ALSK

Alaska Communications Systems Group, Inc. (ALSK)

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Alaska Communications Systems Group, Inc. (ALSK)

Q1 2008 Earnings Call Transcript

May 5, 2008 5:00 pm ET

Executives

Melissa Fouts – Director of IR

Liane Pelletier – Chairman, President and CEO

David Wilson – CFO, SVP and Treasurer

Leonard Steinberg – VP, General Counsel and Corporate Secretary

Analysts

Jonathan Chaplin – JPMorgan Securities

Frank Louthan – Raymond James

David Coleman – RBC Capital Markets

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Alaska Communications Systems first quarter 2008 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator instructions) This conference call is being recorded today, Monday, May 5 of 2008. I would now like to turn the conference over to Melissa Fouts, Director of Investor Relations. Please go ahead, ma'am.

Melissa Fouts

Good afternoon, and welcome to the Alaska Communications Systems First Quarter 2008 conference call. With me today are Liane Pelletier, President, Chief Executive Officer and Chair of ACS, David Wilson, Chief Financial Officer, and Leonard Steinberg, General Counsel.

During this call, company participants will make forward-looking statements as defined under U.S. Securities laws. Forward-looking statements are statements that are not historical facts and may include financial projections, estimates of shareholder returns or other descriptions of the company's plans, objectives, expectations or intentions. You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially from expectations as a result of a variety of factors, many of which are outside the company's control. We discuss these factors in our SEC filings.

Lastly, any non-GAAP measurements referred to during this call have been reconciled to their nearest GAAP measure. You may find these reconciliations in today's press release and our SEC filings on our investor website at www.alsk.com.

We will begin the call with Liane discussing the company's Enterprise strategy underpinning our recently announced acquisition. Then David will review our quarterly operational and financial performance, our recent financing transaction, and our progress in building our Enterprise book of business. Liane will then close and open the call for questions.

With that, I would like to turn the call over to Liane. Liane?

Liane Pelletier

Thank you, Melissa. Welcome and thank you all for participating on the call. At the outset, I will share a bit about our cable build and our cable buy strategy, which form part of how we will serve the Enterprise market. The demand and supply fundamentals of this market make it an ideal place to put capital to work. As for the demand side, the market served by the cable investment is the inter-state transport market, sized last year at over $200 million. Data usage in this market is growing over 40% a year and that’s before we experienced new oil, gas, and other economic development opportunities in Alaska.

As one example of the opportunity ahead of us, British Petroleum and ConocoPhillips recently announced that they will jointly develop a pipeline to move natural gas from the North Slope of Alaska to markets in the Lower 48. Their plan involves spending $600 million over the next three years to reach the first project milestone with total spending for the project estimated at more than $30 billion over more than 10 years.

As for the supply side, with our AKORN build and our Crest buy we will own two of the four cables connecting Alaska to the rest of the world and we will be one of two suppliers. As we have mentioned before, the Alaska supply market differs radically from the long haul fiber market in the Lower 48 where a glut of competing suppliers pressured return. We believe the supply market and therefore expected returns are quite different in Alaska.

As we serve this market, our pricing will reflect a strategy of differentiation, and the value customers place on our solutions. For example, the cable we are building, AKORN, leaves Alaska along the only geographically diverse route and this is key for our customers’ traffic security and business continuity. ACS will operate the AKORN and Crest cables together as a ring and connect this submarine transport system to ACS's in-state data network.

In state, we recently upgraded our Metro Ethernet network to 10 gig in order to best serve the needs of Enterprise customers. ACS's Metro Ethernet and MPLS networks offer key advantages over legacy network technologies commonly installed in Alaska. And the ACS in-state network reaches from the north, site of oil and gas fields, to Southeast Alaska, site of major tourism and fishing industries. ACS will manage customers' traffic on these two cables via two network operations control centers, one here in Alaska, and one in the Lower 48. Our approach to establishing a Lower 48 knock will minimize both our total cost of ownership and the time needed to deliver world-class capabilities to Enterprise customers.

In summary, we believe our differentiated Enterprise strategy is the key to igniting ACS's next growth engine. And in particular, the cable investments revitalize and maximize the value of our local network. Considering the AKORN cable itself has a 25-year life, and the cost of service sold on the cables are largely fixed, we expect an annual return on our investment to be north of 20%. With this Enterprise growth strategy in place, which builds on our wireless growth strategy, we have an ideal platform to reward shareholders.

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