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Alltel Corporation (AT)

Q1 2006 Earnings Conference Call

May 3, 2006, 8:30 am Eastern

Executives:

Scott T. Ford, President and CFO

Kevin T. Beebe, Group President of Operations

Jeffrey R. Gardner, President and CEO, Wireline Operators

Tony Thomas, Vice President Investor Relations

Sharilyn Gasaway, Alltel Executive Vice President and Chief Financial Officer

Analysts:

Thomas Lee, JP Morgan

Michael Rollins, Citigroup

Jonathan Atkin, RBC Capital Markets

David Barden, Bank of America Securities

David Janazzo, Merrill Lynch

Jessica Yell, Morgan Stanley

Tom Sykes, Lehman Brothers

Com Rowsky, Bear Stearns

Operator

Good morning, my name is Darla and I would like to welcome everyone to the Alltel First Quarter 2006 Release. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Thomas you may begin your conference

Tony Thomas, Vice President Investor Relations

Thank you Darla. Good morning everyone, welcome to Alltel’s first quarter 2006 conference call. My name is Tony Thomas and lead Investor Relations for Alltel. Thank you for participating in this discussion of our first quarter results this morning. Today’s conference call was preceded by our first quarter 2006 earnings release. This press release has been distributed on the newswires and is available from our website at www.alltel.com. Today’s conference call should be considered together with our press release and related financial information.

Today’s conference call should be considered together with our press release and related financial information. Today’s discussion includes statements about expected future events and future financial results that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1996. Forward-looking statements are subject to uncertainties that could cause actual future events or results to differ materially from those expressed in such statements. Other factors that could cause actual results of Alltel to differ materially, many of which are beyond the control of Alltel, include but are not limited to the items listed in the Safe Harbor statement contained in our fourth quarter 2006 release.

Additionally, today’s discussion will include certain non-GAAP financial measures. Again, we refer you to the Investor Relations section of our website where we have posted our earnings release and supplemental materials which contain information regarding these non-GAAP financial measures, including a reconciliation of each such measure to the most directly comparable GAAP measure. Note that a live webcast of this call is available on our website. To access the call, go to the Investor Relations section and click on the live webcast link.

During our call we will make reference to performance on a pro forma basis which reflects the Western Wireless merger as if it was completed on January 1, 2005. These pro forma wireless financials are included in the supplemental material.

Participating in our earnings discussion this morning are: Scott Ford, Alltel President and Chief Executive Officer, Kevin Beebe, Alltel Group President Operations, Jeff Gardner, Winscreen President and Chief Executive Officer, Sharilyn Gasaway, Alltel Executive Vice President and Chief Financial Officer.

At the end of the call we will take a few questions. With that, here is Scott Ford.

Scott T. Ford, President and CFO

Thank you Tony and welcome to your first conference call. I think we’ve got a real contender for the Rob Clancy Award for reading disclaimer language. Good morning everybody. I appreciate you joining us today. This morning I would like to briefly like to discuss a few financial highlights and then give you an update of several strategic initiatives. As usual, Kevin will then talk about the operational highlights of the business from the Wireless business and then Jeff Gardner in what we hope will be his swan song performance on this call, will give us strategic and operational highlights review of the Wireline business, followed by Sharilyn Gasaway who will go over the financials and try to give some clarity to all of the things that we’ve talked about.

For the first quarter of 2006 we achieved $0.77 of fully diluted earnings per share on a GAAP basis. This reflects the impact of Western Wireless integration activities, Wireline separation expenses, a net gain in discontinued operations in non cash charges related to the Wireless acquisition amortization.

Sharilyn will cover all of these things with you in detail in a few moments. Excluding these items, we achieved full diluted earnings per share of $0.82 for wire business, which is down 6% year over year on a per share basis primarily due the increase share count related to both the equity unit conversion and the Western Wireless merger.

On a consolidated basis, this quarter we generated $504 million of equity free cash flow, an increase of 49% year over year. In addition, consolidated revenues and operating income from current businesses grew 19 and 18% respectively. On a pro forma basis, both consolidated revenues and operating income grew 7% and pro forma equity free cash flow was up roughly 40%.

In our wireless business, service revenue and operating income grew 29 and 25% respectively. On a pro forma basis, service revenue grew 9% year over year, while segment income was up 5%, equity free cash flow was up roughly 45%.

We added 165,000 customers in the first quarter, driven by our lower churn rate, strong sales of our new pre-pay wireless service UVIRA and our continued commitment to be competitive in the post pay marketplace.

