Alaska Communications Systems Reports Third Quarter 2009 Results

Alaska Communications Systems Group, Inc. ("ACS”) (NASDAQ: ALSK) today reported financial results for its third quarter ended September 30, 2009.

"The ACS strategy of capturing growth in the enterprise and wireless segments to offset reductions in legacy wire line business continues to deliver the right kind of revenue and earnings mix,” said Liane Pelletier, ACS president and chief executive officer. "For the quarter, we delivered stable revenue and EBITDA growth as a result of new enterprise customers buying business IP services.”

"Our participation in the enterprise market is concentrated on selling data services as they most fundamentally allow ACS to help organizations transform how they do business. In the quarter 80 percent of enterprise revenue was data versus voice. Since the last call, the most substantial win came from a federal agency, with a solution valued at more than $10 million, to be earned over six years. Clearly, ACS will also continue to leverage its large Alaska footprint to serve lower 48 carrier voice needs as well, but this will be a volatile segment as carrier market shares shift, and as voice becomes a data application,” said Pelletier.

"Our participation in the wireless market this year continues to challenge ACS - a function of the economy and the iPhone. In terms of the economy, reports just out summarize what ended up being the softest tourist season in years, affecting both Alaska businesses and visitors to the state. In terms of the $99 iPhone, ACS’ high quality subscriber base, able to afford the monthly service charges associated with the iPhone, were again attracted away at very high rates. ACS remains focused on delivering superior mobile data coverage, speed and local service to attract data users. In the quarter, ACS generated more gross additions than the prior three quarters, and grew data ARPU 56 percent year over year, but the subscriber additions were insufficient to outpace churn to the iPhone. We look forward to introducing Android-powered handsets over the next few months and hope they will re-establish a level playing field in devices,” concluded Pelletier.

Financial Highlights: Third Quarter 2009 Compared to Third Quarter 2008

• Revenues of $91.3 million in line with $91.3 million in the prior year.
  • Enterprise revenues increased $2.7 million, or 31 percent.
  • Wireless revenue declined by $2.0 million or 5.0 percent due to declines in roaming revenue and subscribers.
  • Retail, wholesale and access wireline revenues declined by $0.7 million, or 1.7 percent, with the current quarter benefiting from $2.5 million in out-of-period network access reserves compared to $1.4 million in 2008.
• EBITDA of $34.9 million was up 2.8 percent from prior year EBITDA of $33.9 million:
  • Wireline EBITDA of $18.2 million increased by 6.2 percent, with gains in enterprise and higher levels of network access more than offsetting declines in retail and wholesale.
  • Wireless EBITDA of $16.7 million was in line with the prior year with tight expense management offsetting lower contributions from subscriber and roaming revenue.
• Net cash provided by operating activities of $21.3 million was down 26.5 percent from $29.0 million in the prior year period. The annual decline is entirely attributable to working capital changes.
• Net income before extraordinary item of $0.3 million, or $0.01 per diluted share, compared to net income of $1.8 million, or $0.04 per diluted share, in the prior year. The decline in net income is attributable to a $4.9 million increase in depreciation expense resulting from an assessment that with changes in technology, asset salvage values previously set by regulators and historically viewed as reasonable, were no longer appropriate.
• In the third quarter 2009, ACS ceased to follow regulatory accounting rules following its July 1, 2009 conversion to price cap regulation and recognized an extraordinary gain, net of tax, of $37.3 million following the extinguishment of certain regulatory liabilities.

"While we are delighted with the enterprise contracts that we have closed in the quarter and the strength of our provisioning backlog, enterprise revenue did decline by $0.2 million on a sequential basis,” said David Wilson, ACS executive vice president and chief financial officer. "In order to assess the underlying momentum in enterprise, a deeper dive into the major revenue drivers in the quarter is required:

• Firstly, the expiration of a 2007 capacity exchange agreement with another carrier mid way through the quarter resulted in a $0.4 million drop in revenue that had no impact on EBITDA or cash flows;
• Secondly, share shifts that took place one layer below our level of carrier relationship resulted in a $0.4 million sequential decline in voice revenue; and
• Finally, we turned up $0.6 million of new business, significant, but somewhat below our expectations.”

"While we are changing our year end guidance to reflect challenges in our carrier voice and wireless businesses, and delays in booking new enterprise revenues, our dividend payout ratio for the year continues to be within the 70-75 percent range set by the board. In addition, we anticipate $3.3 million in non-recurring cash payments in the fourth quarter from certain enterprise customers, and this is excluded from guidance,” concluded Wilson.

Metric Highlights: Third Quarter 2009 Compared to Second Quarter 2009

• Wireless monthly churn of 2.4 percent compared to 2.0 percent in the second quarter. Key drivers of the increase were a loss of market share to the iPhone and higher ACS initiated disconnects for non-payment.
• Total wireless subscribers decreased by approximately 2,300 to 139,700.
• Wireless ARPU increased by $1.90 to $64.51 from $62.61 with a $0.54 gain in data ARPU and a $1.76 gain in CETC. Data ARPU increased by 7.4 percent to $7.84 from $7.30.
• DSL lines declined by 500 to 46,400 while ISP ARPU increased by 1.0 percent to $34.37.
• Retail local access lines declined by 1.8 percent to 166,600 as a result of cord cutting and seasonality.
• Total local access lines decreased by approximately 2.3 percent to 189,800.

