Alaska Communication's 2Q11 Results Validate Wireless Expansion Strategy

Enterprise and Data Revenue Grow in 2Q11

Alaska Communications (Nasdaq:ALSK) headed into 2Q11 armed with a new ceo and cfo tandem, and a streak of quarterly wireline and wireless connection losses dating back to 3Q08. If there was any uncertainty regarding the new team's growth strategy for ACS going forward, recent announcements and the presentation of its 2Q11 results put all questions to bed. The company is betting on its wireless and enterprise segments to get it out of the red.

While ACS operated at a loss in 2Q11, revenue ticked up slightly to near $85m in the quarter and the highlights presented were concentrated in its wireless and enterprise units.  Wireless churn was down a half percent to 2.1%, and postpaid data revenue jumped 49%, or $16m, YoY—likely a byproduct of its efforts to brand its wireless sales force as “the Smartphone experts.”  ACS was also able to post wireless customer gains in 2Q11 for the first time in nearly three years. Elsewhere, strong performances in data hosting, video conferencing and managed services drove enterprise revenue up 7% YoY to $12.6m, while retail, wholesale and access wireline revenues declined nearly 6%.

Prior to reporting a solid performance from its wireless business in 2Q11, ACS made distinct moves to strengthen the segment. It announced new prepaid wireless plans, and a more flexible set of tiered postpaid data plans in an effort to further reduce churn and attract new customers. Also representative of ACS’s wireless-centric strategy was its announcement that it will invest $20m in building Alaska’s first 4G LTE network.  The $20m investment comes on top of the $12m ACS will spend on building the necessary backhaul infrastructure for network. After losing 12% of its customers in 2010, ACS management is committing to grow its wireless business.

Any guesses as to where ceo Anand Vadapalli focused his comments on ACS' second quarter results?  If you picked residential wireline customers, you’d be wrong.

"With sales and retention efforts (for wireless) showing results during the quarter, we also launched tiered data plans repositioning our postpaid offering, and completely refreshed our prepaid plans. With our announcement to build a 4G LTE wireless network in Alaska, we build on our track record of providing advanced and differentiated wireless service for Alaskans," said Vadapalli, adding “We remain focused on driving top line growth for our Enterprise business.”

Frequently, companies will force you to read between the lines with regards to performance, outlook or corporate strategy, but ACS did not pull any punches while discussing its 2Q11 results. There was no half-hearted praise for its traditional wireline segment, and no question about the provider’s future. It’s doubling down on wireless and growing its enterprise business—straight and simple.

4Q10 Wireless Price/Earnings Ratios

Wireless Share Prices Rise, But P/E Ratios Not Meaningful

As in the cable industry, wireless investors have long paid close attention to cash flow and free cash flow generation when evaluating investment opportunities.  For one thing, wireless companies have been a “growth” business for most of the past decade, investing heavily in network and subscriber base expansion.  Those investments have left many companies highly leveraged and, on an earnings basis, not profitable.  Acquisition costs for new subscribers can run as high as $400+ for certain carriers; that combined with hefty interest expenses place the net income line under significant pressure.

Of the six companies we evaluated, we see meaning in the P/E ratios of three:  both United States Cellular (NYSE:USM) and MetroPCS (NYSE:PCS) enjoyed measurable gains in their P/E ratios as share prices rose in the fourth quarter.  Meanwhile, AT&T’s (NYSE:T) P/E ratio fell significantly, from more than 13x to just more than 8x.  AT&T’s TTM earnings rose 66% from 3Q10 to 4Q10, but its share price gained less than 3%.  AT&T’s fourth quarter results were positively impacted by solid wireless growth on the back of its exclusive iPhone arrangement—but investors were clearly more concerned with the fact that Verizon Wireless will soon begin offering the popular smartphone.

2010 Wireless Total Returns

MetroPCS Surges in 2010 While Leap Lags

Five of the six companies we examined in our review of wireless 2010 stock market action delivered solid returns to investors; in the case of MetroPCS (NYSE:PCS), whose share price rose more than 65%, the return was truly stellar.  Only Leap Wireless (Nasdaq:LEAP) slumped, due primarily to the fact that at the end of 2009 there was a good deal of speculation that the company would sell (ironically, to MetroPCS), which had sent the share price higher.  

That expectation died (again) in 2010 and at this point investors clearly think Leap will have to stand on its own two legs. With intense competition in the market and rivals now offering 4G services in many places, Leap will need to demonstrate a clear ability to grow its subscriber base before that 30% drop in share price begins to reverse itself.

Overall, the wireless group delivered an average return of 16.4% to investors in 2010.

Value of $10,000 Invested on January 1, 2003 - Wireless

Are the Good Days Gone By for Wireless Investors?

It seems ironic that while wireless seems to be taking over the communications world, not just in the voice business but now, with 4G networks, both in both video and data, that the heyday for wireless company investors appears to have been back in 2006.  At least if you look at the past eight years, an investor who put $10,000 into a basket of wireless companies had enjoyed, on average, a near doubling in value by the end of 2006.  But by the end of 2010, that $10,000 was worth only $10,577 on average, implying a CAGR of just 1.9%.

Also notable is that United States Cellular (NYSE:USM), which has been considered a laggard for some time, was actually the best performer out of the sample over the past eight years.  Shares have risen an average of 9% a year since the beginning of 2003, and that initial $10,000 was worth nearly $20,000 at the end of 2010.  Sprint (NYSE:S), Leap (Nasdaq:LEAP) and even MetroPCS (NYSE:PCS), which was 2010’s top performer, have all seen their equity value fall by about half over that time frame.