Kevin will discuss each of these items with you in a few moments.

On the strategic front, an important step in the spin off our Wireline business was completed in April. The new Co. has a name, that is Windstream. We expect the separation of Windstream in the July time frame. Jeff will go through all of those details with you in a moment as well too.

Finally, we are pleased to announce that last week we closed on the sale of our Austrian asset Telering to T-Mobile for $1.6 billion or $1.1 billion after tax. In addition, last week we closed on the sale of our wireless property in Haiti. We expect the closing of the properties in Bolivia and Slovenia to take place sometime in the second quarter. In aggregate, international assets will provide pre tax proceeds of roughly $2.3 billion.

Moving closer to home, we purchased wireless partnerships from Palmetto Mobile Net and LP that covers approximately 2 million pops in North and South Carolina. We just recently closed on the purchase of First Cellular of Southern Illinois which added 485,000 pops. We’d like to welcome the First Cellular employees and their customers to the Alltel family.

Finally, we continue to work towards closing our proposed mid-West wireless transaction which we expect to close in the second half of the year at this point.

Post spin the wireless business will have a capital structure that allows for optimal financial and strategic flexibility. We remain committed to our plans for a $1 billion debt reduction and an aggressive $3 billion share repurchase program beginning immediately after the spin closes.

From an overall strategic perspective, we are encouraged about the opportunities that exist for our wireless business. We believe that both voice and data minutes will continue to migrate to wireless networks. Thus, we have plans to capitalize on that growth through network expansion and evolution. The Alltel brand continues to evolve and become even more relative to existing as well as potential customers, evidenced by our lower churn rate and higher gross adds.

With that, let me turn the call over to Kevin to discuss wireless operations.

Kevin T. Beebe, Group President of Operations

Thank you Scott and good morning everyone. First I’d like to review some quarterly highlights. Wireless gross customer additions were 805,000 for the quarter, that’s up 2% in year over year on a pro forma basis. Net adds were $165,000 which included the loss of 18,000 customers due to our decision to discontinue a western wireless service plan called “Talk Watch.” We made that decision on January 1, 2006. Talk Watch is a post pay rate plan initially designed with real time spending limits. At the end of the first quarter, we had about 49,000 remaining Talk Watch customers, which expect to attrite off over the remainder of this year.

Excluding Talk Watch, we added 72,000 net post pay customers and 111,000 net pre pay customers in the quarter. Our 72,000 post pay net customers additions were driven by post pay churn of 1.66%. Our total churn was 2%. Both of those metrics improved year over year as well as sequential.

Our strong pre pay results were driven by the launch of U-Wireless, our new pre pay product introduced in January and the continued strength of Simple Freedom which is our phone in the box pre pay service sold primarily through Wal-Mart.

We were very pleased with our results this quarter. We do expect seasonally lower sales of our pre pay offerings in the second quarter. Our cost per gross add was 15% higher year over year to $352. That was driven by larger subsidies for higher end handsets by Razor and a higher mix of dealer sales within corp. Offsetting the higher cost per gross add, our cash cost per customer declined to its lowest level in three quarters. We continue to grow ARPU year over year on both an as reported as well as a pro forma basis. Average revenue per customer increased to 4%; year over year to $50.90. On a pro forma basis, average revenue per customer increased 1%. These increases are the result of data revenue growth and improvements in BTC revenues.

Data revenue per customer was $2.86, that’s an increase of 59% year over year, representing over 5% of total ARPU. We were successful in selling existing data products and applications such as text messaging, application downloads, enterprise messaging, and during the quarter we launched an ABDO Blackberry device. Also, we launched several new data applications including access radio, which offers 40 channels of commercial free streaming music, exclusive ring tones from several artists and office sync which allows users to send and receive emails in real from their Palm, OS, or Windows mobile devices.

We will continue expanding data applications and products throughout the year to leverage our growing EDDO coverage. This quarter was also filled with integration and conversion work. We successfully converted our support systems within the former Western Wireless markets. This includes the conversion of the Western Wireless billing system and point of sales systems. This conversion was a key step towards realizing, towards the realization of our synergy targets.

In addition, we’ve completed the conversion to a new pre pay service platform that expands pre pay features and substantially reduce our cost. Today both our U-Wireless and Simple Freedom products build on this new platform.

Finally, to begin the current quarter, we have launched My Circle, giving customers the ability to select up to 10 numbers connected to any wireless or wireline network and add thee numbers to their mobile to mobile plan. In essence, it expands their mobile to mobile service the people they call the most regardless of the network. My Circle is available on any service plan priced at $59 or above. Early sales results have been very encouraging. With that, let me turn the call over to Jeff to discuss our Wireline operations, Jeffrey.

