Deutsche Bank 25th Annual Leveraged Finance Conference October 2017 - - PowerPoint PPT Presentation

1 | Alaska Communications

alaskacommunications.com

Deutsche Bank

25th Annual Leveraged Finance Conference

October 2017

2 | Alaska Communications

alaskacommunications.com

Safe Harbor Statement

Forward-Looking Statements

We have included in this presentation 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. You 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 risks, uncertainties and other factors, many of which are outside Alaska Communications' control. For further information regarding risks and uncertainties associated with Alaska Communications' business, please refer to the Alaska Communications’ SEC filings, including, but not limited to, our annual report on Form 10-K, quarterly reports on Form 10-Q filed subsequently, and other filings with the SEC, included under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Non-GAAP Measures

In an effort to provide investors with additional information regarding our financial results, in particular with regards to our liquidity and capital resources, we have disclosed certain non-GAAP financial information such as Adjusted EBITDA, Adjusted Free Cash Flow and Net Debt, which management utilizes to assess performance and believes provides useful information to investors. The definition of these non-GAAP measures are on Schedules 4, 6, and 9 of our earnings press

• release. Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP measures and should not be considered a

substitute for Net Income, Net Cash Provided (Used) By Operating Activities and other measures of financial performance recorded in accordance with GAAP. Reconciliations of our non-GAAP measures to our nearest GAAP measures can be found in our earnings release or on our website at http://www.alsk.com in the investment data section. Other companies may not calculate non-GAAP measures in the same manner as Alaska Communications. We do not provide guidance for Net Income and Net Cash Provided (Used) By Operating Activities.

3 | Alaska Communications

alaskacommunications.com

Well positioned in a growing market with unique competitive dynamics Differentiated product set and high quality network and customer service drives retention and acquisition Record of consistently posting industry leading revenue growth and committed to expanding Adjusted EBITDA margins and FCF

Capturing Unique Opportunity Leveraging Competitive Advantages Creating Shareholder Value

Extensive fiber network

Extensive in-State and submarine fiber network Fixed wireless and satellite expanding capabilities Proven management team

100+

Years of service in Alaska Consistent top line growth

Alaska Communications

Premier fiber broadband and managed IT services provider in Alaska

4 | Alaska Communications

alaskacommunications.com

$1.6B Market, 85%+ Business, Growing 3%-5% a Year

Telecom Services Competition: Limited Margins: High Growth: Broadband: High Voice: Low IT Services Competition: Fragmented Margins: Moderate Growth: High

IT Services 52% Broadband - Business 30% Broadband - Consumer 9% Voice - Business 5% Voice - Consumer 4% Telecom Services 48%

Business

IT Services & Secure Cloud Data Networking Internet Connectivity Voice Communications

Consumer

Unlimited Internet Home Voice

Overall Market

5 | Alaska Communications

alaskacommunications.com

Opportunity in Business and Wholesale Market

Business and Wholesale represented ~62% of revenue YTD at June 30, 2017 ~8% CAGR expected over next few years

• Broadband growth driven by cloud migration

─ Take share of market

• ~21% market share

─ Consistent track record of year-over-year growth ─ Agreement with Quintillion Networks creates new opportunities to take share

• Managed IT Services allows pursuit of greater share of wallet

─ Fragmented competition ─ Partnerships create capabilities

6 | Alaska Communications

alaskacommunications.com

Consumer Focus on Stability and Increasing Margins

Consumer ~16% of revenue YTD at June 30, 2017 Stable performance expected to continue

• Increasing focused sales for new opportunity in >=10Mbps broadband service
• Margin management with focus on operating model:

─ Online orders now over 35%, up from 5% at the end of 2015 ─ Wireless broadband, online sign up, credit card pre-pay with no paper billing

• CAF II provides new platform for growth over 2017 and 2018

─ $8M to $10M capex to complete engineering and deploy 30% of locations ─ Exploring fixed wireless to meet or exceed speed requirements

