|
|
$
|
30.68
|
|
Year-to-date:
|
|
|
|
|
|
|
|
|
ARPU - business
|
|
$
|
25.26
|
|
|
$
|
23.39
|
|
ARPU - consumer
|
|
$
|
32.21
|
|
|
$
|
29.88
|
|
|
|
|
|
|
|
|
|
|
Broadband:
|
|
|
|
|
|
|
|
|
At quarter end:
|
|
|
|
|
|
|
|
|
Business connections
|
|
|
15,372
|
|
|
|
15,334
|
|
Consumer connections
|
|
|
32,741
|
|
|
|
34,295
|
|
Quarter:
|
|
|
|
|
|
|
|
|
ARPU - business
|
|
$
|
332.33
|
|
|
$
|
345.78
|
|
ARPU - consumer
|
|
$
|
65.61
|
|
|
$
|
60.80
|
|
Year-to-date:
|
|
|
|
|
|
|
|
|
ARPU - business
|
|
$
|
333.05
|
|
|
$
|
334.36
|
|
ARPU - consumer
|
|
$
|
65.57
|
|
|
$
|
61.24
|
|
Liquidity
We generated cash from operating activities of $46.9 million in the first nine months of 2018 compared with $25.7 million in the first nine months of 2017. This improvement reflects cash receipts from the rural health care program in the third quarter of 2018, cash receipts associated with deferred revenue lease arrangements and higher payments on accounts payable and other current liabilities in 2017.
Net debt (defined as total debt excluding debt issuance costs, less cash, cash equivalents and restricted cash held for settlement of the 6.25% Notes) at September 30, 2018 was $159.1 million compared with $177.2 million at December 31, 2017. The decrease reflects principal payments on the Company’s 2017 Senior Credit Facility and an increase in the cash balance. The 6.25% Notes were repurchased on May 1, 2018.
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three-month periods ended September 30, 2018 and 2017. Revenue and the associated analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
|
|
Three Months ended September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
% Change
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business and wholesale revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business broadband
|
|
$
|
15,368
|
|
|
$
|
16,026
|
|
|
$
|
(658
|
)
|
|
|
-4.1
|
%
|
Business voice and other
|
|
|
7,199
|
|
|
|
6,686
|
|
|
|
513
|
|
|
|
7.7
|
%
|
Managed IT services
|
|
|
1,480
|
|
|
|
1,020
|
|
|
|
460
|
|
|
|
45.1
|
%
|
Equipment sales and installations
|
|
|
1,488
|
|
|
|
600
|
|
|
|
888
|
|
|
|
NM
|
|
Wholesale broadband
|
|
|
9,305
|
|
|
|
8,994
|
|
|
|
311
|
|
|
|
3.5
|
%
|
Wholesale voice and other
|
|
|
1,525
|
|
|
|
1,562
|
|
|
|
(37
|
)
|
|
|
-2.4
|
%
|
Total business and wholesale revenue
|
|
|
36,365
|
|
|
|
34,888
|
|
|
|
1,477
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
6,539
|
|
|
|
6,322
|
|
|
|
217
|
|
|
|
3.4
|
%
|
Voice and other
|
|
|
2,719
|
|
|
|
2,986
|
|
|
|
(267
|
)
|
|
|
-8.9
|
%
|
Total consumer revenue
|
|
|
9,258
|
|
|
|
9,308
|
|
|
|
(50
|
)
|
|
|
-0.5
|
%
|
Total business, wholesale and consumer revenue
|
|
|
45,623
|
|
|
|
44,196
|
|
|
|
1,427
|
|
|
|
3.2
|
%
|
Growth in broadband revenue
|
|
|
-0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
|
|
|
7,682
|
|
|
|
7,584
|
|
|
|
98
|
|
|
|
1.3
|
%
|
High cost support
|
|
|
4,924
|
|
|
|
4,923
|
|
|
|
1
|
|
|
|
0.0
|
%
|
Total regulatory revenue
|
|
|
12,606
|
|
|
|
12,507
|
|
|
|
99
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
58,229
|
|
|
$
|
56,703
|
|
|
$
|
1,526
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales (excluding depreciation and amortization)
|
|
|
27,220
|
|
|
|
26,690
|
|
|
|
530
|
|
|
|
2.0
|
%
|
Selling, general and administrative
|
|
|
16,879
|
|
|
|
17,108
|
|
|
|
(229
|
)
|
|
|
-1.3
|
%
|
Depreciation and amortization
|
|
|
8,352
|
|
|
|
9,193
|
|
|
|
(841
|
)
|
|
|
-9.1
|
%
|
Loss on disposal of assets, net
|
|
|
15
|
|
|
|
40
|
|
|
|
(25
|
)
|
|
|
-62.5
|
%
|
Total operating expenses
|
|
|
52,466
|
|
|
|
53,031
|
|
|
|
(565
|
)
|
|
|
-1.1
|
%
|
Operating income
|
|
|
5,763
|
|
|
|
3,672
|
|
|
|
2,091
|
|
|
|
56.9
|
%
|
Other income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,286
|
)
|
|
|
(3,577
|
)
|
|
|
291
|
|
|
|
-8.1
|
%
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(93
|
)
|
|
|
93
|
|
|
|
NM
|
|
Interest income
|
|
|
36
|
|
|
|
13
|
|
|
|
23
|
|
|
|
NM
|
|
Other income (expense)
|
|
|
66
|
|
|
|
(153
|
)
|
|
|
219
|
|
|
|
NM
|
|
Total other income and (expense)
|
|
|
(3,184
|
)
|
|
|
(3,810
|
)
|
|
|
626
|
|
|
|
-16.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense) benefit
|
|
|
2,579
|
|
|
|
(138
|
)
|
|
|
2,717
|
|
|
|