Jeffrey R. Gardner, President and CEO, Wireline Operators

Thank you Kevin and good morning everyone. First I would like to review some Wireline operational highlights and then provide an update on the pending spin off and merger with VALOR. This quarter we added a record 44,000 broadband customers bringing our broadband customer base to 441,000, a penetration rate of 15% of total access lines.

At the end of the quarter we were capable of offering download speeds of 3 megabyte to nearly 60% of total access lines. In addition, we recently launched a 6 megabyte service offering which is currently available to nearly 20% of our total access lines.

Broadband is a very important part of our business and we plan to continue upgrading our network to reach more customers as well as deliver faster speeds.

Future revenue per eligible line increased 2% and coupled with our broadband revenue growth, lead to average revenue per wireline customer of $66.77. This quarter we lost 23,000 access lines, primarily the result of wireless and broadband substitution, bringing our year over year loss to 4%. This 4% year over year decline is an improvement sequentially and represents the first sequential improvement in year over year access line losses in 7 quarters.

We believe our continued emphasis on selling broadband services coupled with our new bundled satellite video offering is having a positive effect on access line losses. Recall that in the fourth quarter of 2005 we launched our dish network TV offering and to date have been very pleased with our sales results.

Looking at broadband customers and access lines together, or total customer connections, we added 21,000 total customer connections this quarter driven by the record broadband add.

Turning to the upcoming spin off and merge with VALOR, several weeks ago we announced a new company would be named “Winstream Communications.” Winstream Communication built on our 60 year history as a reliable communication provider and customer ally with fresh innovative thinking and technology to deliver the information, entertainment and personal connections that customers need. Over the past few weeks, our leadership team visited with roughly 5,000 employees in 9 locations to introduce the new name and our employees were very enthusiastic about the name and our future opportunity. We believe our company will be the premiere rural local exchange company in the industry in terms of scale, and cash flow generation capability. And, we will have a strong balance sheet that affords us financial flexibility.

In terms of transition activities, we have team within Alltel working on detailed plans to separate the shared services functions within Alltel and we also have teams at Alltel and VALOR working on the integration process.

We are very pleased with the progress we are making on both fronts and continue to believe that the merger with VALOR presents an opportunity to achieve approximately $40 million in annual net synergies.

In terms of the regulatory process, we have received approval from the SEC, the FTC, and several State public utility commissions. We also recently received a favorable ruling from the Internal Revenue Service on the tax free treatment of the spin transaction and the merger with VALOR.

At this time, we have 5 State approvals remaining and we hope to complete the entire approval process in time for a mid-year closing. This quarter we also announced the appointment of Keith Paglusch as Chief Operating Officer. Keith has over 25 years of telecom experience and we are all very pleased to have Keith on our team.

In summary, our Board and senior management team is largely in place. We are very eager and excited to begin our new journey together. With that, I now turn the call over to Sharilyn to discuss the financial results.

Sharilyn Gasaway, Alltel Executive Vice President and Chief Financial Officer

Thank you Jeff and good morning everyone. In the first quarter we achieved $0.77 of fully diluted earnings per share on a GAAP basis which includes the following items: $20 million of pre tax expense related to the integration ad re-branding of Western Wireless property and transaction consulting and employee benefit costs for the pending spin off of our Wireline business. $18 million of net gain from discontinued operations which includes the various international businesses held for sale and the domestic divestitures required in connection with our recent acquisition And $45 million of wireless amortization expense related to intangible assets recorded in connection with previous wireless acquisitions. Excluding these items, we achieved $0.82 of fully diluted earnings per shares from current businesses which includes a fully diluted weighted average share count of approximately $390 million.

Under Alltel’s previous presentation of operations from current businesses that included wireless and tangible amortizations, the fully diluted earnings per share would have been $0.75. For the quarter, our wireless business generated $1.64 billion of service revenue, an increase of 29% year over year.

On a pro forma basis, service revenue increased 9% year over year driven by a 9% lift in both retail and wholesale revenues. The primary driver of our retail revenue growth continued to be our focus on quality customer growth, data revenue improvement and ETC revenues.

For the quarter we received approximately $57 million of ETC revenues. As Scott mentioned earlier, we generated $356 million of wireless segment income an increase of 25% year over year. Included in the results this quarter is stock option expense of $5 million associated with the adoption of VAS 123R.

