ALSK

Alaska Communications Systems Group, Inc. (ALSK)

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Alaska Communications Systems Group, Inc (ALSK)

Q42012 Earnings Call

February 28, 2013 5:00 pm ET

Executives

Leonard A. Steinberg - Senior Vice President - Legal, Regulatory and Government Affairs, Corporate Secretary

Anand Vadapalli - President, Chief Executive Officer, Director

Wayne Graham - Chief Financial Officer

Analysts

Frank Louthan - Raymond James

Barry Sine - Drexel Hamilton

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Alaska Communications Systems fourth quarter earnings 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 is being recorded today, February 28, 2013.

I would now like to turn the conference over to Leonard Steinberg, General Counsel. Please go ahead.

Leonard Steinberg

Good afternoon, and welcome to the Alaska Communications fourth quarter 2012 conference call. I am Leonard Steinberg, General Counsel, and with me today are Anand Vadapalli, President and Chief Executive Officer and Wayne Graham, Chief Financial Officer.

During this call, company participants will make forward-looking statements as defined under U.S. security 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 business 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. Important risk factors regarding our expected results such as Verizon's entry into the Alaska market and FCC reforms have substantial disclosures in our most recent SEC filings.

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. Following our remarks, we will open the line for questions.

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

Anand Vadapalli

Thank you, Leonard, and welcome to everyone on the call today. 2012 was our first year of performing to our updated business plan that we shared with you a year ago. We operate in a billion-dollar telecom market in Alaska, growing 5% to 6% a year and assertively stake our claim to participate in this growth by making appropriate investments in network, product, sales and service, and process simplification. With this recap of our business plan as a backdrop, let me briefly review our performance this past year.

Our top line performance, particularly in our core wireline operations was exemplary. Year-over-year, business and wholesale revenues increased 8% to $108.5 million, while overall revenues not tied to wireless increased 4.4% to $207.9 million. We believe this is industry leading growth for wireline services, validating the opportunity we said is available to us.

On the flipside, our wireless service performance as discouraging. Two main factors contributed to the subscriber loss. One is the new lifeline recertification process. While this certification is now an annual requirement, the magnitude of this cleanup from last quarter is in all likelihood a one time event

Second, we had major shift in our technology in Q4 with the launch of 4G LTE. Given the AWN transaction, we changed our technology from LTE/CDMA to LTE/HSPA+. This caused device supply chain issues for us. Additionally this introduced some complexity in our sales channel as our sales associates now sell both 3G and 4G technologies while they work through a new process. We continue to work through these issues. While these caused some near term pain, they position us for a running start when AWN closes.

Closing out my comments on 2012, I would like to emphasize our strong performance in generating cash and deleveraging. We ended the year at the high end of our free cash flow guidance generating $33 million during the year and reducing our debt balances for the first time in three years and setting a trend that will continue. Let me now share my perspective about our business in 2013 and beyond.

Let's start with the AWN transaction and our wireless operations. The competition we face today in wireless will only intensify with the entry of Verizon Wireless quite possibly in the next few months. This will put pressure on the wireless retail metrics and we intend to work hard to earn and maintain our fair share in the market. That being said, this is where the beauty of the AWN transaction comes into play for us over the next four years.

With the one-time cash of $100 million dollars upon closing, and our estimated preferential distributions totaling $190 million over four years, AWN, provides tow major benefits. One, it provide a free cash flow, mitigating, roaming and CETC risks. Two, cash to delever.

We expect to continue our strong performance in the business and wholesale segments. We said we could grow top line and we did this in 2012. We expect to see steady and consistent growth in our top line revenues in this market segment as a result of several factors including one, our investments in sales with both an increased number of sales associates and the performance of our sales channel. We expect to see this performance strengthening over time, while we expand our channel lineup to indirect sales channels.

Two, our investment in network and products is showing rich dividends. In fact, with the closing of AWN, substantially all our capital expenditures will be directed towards wireline and broadband, representing an investment in our future growth. As Wayne will note later, this is not a result of increasing capital expenditures but a result of focused investment in broadband capabilities.

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