NM
|
|
Income tax (expense) benefit
|
|
|
(774
|
)
|
|
|
422
|
|
|
|
(1,196
|
)
|
|
|
NM
|
|
Net income
|
|
|
1,805
|
|
|
|
284
|
|
|
|
1,521
|
|
|
|
NM
|
|
Less net loss attributable to noncontrolling interest
|
|
|
(12
|
)
|
|
|
(36
|
)
|
|
|
24
|
|
|
|
-66.7
|
%
|
Net income attributable to Alaska Communications
|
|
$
|
1,817
|
|
|
$
|
320
|
|
|
$
|
1,497
|
|
|
|
NM
|
|
Operating Revenue
Business and Wholesale
Business and wholesale revenue of $36.4 million increased $1.5 million, or 4.2%, in the third quarter of 2018 from $34.9 million in the third quarter of 2017. This growth was due primarily to a $1.3 million increase in Managed IT services and equipment sales and installations. Voice and other revenue increased $0.5 million. Business voice connections decreased 1,958, or 2.7%, year over year, and ARPU of $25.35 increased from $23.51 in 2017. Wholesale broadband revenue increased $0.3 million. These increases were partially offset by a $0.7 million decrease in Business broadband revenue. Marginally higher connections were offset by lower ARPU. The decline in Business broadband ARPU from $345.78 in the third quarter of 2017 to $332.33 in the third quarter of 2018 was due primarily to price compression in the rural health care program. The Company’s rural health care revenue was $3.8 million in 2018 compared with $6.0 million in 2017. While connections and ARPU serve as data points to support the analysis of period-over-period changes in revenue, they are not critical indicators utilized by the Company to manage the Business and Wholesale customer group.
Consumer
Consumer revenue was $9.3 million in the third quarter of 2018 and 2017. Broadband revenue increased $0.2 million due to an increase in ARPU to $65.61 from $60.80, offset by a decrease in connections. Voice and other revenue decreased $0.3 million due to 3,864 fewer connections, partially offset by an increase in ARPU to $32.05 from $30.68 in the prior year.
Regulatory
Regulatory revenue of $12.6 million increased marginally year over year.
Operating Expenses
Cost of Services and Sales
(excluding depreciation and amortization
)
Cost of services and sales (excluding depreciation and amortization) of $27.2 million increased $0.5 million, or 2.0%, in the third quarter of 2018 from $26.7 million in the third quarter of 2017. A $2.1 million increase in network support costs associated with new customer contracts and a $0.3 million increase in access charges were partially offset by a $1.3 decrease in labor costs and a $0.3 million decrease in circuit installation costs.
Selling, General and Administrative
Selling, general and administrative expenses of $16.9 million decreased $0.2 million, or 1.3%, in the third quarter of 2018 from $17.1 million in the third quarter of 2017. This decline reflects lower advertising and labor costs. Results in both periods include a $0.8 million charge to the allowance for doubtful accounts associated with rural health care customers.
Depreciation and Amortization
Depreciation and amortization expense of $8.4 million decreased $0.8 million, or 9.1%, in the third quarter of 2018 from $9.2 million in the third quarter of 2017. This decrease was due primarily to certain assets reaching the end of their depreciable life.
Other
Income and Expense
Interest expense of $3.3 million in the third quarter of 2018 declined from $3.6 million in the third quarter of 2017 due primarily to lower average borrowing levels. The $0.1 million loss on extinguishment of debt in the third quarter of 2017 was associated with the refinancing transaction.
Income Taxes
Income tax expense and the effective tax rate in the third quarter of 2018 were $0.8 million and 30.0%, respectively. The income tax benefit in the third quarter of 2017 of $0.4 million includes the impact of permanent book to tax differences.
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to the noncontrolling interest of the AQ-JV was $12 thousand and $36 thousand in the third quarter of 2018 and 2017, respectively.
Net
Income Attributable to Alaska Communications
Net income attributable to Alaska Communications of $1.8 million in the third quarter of 2018 compares with $0.3 million in the same period of 2017. The year over year results reflect the revenue and expense items discussed above.