Pro forma segment income grew by 5% year over year driven by (inaudible) and pre pay customer growth. Of course, these customer additions were associated with the higher sales costs that Kevin discussed earlier.

Wireless cash costs per customer excluding selling and marketing expenses were $23.40 and increase of 3% year over year, driven principally by additional data expenses. The sequential decline of wireless cash costs, up 4%, was driven by improvements in bad debt and lower system expenses.

Turning now to our Wireline business. We generated $575 million of revenue, a decrease of 3% year over year and EBITDA of $330 million which also declined 3% year over year.

Segment income for the quarter was $227 million, an increase of 6% year over year driven by lower depreciation expenses as we’ve linked in the depreciation loss of certain assets that are expected to be in service longer than originally anticipated. Communication support services produced $251 million in revenue and $21 million in segment income. This quarter, capital expenditures totaled $221 million and we generated $504 million of equity free cash flow, an increase of 49% year over year ending another quarter with a strong balance sheet in credit metrics. Our capital expenditures will calm significantly in the coming quarter.

Turning to the balance sheet. Our net debt balance at the end of the quarter was $5 billion, which will be impacted in the coming quarters by the $1.2 billion after tax proceeds from the sale of the international assets just received, the $4.2 billion de-leveraging from our spin off of Wireline, the purchase of Mid-West Wireless for $1.1 billion, the recently announced purchase of First Cellular of Southern Illinois for $140 million and the $130 million after tax proceeds from the liquidation of the Rural Telephone Bank. Our pro forma net debt following all of these transactions will be $680 million before the benefit of free cash flow earnings over this period. The Rural Telephone Bank liquidation payment once received in April and will result in a one time pre tax gain of approximately $175 million in the second quarter.

Finally, we expect to be within the first and second half 2006 guidance that we provided on February 1st. With that, we will now take a few of your questions. Operator, please review the instructions and open the call to questions, thank you.

Question-and-Answer Session

Operator

Thank you. At this time I would like to remind everyone if you would like to ask your question, press star and the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster.

Your first question comes from Tom Lee with JP Morgan.

Thomas Lee

Guys, can you hear me? Good morning. I’m not going to ask you questions on the spin off, because I know someone else will. I wanted to ask you really some longer term questions on your wireless business. You know clearly we had a nice rebound in wireless growth, but what I’m curious about is, when I look at the wireless numbers, I’d say that one thing I notice was that wholesale revenues from roaming cells sequentially. Now I know they’re up year over year, but at $151 million we saw about a $20 million drop off sequentially, so my first question just relates to you know, A) can you talk about if this was seasonal factors, if there were step downs behind that and longer term EBITDA margins – I kind of originally was kind of conceptualizing 40% is being that long-term target for Alltel, if you could talk about what you feel comfortable with what long term margins are and kind of related to that is just data revenues? I know data is really exploding with you guys, I’m just curious if data is proportionately doing more capacity than its revenue contribution? Thanks.

Scott Ford

Hello Tom, this is Scott and Kevin will have a few things to say too, but, if you go through it sequentially, just if you look at roaming, we are currently in negotiations with basically every roaming partner that we have. There are a lot of puts and takes going on around those sets of discussions. It’s really not right at this point to be talking about it publicly, but suffice it to say, there is a lot of jockeying going on around the track right now.

If you look at the long-term margin issue, we’ve not gotten into the business of forecasting margins. We’re going to specifically stay out of that right now. But we are in a transition period both in terms of the wholesale business, the network as we start to build out the data network and we start to take the expense of building that data network, but you know you have to build the expense in before you get the revenues. And also, the jockeying that takes place on any quarter in terms of the gross adds side of the business. Kevin, you fill in anything more on that, that you’d like and one of you take the data stuff as well.

Kevin Beebe

Hey Tom. I think on margins, here’s what I offer up to give you some perspective on what happed in Q1, and then obviously you’ll sort through it as you always do in a good way. We did a couple of things in the first quarter. One is, because of the movement on pricing around higher end funds that we saw; we chose to subsidize all higher end phones to a larger degree than we had planned. Market reaction, there were a lot of dynamics around higher end phones in Q1 and we chose to really follow the market there. So I think those higher subsidies had an impact. We continue to price higher end phones at the same level or same price if you will that we did in the first quarter. Of course, we’re working hard with our suppliers to make them understand that additional volume should result in lower costs. That’s an interesting conversation as I know you know.