7 | Alaska Communications

alaskacommunications.com

High Quality Network Serving Major Population Centers

• Deployed pilot projects for fixed wireless broadband service
• Positioning to enter new markets with fiber capacity to the North Slope
• Developing satellite capabilities to complement terrestrial network

8 | Alaska Communications

alaskacommunications.com

Testing Innovative Technology to Create More Opportunity

• Earth station turn up

underway utilizing C band spectrum that covers all of Alaska

• Improves cost

structure by removing third-party and allows for new sale

• pportunities
• Pursuing future Low

Earth Orbit (LEO) solutions with OneWeb

• Pilot program in

progress

• Capital efficient using:
• Unlicensed 5Ghz

band

• Lightly licensed

3.65Ghz band 70/80Ghz band

• More CBRS

spectrum in 3.5Ghz lightly licensed band expected in 2018-2019

• Up to 3 miles
• 1-4 Gbps speeds,

depending on distance

• Applications:
• Backhaul to towers
• Enterprise

customers

• Backhaul where

fiber is unavailable

• Up to 7 miles
• 25-50 Mbps speeds,

expected to increase

• Applications:
• “Last Mile”

broadband

• Multi-unit dwellings
• CAF II program

Point to Point (PTP) mmWave Technology Point to MultiPoint (PTMP) Fixed Wireless using Unlicensed / Lightly Licensed Spectrum Satellite

9 | Alaska Communications

alaskacommunications.com

• First SIP product implementation,

currently in all major metro markets in Alaska

• Hosted Voice over Internet in all

major metro markets in Alaska

• Proactive management of

Enterprise Class networks ‒ Customer Portal capabilities for self management and reporting

Partnerships & Products Driving Differentiation and Growth

• Premier partner with Barracuda
• Microsoft Certifications

‒ Silver, Cloud Platform ‒ Gold, Education Partner ‒ Gold, Small and Midmarket Cloud Solutions

Partnerships with blue-chip companies and access to the latest products deliver best-in-class customer experiences

Leading Edge Partnership Certification Next Generation Products

10 | Alaska Communications

alaskacommunications.com

Delivering Industry Leading Performance

($ in M) Q2 2017 Q2 2016 YoY % Increase/ Decrease Business and Wholesale $36.6 $33.9 8.1% Consumer $9.2* $9.5 (2.4%) Regulatory $12.7 $12.9 (1.8%) Total Revenue $58.5 $56.3 4.0% Q2 ($ in M) 1H 2017 1H 2016 YoY % Increase/ Decrease Business and Wholesale $71.1 $67.4 5.5% Consumer $18.6 $19.0 (2.2%) Regulatory $25.6* $26.2 (2.4%) Total Revenue $115.3 $112.6 2.4% 1H Total Broadband Revenue comprises 55% of Total Revenue for the Quarter and YTD

$14.4 $17.0 $7.8 $8.9 $6.2 $6.5 Q2 2016 Q2 2017 Consumer Broadband Wholesale Broadband Business Broadband ($ in M) $28.5 $33.2 $15.4 $17.3 $12.4 $12.9 1H 2016 1H 2017 Consumer Broadband Wholesale Broadband Business Broadband ($ in M) $56.3 $63.4 $28.4 $32.4

* Changes from the Q2 2017 earnings presentation reflect rounding.

11 | Alaska Communications

alaskacommunications.com

Completed Debt Restructure

• Refinanced maturing debt, extending maturities in April 2017

‒ $120M first lien term loan tranche 1, at LIBOR+5%, maturing in 2022 ‒ $60M first lien term loan tranche 2, at LIBOR+7%, maturing in 2023 ‒ $15M revolving credit facility

• Completed cash tender offer for 6.25% convertible notes in April 2017

‒ Successfully repurchased 89.3% or $84M of the $94M convertible notes ‒ $10M remains in restricted cash account to opportunistically repurchase the remaining convertible notes or settle them upon maturity in May 2018

