ACS posts 4th quarter gains

Posted: Thursday, March 17, 2011

Less was more in the fourth quarter for Alaska Communications Systems Group Inc.

Although its wireless subscriber base was down nearly 17,000 customers from the end of 2009, the Anchorage-based telecom reported a year-over-year increase in fourth quarter gross revenue to $84.8 million.

That was a 2 percent increase versus $82.9 million in fourth quarter revenue to close out 2009. ACS also continued to realize gains in efficiencies, swinging to $9.5 million in income after operating expenses in the 2010 fourth quarter versus a $1.9 million loss in the 2009 fourth quarter.

Although its customer base is down to 120,413, ACS has partly offset its losses in wireless subscribers with higher average revenue in both monthly use and data charges, as well as growth in its large customer, or enterprise, unit.

Average revenue from wireless data use in the fourth quarter increased 12.2 percent from the third quarter to $13.16 as the Android smartphore platform increases penetration among ACS customers.

Android phones now account for 35 percent of ACS customers versus about 16 percent a year ago. According to Nielsen, Android-based smartphones outsold Apple's iPhone in the second half of 2010 with a 43 percent market share.

The enterprise unit helped ACS post a slight increase in wireline revenue year-over-year in the fourth quarter to mitigate an overall decline in wireline customers. The enterprise unit gained nearly $2 million year-over-year in the fourth quarter to just more than $13 million; and grew $3.2 million overall, to $48.5 million, in 2010 versus 2009.

"Our fourth quarter results show success from a data-driven strategy that is securing top and bottom line gains in both our wireline and wireless lines of business," said Anand Vadapalli, who took over as CEO of ACS Feb. 1. "Our focus on enterprise, where we are layering value added services such as data hosting, video conferencing and managed services on top of our base connectivity, and strength in wireless data, where demand for mobile data service is rampant, has served us well in 2010 and will continue to center our actions for 2011 and beyond."

For the year, ACS posted income after operating expenses of $47.8 million in 2010, nearly a 50 percent increase versus $32.6 million in 2009.

Total revenue was $341.5 million in 2010 compared to $346 million in 2009.

ACS needed every dollar of operating income gains. Interest expenses related to years of rapid expansion and acquisition combined with the costs of refinancing $435 million in long-term debt last fall gobbled up ACS' cash from operations and then some.

Total interest expenses for ACS -- which includes $13.3 million in refinancing costs -- were $48 million in 2010 compared to the $47.8 million in operating income.

With approximately $33 million in interest expense projected for 2011, ACS must generate about $8.25 million in operating income each quarter just to cover its interest payments.

Officially, ACS posted a net income loss of $30.7 million for 2010, but that number reflects two accounting measures for potential liabilities. The ACS bottom line was affected by a non-cash write-down of $29.7 million in potential tax expense and a $2.8 million receivable to the IRS related to an audit of Crest Corp.'s 2006, 2007 and 2008 taxes.

Without the non-cash write-down of $29.7 million, ACS had a net loss from operations of about $1 million.

ACS purchased Crest for $70 million in 2008, accounting for one of two ACS high-capacity, fiber optic underwater cables connecting Alaska to the Lower 48. The capability is at the heart of ACS' growth strategy in the enterprise segment.

The write-down came after the IRS filed a notice of proposed adjustment, or NOPA, April 19, 2010, for Crest's 2006, 2007 and 2008 tax years. The IRS disputes Crest's characterization of the acquisition of several bankrupt companies in 2002.

Crest classified certain cash advancements from the previous major stockholder to the subsidiaries during the bankruptcy as equity and the IRS asserts that Crest should have reported the cancellation of debt as additional income.

ACS and the former owners are contesting both the amounts proposed by the IRS and the classification of payments as income versus equity. ACS is protected against potential tax liability related to the IRS audit of Crest based on the purchase agreement, which holds the previous owners responsible for any taxes owed.

However, if ACS cannot enforce the indemnification agreement or if the previously reported value of Crest subsidiaries change in a way that won't allow for mitigating tax liability, ACS could see a hit to its cash flow and overall financial position.

ACS projected total revenue for 2011 to modestly exceed 2010, and said it expects to fund about $12 million in costs to upgrade cell towers to support demand from other wireless carriers and to position ACS for an early rollout of 4G wireless services.

The company also announced a coming change at its chief financial officer position. David Wilson, the current CFO, will step down April 1 and be succeeded by Wayne Graham.

Graham was one of the original founders of ACS in 1999, and a previous CFO at ACS. He will return to ACS from his current position as CFO of Ensequence, a global provider of interactive television software.

Andrew Jensen can be reached at andrew.jensen@alaskajournal.com.



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