We also incented towards the end of the quarter, we incented the dealers to sell Alltel because of some share shift we had seen in the dealer channels. We were very pleased with the results of that, but that caused higher costs. We have removed those incentives at this point, but we’ll be mindful of whether or not that’s something we need to do in the future. We expect the second half of the year to have some improvement in terms of the synergies from Western Wireless. I mentioned we did the conversions 1Q that should begin to have an impact on our run rate. And then of course, whenever we can close Mid-West we’re working through regulatory approval right now, everything is progressing well, it’s just taking time. They’re operations are really exceptional. The Dennison Team have done a great job so did Terry Atakin and team at First Cellular of Illinois. So we think those are some of the positive things going forward.

On the data revenue side, we got the 5% and the 59% growth is exceptional, although in looking at some of the other carriers who have reported, we know that we are known at the levels that others are. I think we need to continue to deploy applications. We’re working hard to get those out as fast as possible. We also need to expand and improve our high speed network, we’ve announced earlier this year our plans to cover 60% of our pops with DO, we’re working through that. 1Q was a slower start than we expected simply because we were doing some other things (inaudible) conversions quite frankly. So our engineers are after it right now and we expect to do some catch up beginning in 2, 3 and 4 Q and that’s why I think you’ll see a pop in our CAPX expenses as the year winds.

Hopefully those things help.

Thomas Lee

Yeah, very helpful, thanks guys.

Kevin Beebe

You’re welcome.

Operator

The next question is from Michael Rollins, Citigroup.

Michael Rollins

I’m curious if you could talk a little bit more about the pace of integration on the Western side. And maybe talk more specifically about if you got any specific cost benefits in the quarter and maybe just an update on the quantitative side of how that should ramp through the year? And then just backing up with a more philosophical question on just the subscriber environment that’s out there today, and what are you seeing as you look at the newer markets that you’ve acquired versus some of the existing markets and are you seeing significant ramp in the new markets as you launch your new marketing message and get that systems conversion fully up and running? Thanks.

Kevin Beebe

Hey Mike, this is Kevin. Why don’t I take a shot at that then Sharilyn and Scott can certainly add on if they see fit. But in terms of integration. Really in 1Q there were more costs than we’ll see because of the integration activity, because of the work we did around the conversions, expenses, etc., so as the year proceeds, we should begin to see some pick up in the synergies. Sharilyn might have something she wants to add.

In terms of customer growth in the lesser markets, while we stop reporting Heritage and Western, because when we converted to our systems in mid-quarter, we converted pence, we don’t see those operations as different any more. We certainly know what’s going on at a market level but I think it’s time to just report at Alltel at this point and continue to give you some pro forma looks which I think should help to get at our real run rate revenues and other things.

We’re very pleased with the post pay pick up in Western markets. I think that’s the result of the launch of our rate plans, our name, which really just happened in 1Q. We just launched the Alltel name as well as all of our handset and pricing. We’re also working through broadening the launch of our data applications in those markets. A lot of that has to do with the network and making sure it’s ready before we launch the applications. The engineers have made great progress there. So we couldn’t be more pleased. What are we seeing in those markets? It’s certainly than Phoenix and Tampa and Cleveland in terms of the growth opportunities and I think the competitive realities are we feel better to be lucky and good, right? We feel very fortunate to have a strong competitive position in those markets.

Sharilyn Gasaway

And Michael, I’ll just add on a little bit. As Kevin mentioned, we are on pace to achieve the synergies related to Western. We don’t fully realize those benefits until the back half of the year. For example, like with the billing system that we have, even though we’ve converted many of our customers, we still are keeping that billing system providing transition services to those markets that we divested of. So we’ll really see those benefits come in the late back half of the year.

Operator

Our next question is from Jonathan Atkin, RBC Markets.

Jonathan Atkin

Yes, RBC Capital Markets. I was wondering, just can you talk more about some of the changes you saw in the overall level, the mix between different technologies and carriers this quarter? And the My Circle rate plan, what kind of take away have you seen among your new customers versus perhaps your upgrade or renewal customers?

Kevin Beebe

Hey Jonathan, Kevin. On roaming, we saw growth across the board in terms of minutes, CDMA and GSM. Of course, the GSM growth was helped by the fact that last first quarter we didn’t have Western and fully baked in, in terms of the GSM activity. We haven’t expanded any GSM capability to our existing markets. We’ve talked pretty openly about our desire to do that but as Scott mentioned, we’re still working through conversations with some of the GSM providers in the business. But feel good about that going forward. We did see some more build from some of the national carriers. That certainly had an impact on our revenue, but we expected that quite frankly as some of them have picked up additional licenses.

Jonathan Atkins

Was that over build mostly GSM or GDMA?