The following table summarizes our results of operations for the nine-month periods ended September 30, 2018 and 2017. Revenue and the associated analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
|
|
Nine Months ended September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
% Change
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business and wholesale revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business broadband
|
|
$
|
46,036
|
|
|
$
|
49,261
|
|
|
$
|
(3,225
|
)
|
|
|
-6.5
|
%
|
Business voice and other
|
|
|
21,088
|
|
|
|
19,918
|
|
|
|
1,170
|
|
|
|
5.9
|
%
|
Managed IT services
|
|
|
3,936
|
|
|
|
3,078
|
|
|
|
858
|
|
|
|
27.9
|
%
|
Equipment sales and installations
|
|
|
3,870
|
|
|
|
2,717
|
|
|
|
1,153
|
|
|
|
42.4
|
%
|
Wholesale broadband
|
|
|
28,221
|
|
|
|
26,252
|
|
|
|
1,969
|
|
|
|
7.5
|
%
|
Wholesale voice and other
|
|
|
4,455
|
|
|
|
4,803
|
|
|
|
(348
|
)
|
|
|
-7.2
|
%
|
Total business and wholesale revenue
|
|
|
107,606
|
|
|
|
106,029
|
|
|
|
1,577
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
19,726
|
|
|
|
19,200
|
|
|
|
526
|
|
|
|
2.7
|
%
|
Voice and other
|
|
|
8,355
|
|
|
|
8,698
|
|
|
|
(343
|
)
|
|
|
-3.9
|
%
|
Total consumer revenue
|
|
|
28,081
|
|
|
|
27,898
|
|
|
|
183
|
|
|
|
0.7
|
%
|
Total business, wholesale and consumer revenue
|
|
|
135,687
|
|
|
|
133,927
|
|
|
|
1,760
|
|
|
|
1.3
|
%
|
Growth in broadband revenue
|
|
|
-0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
|
|
|
23,321
|
|
|
|
23,273
|
|
|
|
48
|
|
|
|
0.2
|
%
|
High cost support
|
|
|
14,771
|
|
|
|
14,770
|
|
|
|
1
|
|
|
|
0.0
|
%
|
Total regulatory revenue
|
|
|
38,092
|
|
|
|
38,043
|
|
|
|
49
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
173,779
|
|
|
$
|
171,970
|
|
|
$
|
1,809
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales (excluding depreciation and amortization)
|
|
|
79,595
|
|
|
|
78,286
|
|
|
|
1,309
|
|
|
|
1.7
|
%
|
Selling, general and administrative
|
|
|
49,398
|
|
|
|
52,331
|
|
|
|
(2,933
|
)
|
|
|
-5.6
|
%
|
Depreciation and amortization
|
|
|
25,336
|
|
|
|
27,124
|
|
|
|
(1,788
|
)
|
|
|
-6.6
|
%
|
Loss on disposal of assets, net
|
|
|
56
|
|
|
|
73
|
|
|
|
(17
|
)
|
|
|
-23.3
|
%
|
Total operating expenses
|
|
|
154,385
|
|
|
|
157,814
|
|
|
|
(3,429
|
)
|
|
|
-2.2
|
%
|
Operating income
|
|
|
19,394
|
|
|
|
14,156
|
|
|
|
5,238
|
|
|
|
37.0
|
%
|
Other income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,191
|
)
|
|
|
(11,335
|
)
|
|
|
1,144
|
|
|
|
-10.1
|
%
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(7,527
|
)
|
|
|
7,527
|
|
|
|
NM
|
|
Interest income
|
|
|
74
|
|
|
|
27
|
|
|
|
47
|
|
|
|
NM
|
|
Other income (expense), net
|
|
|
79
|
|
|
|
(461
|
)
|
|
|
540
|
|
|
|
NM
|
|
Total other income and (expense)
|
|
|
(10,038
|
)
|
|
|
(19,296
|
)
|
|
|
9,258
|
|
|
|
-48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense) benefit
|
|
|
9,356
|
|
|
|
(5,140
|
)
|
|
|
14,496
|
|
|
|
NM
|
|
Income tax (expense) benefit
|
|
|
(2,080
|
)
|
|
|
1,886
|
|
|
|
(3,966
|
)
|
|
|
NM
|
|
Net income (loss)
|
|
|
7,276
|
|
|
|
(3,254
|
)
|
|
|
10,530
|
|
|
|
NM
|
|
Less net loss attributable to noncontrolling interest
|
|
|
(84
|
)
|
|
|
(100
|
)
|
|
|
16
|
|
|
|
-16.0
|
%
|
Net income (loss) attributable to Alaska Communications
|
|
$
|
7,360
|
|
|
$
|
(3,154
|
)
|
|
$
|
10,514
|
|
|
|
NM
|
|
Operating Revenue
Business and Wholesale
Business and wholesale revenue of $107.6 million increased $1.6 million, or 1.5%, in the nine-month period of 2018 from $106.0 million in the nine-month period of 2017. This increase reflects a $2.0 million increase in wholesale broadband revenue reflecting higher rates offset by fewer customers, and a $2.0 million increase in Managed IT services and equipment sales. Voice and other revenue increased $0.8 million. Business voice connections decreased 1,958, or 2.7%, year over year and ARPU of $25.26 increased from $23.39 in 2017. Business broadband revenue declined $3.2 million, or 6.5%, in 2018 due primarily to year-over-year price compression in the rural health care program, partially offset by a $1.4 million cumulative adjustment recorded in the second quarter for the effect of the rural health care program funding increase on revenue previously reported in the third and fourth quarters of 2017. The Company’s rural health care revenue was $13.8 million in the first nine months of 2018, including the $1.4 million adjustment, compared with $19.1 million in the first nine months of 2017. Business ARPU of $333.05 in the nine-month period of 2018 compares with $334.36 in the same period of 2017 due to rural health price compression. Business broadband connections increased marginally year over year.
Consumer
Consumer revenue of $28.1 million increased $0.2 million, or 0.7%, in the nine-month period of 2018. Broadband revenue increased $0.5 million due to an increase in ARPU to $65.57 from $61.24, offset by a decrease in connections. Voice and other revenue decreased marginally due to 3,864 fewer connections, partially offset by an increase in ARPU to $32.21 from $29.88 in the prior year.
Regulatory
Regulatory revenue of $38.1 million was unchanged year over year.
Operating Expenses
Cost of Services and Sales (excluding depreciation and amortization)
Cost of services and sales (excluding depreciation and amortization) of $79.6 million increased $1.3 million, or 1.7%, in the nine-month period of 2018 from $78.3 million in the nine-month period of 2017. A $4.5 million increase in network support costs associated with new customer contracts and a $1.1 million increase in access charges were partially offset by a $3.7 million decrease in labor costs.
Selling
, General and Administrative
Selling, general and administrative expenses of $49.4 million decreased $2.9 million, or 5.6%, in the nine-month period of 2018 from $52.3 million in the nine-month period of 2017. Results in 2018 and 2017 included charges of $0.8 million and $1.9 million, respectively, to the allowance for doubtful accounts associated with rural health care customers. The decrease also reflects a $2.7 million year over year reduction in labor costs.
