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ILEC 3Q11 Quarterly Results: Alaska Communications

ACS Revenue Flat Despite Wireless Gains

From a financial perspective, Alaska Communication’s (Nasdaq:ALSK) 3Q11 was relatively non-eventful.  Revenue ticked up $500k YoY or 0.6%, as its wireless revenue rose $2m or 5.2% and its enterprise segment grew by $1.1m or 8.9% YoY. Business growth and wireless gains offset a $2.6m decline from its legacy wireline segment, which was down $2.6m or 6.5% in 3Q11, after losing 5.2% of its access lines. Overall, ACS’ net loss in 3Q11 was $0.8m, or $0.02 per share, compared to net loss of $3.0m, or $0.07 per share in 3Q10.

ACS added 817 wireless subs in 3Q11, increasing its total wireless connections to 117.5k, but it has lost nearly 6k subs since 3Q10. Its wireless revenue growth in 3Q11 was fueled by an increase in demand for mobile data and a jump in roaming fees. Data ARPU from postpaid subs was $16.86 in 3Q11, up 4.6% QoQ and 43% YoY, while roaming charges from non-ACS customers were up $3.9m or 15.2% from 3Q10.

With wireless providing ACS with the slight growth it has reported in recent quarters, the success of its ongoing $20m 4G LTE network build is critical to the company’s future. ACS however is not the only wireless provider investing in 4G in Alaska. In September, General Communications (Nasdaq:GNCMA) launched 4G wireless service in Anchorage and plans to rollout 4G in other Alaskan communities later this year and in 2012. And a new potential entrant onto the Alaskan wireless scene was the subject of ACS’ focus during its 3Q11 earnings call: Verizon (NYSE:VZ).

The leading wireless provider in the U.S. has made moves to enter the Alaskan wireless market, and ACS ceo Anand Vadapalli spoke to this fact on the call. “It certainly appears that Verizon is taking more action to enter the market. We had several parcels of surplus land. We sold one of those to Verizon, and we certainly see them doing some ground work. We also understand that they have feet out on the street for both backhaul and cell towers.” Vadapalli added that ACS expects to see a decline in roaming revenues starting in 2013, when it will begin losing fees associated with Verizon customers.

Roaming fees may be the least of ACS’ worries with Verizon moving into Alaska. While Vadapalli would not speculate on what Verizon’s intentions were in expanding up north, one would be safe in assuming that Verizon is not looking to be the #2 or #3 wireless provider in the state. In addition to trimming its roaming revenues, ACS stands to lose subs with Verizon jumping into the competitive mix, adversely impacting ACS’ most profitable segment. Wireless currently accounts for 45% of ACS’ revenue, and has generated $12.5m in net income through 3Q11, while all other ACS segments have lost a combined $13.2m during the first nine months of the year.

With ACS currently operating at a loss, and wireless competition ramping up, the viability of company’s $0.86 dividend has come into question. On the earnings call, cfo Wayne Graham put to rest the idea of borrowing more cash to finance the dividend, but Vadapalli was non-committal when asked about cutting the dividend. “With regard to your question on the dividend guidance; clearly, this is one where we’d like to take one step at a time and not get ahead of ourselves. If and when the Board takes any action in this regard; clearly, that action will be in the context of a longer range business plan and we’ll be able to share more when we are ready with that,” commented Vadapalli. Not exactly a ringing endorsement for the long term safety of its dividend.

Meanwhile, shareholders have taken notice of ACS’ troubled outlook and have traded its stock price down to the $5 range, 55% off its recent 52-week high of $11.65 a share. At these current trading levels, ACS is paying around a 16% dividend. But based on Vadapalli’s comments, whether that dividend will exist a year from now is far from certain.    

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