Kevin Beebe

GDMA. My Circle – our early results, very early, so – early results suggest the activity around new customers coming to us as a result of what we think is My Circle, of course there’s a lot of messaging in the marketplace from Alltel right now. The phone price service is great, blah, blah, blah. Not to imply that none of those are bad, some are very good and we don’t put blah, blah, blah in our ad, or should we? But a lot of messaging. So the best we can tell, the people signing up and choosing for My Circle, are generally doing what we expected, that is buying up on the $59 rate plan. That’s good news. The percent of our gross adds right now that are at $59 and above are better than they had been historically. The results, don’t know that it’s going to show up any time soon. All of those caveats apply. I think that’s good news.

In terms of existing customer base, we’ve had a good amount of upgrade activity, but we’ve had some down grade activity as people have sorted through, just as we know customers would, the amount of minutes they think they need as a result of My Circle. Too early to tell how it’s all going to wash out, but it’s about half/half 50% up, 50% down in terms of the base.

So, encouraged by the results, encouraged by how simple it has been, how it’s been received in the marketplace. I think we’ve done a great job in communicating what it is, not only customers, but also as you all know, the challenge at times is to make sure your retail reps understand what they’re selling. And in this case, we’ve done a great job on the training end too, internally. We also have offered it through the web and been very encouraged by our web sales results which, of course, is a much lower cost channel than anything else we have.

Jonathan Atkins

On Western real quick -- is there a concerted effort to equip the customer with Alltel phones and rate plans or is that migration happening more on pace with the typical upgrade cycle?

Kevin Beebe

More on pace Jonathan because they were CDMA. So nothing different there in terms of big expense to get new phones in people’s fingers

Jonathan Atkins

Thank you very much.

Operator

Your next question is from David Barden, Bank of America Securities.

David Barden

Hey guys thanks a lot. Just a couple of questions. First is, thanks for reiterating the guidance Sharilyn. I was wondering if you could give us as we look a the first to second quarter ramp, the kind of maybe 1,2, 3, things are going to change in the revenue cost equation. If it’s not going to be the Western integration numbers that’s going to kind of get us to the guidance range in the second quarter?

The second thing would be if you could just give us a sense as to the magnitude of the costs that were integrated into the Wireline business this quarter from the expected separation?

And then, last question, strategically, I know you guys are sensitive to this but you know, it’s kind of a central theme to your strategy – as you look at the carriers over bill plans, and as you were in negotiations with them on roaming, are you guys comfortable, pleased with your kind of strategic positioning to be the kind of roaming partner of choice? Is this looking to be a good strategy or is it leading to some brinksmanship in terms of threats of overbuilding? I’m just trying to get a sense of where that’s really playing out right now. Thanks.

Sharilyn Gasaway

Okay David, I’ll take the first couple. In terms of some of the things that we’re looking at in terms of the margins, and some of you kind of hinted around, 1Q is more seasonal and so we see declines not only at wholesale from a seasonal basis, but also from a usage standpoint. And so we expect to see that ramp up some. We’ll get some of the synergies associated with the conversion of our billing systems both on the pre pay and the first pay side and so those are a few things and we’ll also continue to be mindful of our cash cost per unit. We continue to watch that as you saw sequentially that was down from 4Q.

In terms of separation costs – I think we’ve provided that there would be about $20 million of synergy costs in a wireless business and now I’d say that we’re probably on track to have incurred $7-$10 million of that. On the Wireline side, we didn’t separately disclose how much we thought that would be. But certainly we’ve had ramp up in terms of duplicate functions from executive teams and are ramping up the head count that the company’s are going to need on both sides of the house in order to run those businesses on a stand alone basis. They have not hired fully and are continuing to do that over the next several months.

Scott Ford

David, this is Scott. On that topic. This is a quarter of immense change and actually we’ve got another one still ahead of us. In trying to glean too much of what’s really going on in the operations from all the noise that are in the numbers right now, I understand that can be difficult. I would imagine that it could be more misleading trying to grapple with too many details of trying to forecast the run rate of what the two businesses will see in long term because there is a lot of duplicate of calls. And frankly, a lot of just management talent and focus on that issue and that’s one of the reasons we need to get on it.