Depreciation and Amortization
Depreciation and amortization expense of $25.3 million decreased $1.8 million, or 6.6%, in the nine-month period of 2018 from $27.1 million in the nine-month period of 2017. This decrease was due primarily to certain assets reaching the end of their depreciable life.
Other Income and Expense
Interest expense of $10.2 million in the nine-month period of 2018 declined from $11.3 million in the nine-month period of 2017 due primarily to lower average borrowing levels. The $7.5 million loss on extinguishment of debt in the nine-month period of 2017 included $5.2 million associated with settlement of the Tender Offer on the Company’s 6.25% Notes in the second quarter and $2.3 million associated with the settlement of the 2015 Senior Credit Facilities in the first quarter.
Income Taxes
Income tax expense in the nine-month period of 2018 of $2.1 million reflects a $0.7 million benefit recorded in the first quarter to correct an overstatement of the income tax provision in 2017. Excluding this out-of-period adjustment, the income tax provision was $2.8 million and the effective tax rate was 29.7%. The income tax benefit and effective tax rate in the nine-month period of 2017 of $1.9 million and 36.7%, respectively, reflect the impact of permanent book to tax differences.
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to the noncontrolling interest of the AQ-JV was $84 thousand and $100 thousand in both the nine-month periods of 2018 and 2017, respectively.
Net Income Attributable to Alaska Communications
Net income attributable to Alaska Communications of $7.4 million in the nine-month period of 2018 compares with a net loss $3.2 million in the same period of 2017. The year over year results reflect the revenue and expense items discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We satisfied our cash requirements for operations, capital expenditures, repurchase of our 6.25% Notes and scheduled debt service under our 2017 Senior Credit Facility in the first nine months of 2018 through internally generated funds, cash on hand and selected draws on our revolving credit facility. At September 30, 2018, we had $17.3 million of cash and cash equivalents, $1.6 million of restricted cash and $15.0 million available under our revolving credit facility.
Our major sources and uses of funds in the nine months ended September 30, 2018 and 2017 were as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
46,879
|
|
|
$
|
25,688
|
|
Capital expenditures
|
|
$
|
(25,432
|
)
|
|
$
|
(24,054
|
)
|
Change in unsettled capital expenditures
|
|
$
|
(1,811
|
)
|
|
$
|
2,007
|
|
Repayments of long-term debt
|
|
$
|
(29,164
|
)
|
|
$
|
(174,378
|
)
|
Proceeds from the issuance of long-term debt
|
|
$
|
14,000
|
|
|
$
|
183,000
|
|
Debt issuance costs and discounts
|
|
$
|
-
|
|
|
$
|
(5,559
|
)
|
Cash paid for debt extinguishment
|
|
$
|
-
|
|
|
$
|
(5,522
|
)
|
Interest paid
(1)
|
|
$
|
(10,723
|
)
|
|
$
|
(10,874
|
)
|
(1)
Included in net cash provided by operating activities.
|
Cash Flows from Operating Activities
Cash provided by operating activities of $46.9 million in the first nine months of 2018 compares with $25.7 million in the first nine months of 2017. The year over year increase was primarily due to cash receipts from the rural health care program in the third quarter of 2018 and higher payments on accounts payable and other current liabilities in 2017.
Cash provided by operating activities of $46.9 million in the first nine months of 2018 reflects net income excluding non-cash items (defined as cash provided by operating activities excluding changes in operating assets and liabilities) of $36.5 million, cash receipts from the rural health care program of $14.5 million (approximately $10.0 million of which was recorded as revenue in 2017) and $7.0 million of cash receipts associated with deferred revenue lease arrangements.
Cash provided by operating activities of $25.7 million in the first nine months of 2017 reflects net income excluding non-cash items (defined as cash provided by operating activities excluding changes in operating assets and liabilities) of $33.3 million offset by a $5.1 million increase in accounts receivable and other current assets and a $2.5 million decrease in accounts payable and other current liabilities. The decrease in accounts payable and other current liabilities includes incentive compensation payments and cash interest payments of $10.9 million. The increase in accounts receivable was largely due to the timing of receipts from certain rural health care customers.
Cash Flows from Investing Activities
Cash used by investing activities of $28.7 million in the first nine months of 2018 consisted of expenditures on capital totaling $27.2 million. Of $25.4 million incurred in 2018, $14.0 million was success based versus maintenance.
Cash used by investing activities of $22.8 million in the first nine months of 2017 consisted primarily of expenditures on capital totaling $22.0 million. Of $24.1 million incurred in 2017, $14.5 million was success based versus maintenance.
Our networks require the timely maintenance of plant and infrastructure. Future capital requirements may change due to impacts of regulatory decisions that affect our ability to recover our investments, changes in technology, the effects of competition, changes in our business strategy, and our decision to pursue specific acquisition and investment opportunities. Capital spending is typically higher during the second and third quarters. We intend to fund future capital expenditures with cash on hand and net cash generated from operations.
Cash Flows from Financing Activities
Cash used by financing activities was $15.4 million in the first nine months of 2018. Repayments of long-term debt of $29.2 million included scheduled principal payments on the term loan components of our 2017 Senior Credit Facility of $5.0 million, repayment of draws totaling $14.0 million on the revolving credit facility and repurchase of the 6.25% Notes of $10.0 million. Proceeds from the issuance of long-term debt of $14.0 million consisted of draws on the revolving credit facility.