Nine Month Financial Review

For the nine months ended September 30, 2009, revenues were $263.4 million, compared to $264.3 million in the same period last year. Net income before extraordinary item was $3.7 million, or $0.08 per diluted share, compared to net income of $8.3 million, or $0.19 per diluted share, in the same period in 2008. Net cash provided by operating activities for the first nine months of 2009 was $73.0 million compared to $69.2 million in the same period in 2008. EBITDA for the nine months ended September 30, 2009 was $98.6 million, compared to $99.3 million in the same period last year.

2009 Business Outlook

For the full-year 2009, ACS is changing its revenue and EBITDA guidance.

• Revenues are now expected to be approximately $350 million versus prior guidance of exceeding this level; and
• EBITDA is now expected to be approximately $128 million rather than exceeding $132 million.

As previously reported ACS expects:

• Maintenance capital expenditures are expected to be below the $40 million spent in 2008;
• Funding required for the completion of AKORN; the upgrade of Northstar; and the build of a second fiber route between Anchorage and Fairbanks to be $11 million; and
• Net cash interest expense of $36 million.

¹ Our FCC approved conversion to price cap regulation went into effect July 1, 2009. At the effective date, ACS ceased to follow regulatory accounting rules resulting in the elimination of certain intercompany transactions with regulated affiliates that were not previously eliminated during consolidation. This change reduced the absolute level of reported revenue by approximately 10 percent but had no impact on the absolute levels of reported EBITDA or cash flows.

Conference Call

The company will host a conference call and live webcast today at 5:00 p.m. Eastern Time. Parties in the United States and Canada can call 866-225-8754 to access the conference call. Parties outside the United States and Canada can access the call at 480-629-9692. The live webcast of the conference call will be accessible from the "Events Calendar" section of the company's website (www.alsk.com). The webcast will be archived for a period of 90 days. A telephonic replay of the conference call will also be available two hours after the call and will run until Wednesday, November 11, 2009 at midnight ET. To hear the replay, parties in the United States and Canada can call 800-406-7325 and enter pass code 4176885. Parties outside the United States and Canada can call 303-590-3030 and enter pass code 4176885.

About Alaska Communications Systems

Headquartered in Anchorage, ACS is Alaska's leading provider of broadband and other wireline and wireless solutions to Enterprise and mass market customers. The ACS wireline operations include the state's most advanced data networks and the only diverse undersea fiber optic system connecting Alaska to the contiguous United States. The ACS wireless operations include a statewide 3G CDMA network, reaching across Alaska from the North Slope to Ketchikan, with coverage extended via best-in-class CDMA carriers in the Lower 49 and Canada. By investing in the fastest-growing market segments and attracting the highest-quality customers, ACS seeks to drive top and bottom-line growth, while continually improving customer experience and cost structure through process improvement. More information can be found on the company's website at www.acsalaska.com or at its investor site at www.alsk.com.

Forward-Looking EBITDA Guidance

This press release includes information related to management's estimate of EBITDA for the year ending December 31, 2009. EBITDA, as defined by the company, may not be similar to EBITDA measures used by other companies and is not a measurement under generally accepted accounting principles (GAAP). Management believes that EBITDA provides useful information to investors about the company's performance because it eliminates the effects of period-to-period changes in costs associated with capital investments, interest and stock-based compensation expense that are not directly attributable to the underlying performance of the company's business operations. Management believes the most directly comparable GAAP measure would be "Net cash provided by operating activities." Due to the difficulty in forecasting and quantifying the amounts that would be required to be included in this comparable GAAP measure, the company is not providing an estimate of year-end net cash provided by operating activities at this time.

Forward-Looking Statements

This press release includes certain "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's beliefs as well as on a number of assumptions concerning future events made using information currently available to management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside ACS' control. Such factors are, without limitation, adverse national economic conditions, including continuing disruption in the U.S. capital markets, adverse local economic conditions, including an unexpected downturn in the Alaska oil and gas or tourism markets, changes in capital expenditures, or other factors affecting the company's ability to generate sufficient earnings and cash flows to continue to make dividend payments to its stockholders; the company’s ability to complete, manage, integrate, market, maintain, and attract sufficient customers to the products and services it may derive from the construction of AKORN and purchase and integration of Crest Communications Corporation; adverse changes in labor matters, including workforce levels and labor negotiations; disruption of our suppliers' provisioning of critical products or services; the impact of natural or man-made disasters; changes in company's relationships with large carrier or enterprise customers or its roaming partners; changes in revenue from Universal Service Funds; unforseen changes in public policies; changes in accounting policies, including the Company’s application of regulatory accounting rules, which could result in an impact on earnings; or disruptive technological developments in the telecommunications industry. For further information regarding risks and uncertainties associated with ACS' business, please refer to the company's SEC filings, including, but not limited to, the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q. Copies of the company's SEC filings may be obtained by contacting its investor relations department at (907) 564-7556 or by visiting its investor relations website at www.alsk.com.