Long term, you talk about roaming. The question about roaming. I want to turn it a little bit around this way. 90% of our business is retail; retail is where we spend 90% of our time. Roaming is a nice revenue add. With every revenue dollar that you add though, you incur some requirement to build networks. You incur additional expenses and you spend a lot of management time sorting through the relative changes in the contracts and changes in the day to day operations at that group level. So, it’s great to have, we love to have it, but that is not the purpose of the business. It’s not the primary focus of the business. Where we see over build is where you would expect to see it. It’s in high traffic volume areas where the incremental return for another carrier saying well rather than send the roaming tractor to Alltel, at X rate, I’d rather just over build it because return on capital or the margin impact is positive for us.

So you can imagine, we’re constantly arguing about volume or constantly arguing about rate. Some carriers are very easy to deal with and sit down at the table and are very constructive and some like to hammer and play back and forth in the longer term. Hash out, shall we say – and we’ve got some of that going on right now and that’s probably all we need to get into.

David Barden

Alright guys, thanks for sharing. I appreciate it.

Operator

Your next question, David Janazzo with Merrill Lynch.

David Janazzo

Discussion on the CETC topic has been increasing in the recent weeks and months. What is your view on the prospects and timing of changes, if any in that area?

Kevin Beebe

Hey Dave, this is Kevin. It has been in the most recent bill proposed by I think Senator Stevens Inue from Hawaii. We feel it positive in terms of attempting to sort through and establish some requirements. We would certainly be very interested in the opportunity to get additional ETC dollars as you know for broadband deployment. We are planning on deploying EBDO and certainly we’re going to deploy most of that EBDO capital in places where the volume is there to recover the investment that just makes good business sense. Under the current bill, which we haven’t studied in full, it’s a pretty lengthy document, because it includes other things, but under that proposal, it would seem that there’s a proposal would change the opportunity for return if we invest in certain areas. And certainly if that what ETC is all about.

You know, the other thing I comment on is there is this significant difference between State regulators, legislators are viewing that whole topic and the way we hear about it at the Federal level.

The State regulators, legislators we have had great working relationships in all the States where we’ve received support. We continue to have very open dialog with regulators on the areas that they’re most interested in us deploying technology and the potential return down the road in exchange for additional funding. So we welcome that kind of dialog at the State level. We continue to work at the federal level to make our opinions known.

David Janazzo

Thank you.

Operator

Your next question is from Simon Flannery from Morgan Stanley.

Simon Flannery

Hi, this is Jessica Yell for Simon Flannery.

I was wondering what your latest thoughts are on the wireless spectrum auction that’s coming up. Any willingness to participate? Also what are you seeing on the M&A front other opportunities to buy other wireless players?

Kevin Beebe

The two don't go together right now as you can appreciate. The Spectrum Auction has basically brought to a halt any discussions that might have been going on, on the M&A front. I think that there was some reasonable non activity on the M&A front that was possible this year when the Spectrum auctions were scheduled to be placed in the middle of the summer. I think most of that stopped.

Our own thoughts about, so you know, we’ll see what happens in the fall, what everything looks like in the fall when we start over.

When you look at the Spectrum auctions, we are still thinking about it. We have been through a number of discussions with several parties that we looked at participating with. We have not been able to get those lined up exactly like we would all like them to get lined up. It is important to remember that the license is the cheapest part of the exercise. And building it is the second cheapest part. You then have to put customers on the network and have to underwrite the losses on the network, and so any new build in the modern era is expected to be extremely expensive and this is not the best spectrum for looking at things like that. So, while we might still go to this one, we are leaning towards not going to this auction and are taking a hard look at those things that are scheduled to come down over the next two or three y ears because that’s much better spectrum for building out networks that have voice at the core of them.

Jessica Yell

The question about M&A environment. What do you see there?

Kevin Beebe

Well most of the discussions that you would expect to be taking place at this point, I have halted because of the auction rules that say nobody can talk and so at this juncture M&A has dried up for all intents and purposes and probably will stay that way until maybe the back quarter of the year. And then what happens at that point we’ll have to see what ends on the auction, what prices are, value, what relative trading comparisons are. A lot can be sorted out at that time.

Jessica Yell

Great. Thanks.

Operator

Your next question is from Tom Sykes with Lehman Brothers.

Tom Sykes

Most of my questions have been answered, but just a couple of quick ones. Could you talk about that Western Service Plan that was discontinued? I think you said that there were maybe like 50,000 total customers on it. Does that mean that we’re going to get a churn off of 30,000 next quarter kind of impacting our net add forecast? Or is it going to kind of dribble off from here?