Cash used by financing activities were $2.9 million in the first nine months of 2017. Repayments of long-term debt of $174.4 million included repayment of the outstanding principal of the 2015 Senior Credit Facilities of $86.8 million, settlement of the tender offer on the Company’s 6.25% Notes in the principal amount of $84.0 million and repayment of a $3.0 million draw on the revolving credit facility. Proceeds from the issuance of long-term debt of $183.0 million consisted of gross proceeds of $180.0 million from the issuance of the 2017 Senior Credit Facility and a $3.0 million draw on the revolving credit facility. Payment of debt issuance costs and discounts of $5.6 million were associated with the issuance of the 2017 Senior Credit Facility. Cash paid for debt extinguishment of $5.5 million was associated with settlement of the 2015 Senior Credit Facilities and the tender offer on the 6.25% Notes.
Liquidity and Capital Resources
Consistent with our history, our current and long-term liquidity could be impacted by a number of challenges, including, but not limited to: (i) potential future reductions in our revenues resulting from governmental and public policy changes, including regulatory actions affecting inter-carrier compensation, changes in revenue from Universal Service Funds, and the timing of Rural Health Care Program funding receipts; (ii) servicing our debt and funding principal payments; (iii) the funding of other obligations, including our pension plans and lease commitments; (iv) competitive pressures in the markets we serve; (v) the capital intensive nature of our industry; (vi) our ability to respond to and fund the rapid technological changes inherent to our industry, including new products; and (vii) our ability to obtain adequate financing to support our business and pursue growth opportunities.
We are responding to these challenges by (i) driving top line growth in broadband service revenues outside the rural health care market with a focus on business and wholesale customers; (ii) managing our cost structure to deliver consistent Adjusted EBITDA and Adjusted Free Cash flow performance; and (iii) holding capital spending to approximately $35 million annually.
The obligations under the 2017 Senior Credit Facility are secured by substantially all personal property and certain material real property owned by the Company and its wholly-owned subsidiaries, with certain exceptions. The 2017 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, declaring dividends, making investments, dispositions, and entering into mergers and acquisitions. Repurchases of the Company’s common stock are subject to a $10 million limitation, satisfying a minimum liquidity and cash-flow requirement and other conditions as described in the agreement. Upon achieving certain Net Total Leverage Ratio targets, additional repurchases may be made. The 2017 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment under the agreement, breach of warranty, breach of covenants, defaults on other debt, incurrence of liens on collateral, change of control and insolvency, all as defined in the agreement. Consequences of an event of default are defined in the agreement.
The 2017 Senior Credit Facility requires the maintenance of certain financial ratios as defined in the agreement and summarized below. The Company was in compliance with all relevant financial ratios at September 30, 2018.
Net Total Leverage Ratio:
The ratio of our (a) total debt, less unrestricted cash and cash equivalents held in pledged accounts, less cash held for repurchase or repayment of the 6.25% Notes to (b) Consolidated EBITDA (as defined more specifically below) for the consecutive four fiscal quarters ending as of the calculation date. The maximum allowable net total leverage ratio is provided in the table below.
Period
|
|
Ratio
|
|
|
|
|
|
July 1, 2017 through December 31, 2017
|
|
3.50 to 1.00
|
|
January 1, 2018 through June 30, 2018
|
|
3.25 to 1.00
|
|
July 1, 2018 through December 31, 2018
|
|
3.00 to 1.00
|
|
January 1, 2019 through September 30, 2019
|
|
2.75 to 1.00
|
|
October 1, 2019 and thereafter
|
|
2.50 to 1.00
|
|
The actual net total leverage ratio was 2.64 at September 30, 2018.
Fixed Charge Coverage Ratio
:
The ratio of our (a) Consolidated EBITDA for the consecutive four fiscal quarters ending as of the calculation date to (b) the sum of, for the same period, consolidated interest expense, capital expenditures (with certain exceptions), the current portion of long term debt including capital lease obligations, restricted payments, and cash payments for income taxes. The minimum fixed charge coverage ratio was 1.05 to 1.00 commencing September 30, 2017. The actual fixed charge coverage ratio was 1.25 at September 30, 2018.
Consolidated EBITDA
, as defined in the 2017 Senior Credit Facility, means consolidated net income attributable to Alaska Communications, plus (to the extent deducted in calculating net income) the sum of:
|
●
|
cash and non-cash interest expense;
|
|
●
|
depreciation and amortization expense;
|
|
●
|
other non-cash charges and expenses, including equity-based compensation expense;
|
|
●
|
the write down or write off on any assets, other than accounts receivable;
|
|
●
|
subject to limitation, fees and out-of-pocket transaction costs incurred in connection with the 2017 refinancing transactions;
|
|
●
|
unusual, non-recurring losses, charges and expenses;
|
|
●
|
one-time costs associated with permitted acquisitions; and
|
|
●
|
cost savings from synergies in connection with permitted acquisitions or dispositions.
|
minus (to the extent included in calculating net income) the sum of:
|
●
|
unusual, non-recurring gains on permitted sales or dispositions of assets and casualty events;
|
|
●
|
cash and non-cash interest income;
|
|
●
|
other unusual nonrecurring items;
|
|
●
|
the write up of any asset;
|
|
●
|
patronage refunds or similar distributions from any lender; and
|
|
●
|
the Company’s share of earnings in its joint venture with Quintillion if such earnings exceed $0.5 million and at least 50% of the Company’s share in such earnings have not been received in cash by the Company.
|
Consolidated EBITDA as defined in the 2017 Senior Credit Facility is not a GAAP measure and is not consistent with Adjusted EBITDA presented elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Term A-1 Facility bears interest at LIBOR plus 5.0% per annum, with a LIBOR minimum of 1.0%. The Term A-2 Facility bears interest at LIBOR plus 7.0% per annum, with a LIBOR minimum of 1.0%. The revolving facility bears interest at LIBOR plus 5.0% per annum, with a LIBOR minimum of 1.0%.