• Net debt of $171.0M and total debt of $187.7M at June 30, 2017

12 | Alaska Communications

alaskacommunications.com

Performing to Plan and Reaffirming 2017 Guidance

($ in M) 1H 2017 Results 2017 Guidance Total Revenue $115.3 $229 - $235 Adjusted EBITDA1 $28.8 $59 - $61 Net Capital Spending $10.5 $35 - $38 Adjusted Free Cash Flow 1,2 $10.2 $4 - $7 ($ in M) 6/30/17 12/31/16 Total Debt $187.7 $179.6 Cash3 $13.0 $21.2

1 Reconciliations of non-GAAP measures to the nearest GAAP measures can be found in the Appendix or on the website at http://www.alsk.com in the investment data section. The company does not provide guidance for Net Income and Net Cash Provided By Operating Activities. 2 Quarterly Adjusted Free Cash Flow fluctuates and should not be viewed as an indicator of annual performance. Events including seasonality of capital spend and the timing of interest payments, may result in negative Adjusted Free Cash Flow in one or more quarters. 3 Change in cash reflects the utilization of cash in the refinancing transactions and other changes in working capital.

13 | Alaska Communications

alaskacommunications.com

Business Plan Drives Shareholder Value

Committed to expanding Adjusted EBITDA margins and FCF driven by top-line performance Prudent balance between investing for growth vs. returning cash to shareholders Explore strategic actions to drive scale and diversification Operating Performance Capital Allocation Strategic Actions

14 | Alaska Communications

alaskacommunications.com

Use of Non-GAAP Measures

The Company provides certain non-GAAP financial information, including Adjusted EBITDA, Adjusted Free Cash Flow and Net Debt. Adjusted EBITDA eliminates the effects of period to period changes in costs that are not directly attributable to the underlying performance of the Company’s business operations and is used by Management and the Company’s Board of Directors to evaluate current operating financial performance, analyze and evaluate strategic and operational decisions and better evaluate comparability between periods. Adjusted Free Cash Flow is used to assess the Company’s ability to generate cash and plan for future operating and capital actions. Adjusted EBITDA and Adjusted Free Cash Flow are common measures utilized by our peers (other telecommunications companies) and we believe they provide useful information to investors and analysts about the Company’s operating results, financial condition and cash flows. Net Debt provides Management and the Board of Directors with a measure of the Company’s current leverage position. Adjusted EBITDA is defined as net income (loss) before interest, loss on extinguishment of debt, depreciation and amortization, gain or loss on asset purchases or disposals, earnings from equity method investments, income taxes, stock-based compensation, pension adjustments, net loss attributable to non-controlling interest and expenses under the Company’s long term cash incentive plan (“LTCI”). LTCI expenses are considered part of an interim compensation structure, which ended in 2016, to mitigate the dilutive impact of additional share issuances for executive compensation. Adjusted Free cash flow is a non-GAAP liquidity measure and is defined as Adjusted EBITDA, less recurring operating cash requirements which include capital expenditures, net of cash received for a fiber build for a carrier customer, less cash income taxes refunded or paid, cash interest paid, amortization of GCI capacity revenue, and cash receipts and payments associated with the purchase of the North Slope fiber network and establishment of our joint venture with Quintillion Holdings Limited. Amortization of deferred revenue associated with our interconnection agreement with GCI is excluded from Adjusted Free Cash Flow because no cash was received by the Company in connection with this agreement. Amortization of all other deferred revenue, including that associated with other IRU capacity arrangements, is included in Adjusted Free Cash Flow because cash was received by the Company, typically at contract inception, and it being amortized to revenue

• ver the term of the relevant agreement.

