Revenue flat, Alaska Communications points to unpaid rural funds

First quarter revenue for Alaska Communications Systems Group Inc. was down just 1.2 percent despite reporting $11.8 million in shortfall from the federal program for providing service to rural hospitals and medical facilities.

Senior Vice President of Finances Laurie Butcher said a debt refinancing cost reflected in the 2017 first quarter made the company's net income look a little better than they were.

“Last year’s first quarter recorded a $2.3 million negative impact that didn’t reoccur in a year-over-year,” Butcher said.

The Anchorage-based telecom reported overall revenue of $56 million for the first quarter compared to $56.7 million reported for the same quarter last year. It was the first report after the company laid off 30 people in December, representing a 5 percent cut in its workforce.

Alaska Communications has attributed the workforce cuts in part on the costs of providing the service to rural customers while only being able to charge the urban rate. It cited those costs in a shutoff notice sent May 6 to the Cordova Community Medical Center demanding nearly $1 million representing what the federal program hasn’t covered for its monthly invoices. Federal Communications Chairman Ajit Pai warned company CEO Anand Vadapalli in a letter two days later that it would be illegal to cut off Cordova or any other rural client.

The Universal Services Administration Co., or USAC, normally fills the funding gap between the urban and rural rate that makes remote telehealth affordable. But last year and this year, requests for reimbursement have exceeded the $400 million pool for the first time.

The unreimbursed funds are impacting all of Alaska’s telecoms. GCI Liberty reported a $6 million shortfall in the same Rural Health Care payments and also noted the Federal Communications Commission is conducting a review of the rates charged in Alaska, which consumed a bit more than a quarter of the total RHC funds at $122 million in 2016.

This is the second year Alaska Communications is experiencing a funding shortage in its RHC revenue. Given overlaps in the fiscal years, with the federal funding year ending June 30, the losses were distributed over two years, Butcher said.

“In 2016-2017 is when they had the first shortfall, a 7 percent funding gap. Sitting in Q1 last year, we thought we were getting the full revenue from the RHC program,” Butcher said. “But they didn’t announce their funding gap until April, so we didn’t start recording (losses) until Q2 last year. For this year, the 2017-2018 funding year, which started in July 2017, we still have not received any funding.”

The cash flow impact amounts to about $1 million a month.

Business revenue and wholesale revenue of $33.8 million decreased $700,000 or 2.2 percent in the first quarter of 2018. That’s down from the $34.5 million in the first quarter of 2017, and “due primarily to a $2.6 million reduction in broadband revenue driven by price compression and losses in the RHC funding levels,” Butcher said.

The company’s first quarter RHC revenue was $3.5 million in 2018, compared to $6.3 million in 2017.

Business and wholesale makes up just more than 60 percent of Alaska Communications’ total revenue while consumer business comprises almost 17 percent. Wholesale broadband revenue increased by $1.3 million. Business phone connections fell by 2,311 landlines, or 3.2 percent, year-over-year.

Consumer revenue rose from $9.3 million last year by March 31, 2017 to $9.4 million for the same date this year. Of that, broadband helped push revenue slightly from $6.4 million to $6.5 million.

Also in the consumer category, voice and other revenue decreased marginally due to 4,298 fewer connections due to loss of landlines. The consumer category overall benefitted from a rise in the average revenue per user or ARPU to $63.77 from $61.22.

Regulatory income, which comprises 23 percent of its revenue, remained flat with first quarter 2017 at $12.8 million.

The EBITDA tracking of earnings before interest, taxes, depreciation and amortization is a key indicator, Butcher said.

“We don’t really focus on net income as much as we do EBITDA – depreciation, gains and loss on things that are non-operating expenses. These were double last year and are non-cash in nature.”

Flat EBITDA was good news, she said, after the December employment cuts.

“Some of the really drastic cost cutting measures we took in fourth quarter in response to what was happening with RHC impacted our employee compensation and reduced our workforce. It took serious cost cutting to keep EBITA flat,” Butcher said.

An uptick in broadband is increasing revenues due to new technology that is expanding in fixed wireless for multi-dwellings and tenants, she added.

“Technology enables us to provide services quickly at a much lower cost,” she said. Fixed wireless is installed via entire buildings that then enable individuals to quickly sign up for services.

“Rather than the Old World of signing up for DSL where we roll a truck and hook you up, this is more customer friendly and cost efficient,” she said.

Another bright spot is in new tax refunds that Alaska Communications can expect to begin collecting when 2018 taxes are filed and over the next four years.

The company paid the alternative minimum tax, or AMT, that added back deductions to recalculate liability. Under the Tax Cuts and Jobs Act of 2017, the AMT was eliminated and corporations that paid it are due refunds.

As for the RHC funding shortage, the Federal Communications Commission is currently evaluating how the Rural Health Care program is managed, said Sen. Lisa Murkowski’s spokesperson Karina Petersen.

“Until that is finalized Alaskan participants are in limbo, which is a real problem because rural health clinics provide critical tele-medicine services for remote Alaskan communities,” Petersen wrote.


Naomi Klouda can be reached at [email protected].

05/24/2018 - 1:56pm