The weighted interest rate on the 2017 Senior Credit Facility was 7.46% at September 30, 2018.
As required under the terms of the 2017 Senior Credit Facility and as a component of its cash flow hedging strategy, the Company has entered into an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the 2017 Senior Credit Facility of $90.0 million through June 28, 2019.
On March 15, 2018, USAC announced that demand for rural health care support had exceeded the program’s annual cap in Funding Year 2017, which began July 1, 2017 and ends on June 30, 2018, and that successful applicants would receive 84.4% of the funding for which they would otherwise be eligible. The budget constraints announced in the first quarter prompted USAC, which administers the program, to engage in substantially more rigorous reviews of rural health care support, raising compliance costs and delaying issuance of support payments. In connection with that review, the Company received certain inquiries and requests for information from USAC and from the FCC Enforcement Bureau. In the first quarter of 2018, the Company’s rural health care customers received notice from USAC regarding deficiencies in the rates stated in their applications. The rates were subsequently revised and, in July 2018, the FCC notified the Company that it had approved the cost-based rural rates for certain of its customers and that amendment of those customer’s applications was in process. In June 2018, the FCC announced an increase in the annual program funding cap to $571 million from the prior cap of $400 million effective for Funding Year 2017. This FCC order also provides for an annual adjustment to the funding cap to reflect inflation and the establishment of a process to carry forward unused funds from past funding years for use in future funding years. During the third quarter of 2018, substantially all customer applications for Funding Year 2017 were either approved or denied by USAC. Resolution of the applications for Funding Year 2017 did not have a material effect on revenue recognized through June 30, 2018. As of September 30, 2018, the FCC and USAC had not approved the Company’s rural health care rates or its customers’ applications for Funding Year 2018, which began on July 1, 2018 and ends on June 30, 2019.
We recorded revenue from the rural health care program of $13.8 million in the first nine months of 2018, which included $1.4 million to record the effect of the funding increase on revenue reported in the third and fourth quarters of 2017, and reflects the negative effect of price compression.
Our accounts receivable balance for rural health care customers, net of amounts reserved, was $6.6 million at June 30, 2018 and $8.6 million at December 31, 2017. The Company received cash payments totaling $14.5 million in the third quarter of 2018 associated with Funding Year 2017. The timing of the approval of our rural health care rates and our customers’ applications, and timing of cash payments from USAC for Funding Year 2018 could have an adverse effect on our financial position, results of operations and liquidity. With regards to Funding Year 2018, we cannot, at this time, determine with a high level of confidence when and if the FCC and USAC will approve the rates and applications, or when the Company will receive payment from USAC.
In the second quarter of 2017, the Company’s Board of Directors authorized a program to repurchase up to $10 million of the Company’s outstanding common stock. Repurchases can be conducted in the open market or through private transactions, including through purchases made in accordance with Rule 10b plans. The timing and amount of repurchases will be determined by the Company based on its evaluation of market conditions, its financial position, the trading price of its stock and other factors. The Company intends to use cash on hand to fund share repurchases subject to, among other things, federal and state securities, corporate and other laws and regulations, and the Company’s financing arrangements. Shares repurchased under this program will be accounted for as treasury stock.
We believe that we will have sufficient cash on hand, cash provided by operations and availability under our 2017 Senior Credit Facility to service our debt and fund our operations, capital expenditures and other obligations over the next twelve months. However, our ability to make such an assessment is dependent upon our future financial performance, which is subject to future economic conditions and to financial, business, regulatory, competitive entry and many other factors, many of which are beyond our control and could impact us during the time period of this assessment. See Item 1A. Risk Factors in Amendment No. 1 on Form 10-K/A for the year ended December 31, 2017 for further information regarding these risks.
NON-GAAP FINANCIAL MEASURES
The Company provides certain non-GAAP financial information, including Adjusted EBITDA, Adjusted Free Cash Flow and Net Debt. Adjusted EBITDA eliminates the effects of period to period changes in costs that are not directly attributable to the underlying performance of the Company’s business operations and is used by Management and the Company’s Board of Directors to evaluate current operating financial performance, analyze and evaluate strategic and operational decisions and better evaluate comparability between periods. Adjusted Free Cash Flow is a non-GAAP liquidity measure used by Management and the Board of Directors to assess the Company’s ability to generate cash and plan for future operating and capital actions. Adjusted EBITDA and Adjusted Free Cash Flow are common measures utilized by our peers (other telecommunications companies) and we believe they provide useful information to investors and analysts about the Company’s operating results, financial condition and cash flows. Net Debt provides Management and the Board of Directors with a measure of the Company’s current leverage position.
Adjusted EBITDA is defined as net income (loss) before interest, loss on extinguishment of debt, depreciation and amortization, other income and (expense), gain or loss on asset purchases or disposals, income taxes, stock-based compensation, and net loss attributable to noncontrolling interest.
Management considers Adjusted Free Cash Flow a non-GAAP liquidity measure and is defined as Adjusted EBITDA, less recurring operating cash requirements which include capital expenditures, less cash income taxes refunded or paid, cash interest paid, and amortization of GCI capacity revenue. Amortization of deferred revenue associated with our interconnection agreement with GCI is excluded from Adjusted Free Cash Flow because no cash was received by the Company in connection with this agreement. Amortization of all other deferred revenue, including that associated with other IRU capacity arrangements, is included in Adjusted Free Cash Flow because cash was received by the Company, typically at contract inception, and is being amortized to revenue over the term of the relevant agreement.