The Company does not provide reconciliations of guidance for Adjusted EBITDA to Net Income, and Adjusted Free Cash Flow to Net Cash Provided by Operating Activities, in reliance on the unreasonable efforts exception provided under Item 10(e)(1)(i)(B) of Regulation S-K. The Company does not forecast certain items required to develop the comparable GAAP financial measures. These items are charges and benefits for uncollectible accounts, certain other non-cash expenses, unusual items typically excluded from Adjusted EBITDA and Free Cash Flow, and changes in operating assets and liabilities (generally the most significant of these items, representing cash outflows of $6.2 million in the six-month period of 2017). Adjusted EBITDA and Adjusted Free Cash Flow are not GAAP measures and should not be considered a substitute for net income, net cash provided by operating activities, or net cash provided or used. Adjusted EBITDA as computed below is not consistent with the definition of Consolidated EBITDA referenced in our 2017 Senior Credit Agreements, and other companies may not calculate Non-GAAP measures in the same manner we do. The following tables provide the computation of Adjusted EBITDA and Adjusted Free Cash Flow for the three and six months ended June 30, 2017 and 2016, and Net Debt at June 30, 2017 and December 2016. Reconciliations of our non-GAAP measures to our nearest GAAP measures can be found in our earnings release on

• ur website at http://www.alsk.com in the investment data section.

15 | Alaska Communications

alaskacommunications.com

Adjusted EBITDA Reconciliation (in thousands)

2017 2016 2017 2016 Net (loss) income (2,830) $ 283 $ (3,538) $ 336 $ Add (subtract): Interest expense 3,913 3,852 7,758 7,721 Loss on extinguishment of debt 5,158

• 7,434

336 Interest income (7) (6) (14) (11) Depreciation and amortization 9,028 8,640 17,931 17,160 Loss on disposal of assets, net 14 128 33 152 Income tax (benefit) expense (632) 236 (1,464) 299 Stock-based compensation (29) 642 581 1,447 Long-term cash incentives

• 194
• 405

Pension adjustment

• 20
• 41

Net loss attributable to noncontrolling interest 32 34 64 67 Adjusted EBITDA 14,647 $ 14,023 $ 28,785 $ 27,953 $ June 30, June 30, Three Months Ended Six Months Ended

16 | Alaska Communications

alaskacommunications.com

Adjusted Free Cash Flow Reconciliation (in thousands)

2017 2016 2017 2016 Adjusted EBITDA 14,647 $ 14,023 $ 28,785 $ 27,953 $ Less: Capital expenditures (5,374) (8,487) (10,522) (13,662) Payment for North Slope fiber network

• (5,500)
• (5,500)

Proceeds on sale of fiber to joint venture partner

• 2,650

Amortization of GCI capacity revenue (516) (516) (1,027) (1,025) Income taxes (paid) refunded, net (2)

• 572

(577) Interest paid (6,059) (4,562) (7,595) (6,359) Adjusted free cash flow* 2,696 $ (5,042) $ 10,213 $ 3,480 $ * Quarterly Adjusted Free Cash Flow fluctuates and should not be viewed as an indicator of annual performance. Onetime events, seasonality of capital spend and the timing of interest payments may result in negative Adjusted Free Cash Flow in one or more quarters. Three Months Ended Six Months Ended June 30, June 30,

17 | Alaska Communications

alaskacommunications.com

Long Term Debt and Net Debt Calculation (in thousands)

June 30, December 31, 2017 2016 2017 senior secured credit facility due 2023 180,000 $

• $

Debt discount - 2017 senior secured credit facilities due 2023 (3,000)

• Debt issuance costs - 2017 senior secured credit facilities due 2023

(3,176)

• 2015 senior secured credit facilities due 2018
• 86,750

Debt issuance costs - 2015 senior secured credit facilities due 2018

• (1,738)

6.25% convertible notes due 2018 10,044 94,000 Debt discount - 6.25% convertible notes due 2018 (131) (2,271) Debt issuance costs - 6.25% convertible notes due 2018 (27) (467) Capital leases and other long-term obligations 3,956 3,325 Total debt 187,666 179,599 Less current portion (15,958) (1,973) Long-term obligations, net of current portion 171,708 $ 177,626 $ Total debt 187,666 $ 179,599 $ Plus debt discounts and debt issuance costs 6,334 4,476 Gross debt 194,000 184,075 Cash and cash equivalents (12,982) (21,228) Restricted cash held for 6.25% convertible notes due 2018 (10,044)

• Net debt

170,974 $ 162,847 $