Alaska Communications Systems Reports Fourth Quarter and Year-End 2008 Results

Alaska Communications Systems Group, Inc. ("ACS”) (NASDAQ:ALSK) today reported financial results for its fourth quarter and year ended December 31, 2008.

"Today we report results that meet or beat the high end of guidance,” said Liane Pelletier, ACS president and chief executive officer, "Our results come from tight execution of a strategic plan that positions ACS in high quality, high demand segments of the market, and is reflected in both revenue growth and a favorable shift in revenue mix; wireless and enterprise comprised 46% of total company revenues at year end, up from 42% in the prior year.”

"Since our last call in October we have continued to assemble the components to accelerate enterprise revenue growth. We have integrated Crest into ACS’ operations and have largely completed the upgrade of the Crest Northstar fiber to OC-192 increments. We completed end to end testing of the AKORN fiber system and will turn up commercial service by quarter end. We turned up a new Lower 48 NOCC to provide world class managed services. We further expanded and deepened our differentiated Metro Ethernet and MPLS footprint. And as projected, we exited the year with a book of business that more than offset the incremental operating and financing cash costs of our AKORN build and our Crest buy. We recently entered into agreements to establish network nodes for two large lower 48 carriers to help meet their Alaska customers’ data needs,” noted Pelletier.

"We launched Blackberry smartphones late in the third quarter, and marketed them with laptop aircards; these and other data-rich devices accounted for over 30% of sales and helped to drive a 22% sequential increase in data ARPU in Q4. While retention of wireless customers improved by 0.1%, softer demand in the last three months of the year outstripped this benefit as we ended the quarter with a loss of approximately 700 subscribers on a base of about 150,000,” said Pelletier.

"Finally, we report today that the free cash flow to support our dividend of 86 cents per share is secure and the dividend will be maintained at this level for as long as it maximizes shareholder value,” concluded Pelletier.

Financial Highlights: Fourth Quarter 2008 Compared to Fourth Quarter 2007

• Revenues of $97.1 million were down 2.0 percent from $99.1 million in the prior year.
  • Enterprise revenues increased $3.3 million, or 42 percent.
  • Wireless revenues increased $0.3 million, or 0.9 percent.
  • Retail wireline revenues declined by $0.4 million or 1.6 percent.
  • Wholesale and network access revenues declined by $5.2 million with the prior year benefiting from $4.9 million in out-of-period network access.
• EBITDA of $30.8 million, exclusive of $1.4 million in start-up costs for our long haul fiber investments, was down from prior year EBITDA of $34.0 million; higher returns from enterprise were partially offset by lower network access.
• Net cash provided by operating activities of $26.4 million was in line with $26.6 million in the prior year.
• Net loss of $18.9 million, or $0.43 per diluted share, compared to net income of $120.4 million, or $2.71 per diluted share in the prior year. Comparative performance was impacted by a $29.6 million non cash goodwill impairment charge in the current period, while the prior period benefited from a onetime non cash net tax gain of $111.5 million.

David Wilson, ACS executive vice president and chief financial officer, said, "We exited the year comfortably positioned from a liquidity standpoint with $40 million in available capacity under our revolver; $20.5 million in restricted cash available to settle remaining obligations for our fiber investments; and no significant debt maturities due until February 2012. With the Crest acquisition closed and the turn up of the AKORN system near complete, we are also well positioned to accumulate cash as we leverage our fiber investments with enterprise customers and as cash outflows for new investments decline; our recurring maintenance capex program substantially covers the company’s future needs. In the longer term, we will also benefit from an extension of bonus depreciation available under the 'Economic Stimulus Act of 2008', and now do not expect to pay full cash taxes until 2015.”

"In order to manage our costs we continue to gain operating leverage through our process improvement programs that drive efficiencies; and we proactively cut costs in areas of the business subject to structural decline,” noted Wilson. "Our success is most recently evident when we absorbed 14 FTE in the fourth quarter with the acquisition of Crest and exited February with 960 FTEs, down from 980 at the end of September.”

Metric Highlights: Fourth Quarter 2008 Compared to Third Quarter 2008

• Average retail wireless monthly churn of 1.8 percent was down from 1.9 percent in the third quarter.
• Wireless subscribers decreased by approximately 700, to 149,500. Consistent with the overall retail sector, the company experienced soft wireless sales in the fourth quarter.
• Retail wireless ARPU decreased modestly to $60.41 from $60.79 with seasonal declines in voice ARPU offsetting growth in data ARPU which jumped 22 percent to $6.10 from $5.02.
• While DSL lines were flat at 47,600, ISP ARPU again increased by 3.6 percent to $33.24 from $32.09.
• Retail local access lines declined by 1.6 percent to 174,500.
• Total local access lines decreased by approximately 2.9 percent to 201,400.

Annual Financial Review

For the twelve months ended December 31, 2008:

• Total revenues were $389.6 million, which represented a 1.0 percent increase over 2007 revenues of $385.8 million.
• Net loss for 2008 was $10.1 million, or $0.23 per share (diluted), as compared to a net income of $144.1 million, or $3.26 per share, in 2007. Net loss for 2008 included a non cash goodwill impairment charge of $29.6 million while the prior year benefited from a one-time, non-cash, income tax benefit of $111.2. Performance in 2008 also reflects the start up costs of our long haul fiber investments; higher non-cash depreciation; interest expense on our new $125 million convertible debt offering; and book tax expense this year but not last.
• Net cash provided by operating activities for 2008 was $94.6 million as compared to $104.8 million in 2007 with the prior year benefiting from higher EBITDA and lower net cash interest expense.
• EBITDA for 2008, exclusive of $3.5 million in start-up costs for our long haul fiber investments, was $132.2 million compared to $138.1 million in 2007. 2007 performance benefited from network access revenue that management estimates was $10 million higher than long term trends and $0.7 million of out-of-period CETC revenue, while 2008 benefited from a first quarter net release of network access reserves of $5.1 million.
• Investment in construction and capital investments, net of capitalized interest and investments funded by the selling stockholders of Crest, totaled $121.9 million, comprising maintenance capital spend of $39.5 million; and investments in growth capital expenditures of $82.4 million.

2009 Business Outlook

For the full-year 2009, ACS expects:

• Revenues and EBITDA to exceed 2008 levels;
• Maintenance capital expenditures to be in line with the $40 million spent in 2008;
• To fund $16 million for the turn up of AKORN; the upgrade of Northstar; and the start up of its second, geographically diverse fiber route between Anchorage and Fairbanks; and
• Incur $36 million in net cash interest expense.

Pro forma for growth capex and working capital movements, ACS expects its dividend payout ratio to remain below its long term payout target of 70-75%.

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 800-218-4007 to access the conference call. Parties outside the United States and Canada can access the call at 303-228-2960. 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 2 hours after the call and will run until Monday, March 9, 2009 at midnight ET. To hear the replay, parties in the United States and Canada can call 800-405-2236 and enter pass code 11126480. Parties outside the United States and Canada can call 303-590-3000 and enter pass code 11126480.

About Alaska Communications Systems

Headquartered in Anchorage, ACS is Alaska’s leading provider of broadband and other wireline and wireless solutions to Enterprise, Carrier and mass market customers. The ACS wireline operations include the state’s most advanced data networks and, to be launched in 2009, the only diverse undersea fiber optic system connecting Alaska to the contiguous United States. The ACS wireless operations include the only 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 Alaskan 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.