Amortization of deferred revenue included in our operating revenues for the three and nine-month periods ended September 30, 2018 and 2017, were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCI capacity revenue
|
|
$
|
522
|
|
|
$
|
522
|
|
|
$
|
1,549
|
|
|
$
|
1,549
|
|
Other deferred capacity revenue
|
|
|
545
|
|
|
|
362
|
|
|
|
1,448
|
|
|
|
1,052
|
|
Total deferred capacity revenue
|
|
|
1,067
|
|
|
|
884
|
|
|
|
2,997
|
|
|
|
2,601
|
|
Other deferred revenue
|
|
|
857
|
|
|
|
753
|
|
|
|
2,429
|
|
|
|
2,294
|
|
Total
|
|
$
|
1,924
|
|
|
$
|
1,637
|
|
|
$
|
5,426
|
|
|
$
|
4,895
|
|
The Company does not provide reconciliations of guidance for Adjusted EBITDA to Net Income, and Adjusted Free Cash Flow to Net Cash Provided by Operating Activities, in reliance on the unreasonable efforts exception provided under Item 10(e)(1)(i)(B) of Regulation S-K. The Company does not forecast certain items required to develop the comparable GAAP financial measures. These items are charges and benefits for uncollectible accounts, certain other non-cash expenses, unusual items typically excluded from Adjusted EBITDA and Adjusted Free Cash Flow, and changes in operating assets and liabilities (generally the most significant of these items, representing cash outflows of $10.4 million in the nine-month period ended September 30, 2018).
Adjusted EBITDA and Adjusted Free Cash Flow are not GAAP measures and should not be considered a substitute for Net Income, Net Cash Provided by Operating Activities, or Net Cash Provided or Used. Adjusted EBITDA as computed below is not consistent with the definition of Consolidated EBITDA referenced in our 2017 Senior Credit Facility, and other companies may not calculate Non-GAAP measures in the same manner we do.
The following tables provide the computation of Adjusted EBITDA and reconciliation to Net Income (Loss), and the computation of Adjusted Free Cash Flow and reconciliation to Net Cash Provided by Operating Activities for the three and nine-month periods ended September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,805
|
|
|
$
|
284
|
|
|
$
|
7,276
|
|
|
$
|
(3,254
|
)
|
Add (subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,286
|
|
|
|
3,577
|
|
|
|
10,191
|
|
|
|
11,335
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
|
|
7,527
|
|
Interest income
|
|
|
(36
|
)
|
|
|
(13
|
)
|
|
|
(74
|
)
|
|
|
(27
|
)
|
Depreciation and amortization
|
|
|
8,352
|
|
|
|
9,193
|
|
|
|
25,336
|
|
|
|
27,124
|
|
Other (income) expense, net
|
|
|
(66
|
)
|
|
|
153
|
|
|
|
(79
|
)
|
|
|
461
|
|
Loss on the disposal of assets, net
|
|
|
15
|
|
|
|
40
|
|
|
|
56
|
|
|
|
73
|
|
Income tax expense (benefit)
|
|
|
774
|
|
|
|
(422
|
)
|
|
|
2,080
|
|
|
|
(1,886
|
)
|
Stock-based compensation
|
|
|
642
|
|
|
|
261
|
|
|
|
1,209
|
|
|
|
842
|
|
Net loss attributable to noncontrolling interest
|
|
|
12
|
|
|
|
36
|
|
|
|
84
|
|
|
|
100
|
|
Adjusted EBITDA
|
|
$
|
14,784
|
|
|
$
|
13,202
|
|
|
$
|
46,079
|
|
|
$
|
42,295
|
|
Reconciliation of Net Cash Provided by Operating Activities to Adjusted
|
Free Cash Flow and Computation of Adjusted Free Cash Flow
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
24,521
|
|
|
$
|
8,623
|
|
|
$
|
46,879
|
|
|
$
|
25,688
|
|
Adjustments to reconcile net cash provided by operating activities to adjusted free cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(8,351
|
)
|
|
|
(13,532
|
)
|
|
|
(25,432
|
)
|
|
|
(24,054
|
)
|
Amortization of deferred capacity revenue
|
|
|
1,067
|
|
|
|
884
|
|
|
|
2,997
|
|
|
|
2,601
|
|
Amortization of GCI capacity revenue
|
|
|
(522
|
)
|
|
|
(522
|
)
|
|
|
(1,549
|
)
|
|
|
(1,549
|
)
|
Amortization of debt issuance costs and debt discount
|
|
|
(333
|
)
|
|
|
(414
|
)
|
|
|
(1,022
|
)
|
|
|
(1,951
|
)
|
Interest expense
|
|
|
3,286
|
|
|
|
3,577
|
|
|
|
10,191
|
|
|
|
11,335
|
|
Interest paid
|
|
|
(3,472
|
)
|
|
|
(3,279
|
)
|
|
|
(10,723
|
)
|
|
|
(10,874
|
)
|
Interest income
|
|
|
(36
|
)
|
|
|
(13
|
)
|
|
|
(74
|
)
|
|
|
(27
|
)
|
Income taxes receivable (payable)
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
37
|
|
|
|
(577
|
)
|
Income taxes refunded (paid), net
|
|
|
-
|
|
|
|
52
|
|
|
|
(4
|
)
|
|
|
624
|
|
Charge for uncollectible accounts
|
|
|
(1,279
|
)
|
|
|
(929
|
)
|
|
|
(2,371
|
)
|
|
|
(2,562
|
)
|
Other (income) expense, net
|
|
|
(66
|
)
|
|
|
153
|
|
|
|
(79
|
)
|
|
|
461
|
|
Net loss attributable to noncontrolling interest
|
|
|
12
|
|
|
|
36
|
|
|
|
84
|
|
|
|
100
|
|
Other non-cash expense, net
|
|
|
13
|
|
|
|
(142
|
)
|
|
|
(168
|
)
|
|
|
(430
|
)
|
Changes in operating assets and liabilities
|
|
|
(12,402
|
)
|
|
|
1,430
|
|
|
|
(10,395
|
)
|
|
|
7,657
|
|
Adjusted free cash flow
|
|
$
|
2,439
|
|
|
$
|
(4,079
|
)
|
|
$
|
8,371
|
|
|
$
|
6,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
14,784
|
|
|
$
|
13,202
|
|
|
$
|
46,079
|
|
|
$
|
42,295
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(8,351
|
)
|
|
|
(13,532
|
)
|
|
|
(25,432
|
)
|
|
|
(24,054
|
)
|
Amortization of GCI capacity revenue
|
|
|
(522
|
)
|
|
|
(522
|
)
|
|
|
(1,549
|
)
|
|
|
(1,549
|
)
|
Income taxes refunded (paid), net
|
|
|
-
|
|
|
|
52
|
|
|
|
(4
|
)
|
|
|
624
|
|
Interest paid
|
|
|