Kevin Beebe

You’ve got another one. This is Kevin. We have about 50,000 left actually. So about 18,000 disconnect in the first quarter. We’ll continue as has been our tradition. When we eliminate service plans like we did a few years ago with Boomerang, instead of adjusting the customer base, which some carriers choose to do, we just report it to you like we did this morning and it will certainly impact the reported net number but we think it’s important that you know how many customers that there are in that net number that have left. In this case it was 18,000 in one queue. We discontinued the service plan. We still offer the service plan but new customers can’t get it. We’ve never really discontinued a service plan in terms of taking it out and force migrating a customer. In fact, we still have about 1,000 or so boomerang customers that are active today that continue to replenish, which is fine. But we do expect as it relates to Talk Watch that those customers will continue to attrite off as we don’t offer the service any more and they move to something that’s more competitive.

Hopefully, now that our full suite of plans is in the marketplace, and we have the new U wireless pre pay plans, they’ll get a sense that there’s a better offer from Alltel today. But we won’t force migrate them. We do expect them to attrite off over time, probably the rest of the year. It may never go to zero though. I don’t want to mislead you. That 49,000 may never go to zero.

Tom Sykes

Okay. And just on the you know State regulatory approvals, are there any, I mean without getting into the discussions that are happening, is there any big hurdle that you see, I mean are you at all worried about slippage from a July-ish split?

Jeff Gardner

Tom, this is Jeff Gardner We are spending 100% of our time, a couple of us are on the landmine side of the business on the regulatory process and we’ve been making a lot of progress. It’s about convincing the State public commissions that this transaction is in the public interest. So, we’re focusing on things like we’re 100% focused on landmines and driving broadband addressability. We’re talking about our capital structure. The fact that we’re going to be the largest (inaudible) in the State with what we believe some of the best cash flow characteristics and we’re focusing them on the management team that we think is capable of leading this business for several years to come. So, we’re feeling very good about the process. We’re 100% focused on it. Scott made a great point earlier that we really believe it’s in the best interest of both businesses to get this done. And we’re taking very seriously our talks with each State to make them feel as good as possible about this transaction. In the last two weeks we’ve had a lot of momentum.

Tom Sykes

Okay. Thanks.

Tony Thomas

Darla, this is Tony, we’ll take one more question.

Operator

Your final question is from Phil Cusick from Bear Stearns.

Phil Cusick

Hi, good morning, this is Com Rowsky for Phil. I was just wondering if you could comment on the net add situations. You guys have seen over 100,000 pre paid net adds and about 80,000 (inaudible) how do you see that mix going forward and how has the national carrier, the competition from them affected you.

Kevin Beebe

Sure, this is Kevin. I feel good. In 1Q we lead what we thought was consensus on post pay, so that was good and again, pre pay has been incremental growth. Given that incremental growth has come at a much lower cost because of our new structure, our new systems, our new infrastructure. We feel really good about that pre pay. I do believe that pre pay activity is always seasonally higher in 1Q and hence I would expect to see a drop of that. But you know, we’re continuing to push post pay growth as our primary way of doing it. This Simple Freedom product in the Wal-Mart has been exceptional these last few quarters. Battle for Wal-Mart shelf space is just that. It’s always a battle. They’re the world’s largest retailer, but we continue to position our product very well there. So I feel good about the continued growth of both. On the national front, you know the market is obviously very, very competitive. It continues to be and we’ll be mindful of that and balancing everything we need to in terms of our position in the marketplace.

Com Rowsky

And just one question on the roaming. Are you guys seeing any loss from the recent Verizon over builds as far as roaming is concerned?

Kevin Beebe

I think I commented earlier that we’ve seen some over builds from some carriers in the first quarter, that was a level of what we expected.

Com Rowsky

Okay. Thank you.

Kevin Beebe

You’re welcome.

Just to wrap up the call. On February 1st, when we had our analyst day, we tried to lay out what we hoped to execute over the next 12 months which was a very complicated set of integration work and then separation work on the Wireline business. The team has just done a remarkable job and I know a lot of them listen to this call and so if you’re just a shareholder and you don’t really care about all of this stuff you can hop off, but to the team, I want to say, just how proud we are of the job that you’ve done. You have worked nights, weekends. You have worked weekends in a row. You’ve done a fantastic job of going above and beyond on every front. Jeff Gardner, we appreciate your leadership. We wish you well in the new Wireline business. And we’ll miss you and your ring tone phones here on these quarterly calls.

If you’ve got any questions and want to follow up, Tony will be manning the phones today at 501 905-8991 in Investor Relations. Thanks very much. You all have a great day.

Operator

This concludes today’s conference call you may now disconnect.

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Source: Alltel Corporation Q1 2006 Earnings Conference Call Transcript (AT)
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