Big Potential in Alaskan Fiber
By
Dave Mock
May 7, 2008
|
In terms of serving the communications needs of the 49th state, Alaska Communications' (Nasdaq: ALSK) recent earnings report shed light on just how different business can be up north.
The hallmarks of a telecom business are there: consistent revenue growth and nice cash flow from subscribers. Alaska Communications Systems (ACS) reported a 5.6% increase in revenue to $96.8 million, and a 19.4% jump in operating income to $16.9 million. Net income dipped to $5.8 million, but this was largely thanks to a $4.1 million tax expense incurred this quarter.
But while many other nationwide telecoms -- from Verizon (NYSE: VZ) to Sprint Nextel (NYSE: S) to AT&T (NYSE: T) -- pour more resources into expanding wireless networks to capture growth, ACS is taking on more debt and putting those dollars to work in exactly the place most wouldn't expect: fixed-line communications.
The investment actually is in undersea fiber that connects the largest state to the "Lower 48." While it certainly isn't shunning opportunities to grow its wireless business, the company considers fiber capacity an ideal place to put capital to work. ACS sees enterprise services as a big opportunity, with a prime example being BP (NYSE: BP) and ConocoPhilips' (NYSE: COP) plan to spend years and tens of billions of dollars to build a new gas pipeline between Alaska and the Lower 48.
With its in-state data network and capacity to transport large volumes of data outside Alaska, ACS is one of only two providers of broadband capacity to the Lower 48. As such, management sees a return of 20% or better on its investment in undersea fiber and networks by selling this capacity to enterprise customers.
The fiber capacity also benefits the wireless side of business by giving backhaul capacity to broadband wireless services. Though AT&T has not brought its unlimited voice plans to Alaska yet, Ma Bell is giving ACS more competition after taking over and rebranding Dobson Communications. So ACS is pushing its unlimited plans for voice and data to differentiate itself from the national giant.
Overall, I'm satisfied holding ACS stock. While interest expense will increase to service debt, the company largely maintained guidance and still targets a 70% to 75% dividend payout ratio. The moat ACS is building around its services should benefit shareholders in the long run.
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Fool contributor Dave Mock floats his boat without the safety of a moat. He owns shares of Alaska Communications and is the author of The Qualcomm Equation. The Fool's disclosure policy can be made into a paper boat, but why would you want to?
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