(3,472
|
)
|
|
|
(3,279
|
)
|
|
|
(10,723
|
)
|
|
|
(10,874
|
)
|
Adjusted free cash flow
|
|
$
|
2,439
|
|
|
$
|
(4,079
|
)
|
|
$
|
8,371
|
|
|
$
|
6,442
|
|
OUTLOOK
We expect to see continued strength in business and wholesale revenues, led by broadband revenue and managed IT services, focused on the larger enterprise and carrier customer segments. These revenue increases are driven by continued demand for broadband as businesses migrate their IT infrastructure to the cloud, deployment of small cell networks, expansion into managed IT services and continued gain in market share. We expect continued pressure within the health care segment driven by pressures from the rural health care program, while we expect to see solid performance from our carrier and federal customers as well as opportunities in markets enabled by the Quintillion networks. Driven by our network investments in fiber fed wifi and fixed wireless, we expect to become more competitive serving small business and residential customers, while we focus on improving profitability by enhancing our online and self-serve capabilities.
Additionally, we are focused on implementing the CAF II program and expect to meet our obligations for 2018 by providing broadband to 30% of our target locations, or about 9,200 locations by the end of the year. The FCC has deferred our report of all locations to be served under this program, originally due October 1, 2018, to a date yet to be determined. The preliminary engineering design for the majority of the program has been completed.
We also expect continued attention by our Board of Directors on the evaluation of value creating strategic opportunities that address our scale and geographic concentration issues.
Our financial guidance for the full year 2018 is as follows:
|
●
|
Total revenue of $225 million to $230 million.
|
|
●
|
Adjusted EBITDA of $55 million to $58 million.
|
|
●
|
Capital spending of $37 million to $39 million.
|
|
●
|
Adjusted free cash flow of $5 million to $8 million.
|
As discussed in “Non-GAAP Financial Measures,” the Company does not provide reconciliations of guidance for Adjusted EBITDA to Net Income, and Adjusted Free Cash Flow to Net Cash Provided by Operating Activities.
LEGAL
We are involved in various claims, legal actions, personnel matters and regulatory proceedings arising in the ordinary course of business and as of September 30, 2018, we have recorded litigation accruals of $0.9 million against certain of those claims and legal actions. Estimates involved in developing these litigation accruals could change as these claims, legal actions and regulatory proceedings progress. See also Part II, Item 1. Legal Proceedings.
E
MPLOYEES
As of September 30, 2018, we employed 579 regular full-time employees, 8 regular part-time employees and 2 temporary employees, compared with 583, 5 and 1, respectively at December 31, 2017. Approximately 54% of our employees are represented by the IBEW. Our Master Collective Bargaining Agreement (“CBA”) with the IBEW, which is effective through December 31, 2023, governs the terms and conditions of employment for all IBEW represented employees working for us in the state of Alaska. Management considers employee relations to be generally good.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations.
The Company’s revenue associated with its rural health care customers is subject to various regulatory requirements associated with the provision of these services. Funding through the FCC represents the predominant portion of the payments received by the Company for the services provided. The amount ultimately collected from the FCC is dependent on program funding levels and the FCC’s approval of customer’s applications for funding. Approval of these applications is subject, in part, to the FCC’s approval of the rates the Company charges its customers. Accordingly, the Company’s recorded revenue and associated accounts receivable is dependent on its estimate of the FCC’s (i) funding levels, if not yet approved; (ii) approval of the Company’s pricing; and (iii) approval of customer applications.
For additional discussion on the application of significant accounting policies, see “Critical Accounting Policies and Estimates” in Item 7. 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, 2017. These policies and estimates are considered critical because they had a material impact, or have the potential to have a material impact, on our financial statements and because they require significant judgments, assumptions or estimates.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable and long-lived assets, the value of derivative instruments, deferred capacity revenue, legal contingencies, stock-based compensation and income taxes. As future events and their effects cannot be determined with precision, actual results may differ significantly from those estimates. Changes in those estimates will be reflected in the financial statements of future periods.
New
Accounting Pronouncements
See Note 1 “
Summary of Significant Accounting Polices
” to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements and recently issued pronouncements not yet adopted.